With new-home buyers looking past building one from scratch, Lennar has seen sales decline and has tried to attract new customers through its sales incentives.
- A September report by the U.S. Census Bureau showed that privately-owned housing units in August were at a seasonally adjusted annual rate of 1,312,000.
- The company has been offering price cuts and mortgage rate buy-downs to drive up demand for new homes.
- For the fourth quarter, the company said it expects new orders to be in the range of 20,000 to 21,000 homes.
Not everyone is lining up to buy a new home, and Lennar’s financial results so far have laid bare the uneasy reality facing the U.S. housing market. Elevated mortgage rates and affordability pressures continue to pin down many homeowners, making their dream leap from older properties to newly built homes all the more daunting.
More than three years after higher borrowing costs first froze buyer activity, the drag has yet to lift. For Lennar and its peers, the challenge remains the same: rekindling demand in a market where would-be buyers are still waiting on the sidelines.
A September report by the U.S. Census Bureau showed that privately-owned housing units in August were at a seasonally adjusted annual rate of 1,312,000. This is 3.7% below the revised July rate of 1,362,000 and is 11.1% below the August 2024 rate of 1,476,000.
This has pressured Lennar’s stock, which has lost nearly 15% of its value in the last 12 months.
Sales Incentives: A Strategic Move By Lennar
To maintain demand, Lennar has turned to sales incentives. The company has been offering price cuts and mortgage rate buy-downs to drive up demand for new homes. This has also helped in a jump in new orders.
For the fourth quarter, the company said it expects new orders to be in the range of 20,000 to 21,000 homes and noted deliveries to be in the range of 22,000 to 23,000 homes.
Co-CEO Stuart Miller said during the third-quarter earnings call that sales volume was challenging to maintain in the quarter and required additional incentives to achieve the company’s expected pace and to avoid building excess inventory.
Margin Compression
In the third quarter, Lennar increased its sales incentives by approximately 100 basis points to meet its sales targets. The increase in sales incentives has now led to margin compression, and the company is struggling to maintain bottom-line growth.
“We will maintain responsible volume to maintain an affordable cost structure, and we will find the floor and rebuild our margin as the overall housing market continues to remain short on supply,” Miller said.
During the third quarter, sales incentives rose to 14.3%, reducing the gross margin to 17.5%, which was lower than what Lennar expected.
Lennar’s Q4 In Focus
Heading into the quarter, Barclays analyst Matthew Bouley downgraded Lennar to ‘Underweight’ from ‘Equal Weight’ with a price target of $98, up from $95, according to The Fly. Barclays expects another year of declines in single-family housing starts, saying the housing market "remains far from balanced." This leaves the homebuilder stocks "volatile, with no cycle call to be made."
Lennar is expected to post quarterly results after the markets close on Tuesday, with Wall Street estimates of revenue of $9.13 billion and earnings per share of $2.18, according to data compiled by Fiscal AI.
BTIG said in early December that Lennar has adopted an operating strategy transition that involves both driving sales volume to support investments and shifting to a 100% optioned land bank — purchasing land to develop later. But the firm added that the transition has resulted in declines in margins, earnings, and return on equity.
How Are Stocktwits Users Reacting?
Retail sentiment on Lennar improved to ‘neutral’ from ‘bearish’ a day ago ahead of earnings, with message volumes at ‘low’ levels, according to data from Stocktwits. The stock has seen a 22% surge in users adding it to their watchlist on Stocktwits.
Shares of Lennar have fallen about 4% so far this year.
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