Homebuilder Lennar guards against ‘inventory overhang’ as housing market slowdown continues
Lennar (LEN) reported a slowdown in new home orders in its fourth-quarter as the housing market remains in correction mode.
Lennar said this week new home orders dipped 15% year-over-year in the fourth quarter, reaching 13,200 homes, beating estimates for 12,854 to be delivered.
The homebuilder posted quarterly results that topped Wall Street expectations, with earnings per share coming at $5.02 compared to $4.89 consensus estimates compiled by Bloomberg.
Revenue in the quarter totaled to $10.17 billion, up from the $10.14 billion expected by analysts. The company delivered 20,064 homes, up 13% over last year, and in line with their quarterly forecasts.
Shares of Lennar rose 3% on Thursday following the earnings call, but were down 2% on Friday amid broader market weakness. Lennar shares are down about 20% this year with the S&P Homebuilders ETF (XHB) off about 28% in 2022.
The company reported gross margin on home sales at 24.8%, down from 29.2% from the prior quarter. Meanwhile, in the same quarter, Lennar produced a pre-impairment homebuilding gross margin of 25.3%, a 2.7% drop year-over-year. In the first quarter, Lennar expects gross margins on home sales to fall closer to 21%.
“We think the lower-than-expected margins reflect the need to work with customers in backlog to reduce the risk of cancellations as well as increased incentives [and] lower prices for new buyers,” Dan Oppenheim, director of U.S. housing and building products equity research at Credit Suisse, wrote in a note following the release.
This approach of minimizing cancellations to protect the inventory in the backlog is “wise as it then also helps to limit spec inventory,” in Oppenheim’s view.
On the company’s earnings call, Executive Chairman Stuart Miller said he’s expecting a nationwide slowdown for both single-family and multifamily construction in 2023, but plans to make price adjustments as a way to reduce cancellation rates and promote deliveries.
“We’re not going to have an inventory overhang,” Richard Beckwitt, co-president and co-ceo of Lennar, said on the earnings call. “It is our belief that the duration of this correction is going to be somewhat smaller or more limited and having additional capital enables us to be opportunistic in growing our business when those signals start to come our way as well.”
The Miami-based homebuilder expects new orders in Q1 to range from 12,000 to 13,500, and anticipates a slowdown in expanding into new communities as the company has walked away from deals.
The rapid rise in interest rates has reduced housing demand nationwide. Homebuilder sentiment in the U.S. weakened more than expected in November, sliding to the lowest level in a decade when excluding the pandemic-impacted months in the spring of 2020.
Despite margins taking a hit in the first quarter of next year, Miller expects overhead costs to improve as construction and land prices come down.
The Federal Reserve’s interest rate hikes have weighed on housing this year, with the central bank raising interest rates by half a percentage point on Wednesday to a range of 4.25 to 4.5%, its seventh increase this year. The central bank’s moves have pushed mortgage rates higher, with the average 30-year fixed mortgage rate moving from 3% at the beginning of 2022 to north of 7% at its peak this fall.
Mortgage rates have retreated from highs in recent weeks, with the average rate on a 30-year fixed mortgage dipping to 6.31% this week from the prior week of 6.33%, according to Freddie Mac.
Demand for mortgages gained 3.2% last week compared to the week prior in response to this move, according to the Mortgage Bankers Association’s latest survey of applications, with purchase activity adding 4%. But purchase applications are still 38% lower than a year ago, the MBA cited, with most of that drop driven by first-time buyers.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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