Lennar (LEN): Even the best-laid plans can go wrong

Shares of Lennar Corporation (NYSE: LEN) stayed green on Monday. The stock has dropped 25% over the past three months. The homebuilder delivered underwhelming results for the fourth quarter of 2024, as its performance was derailed by the negative impact of higher interest rates on affordability. Against this backdrop, the company has moderated its expectations for sales and margins for the first quarter of 2025.

Interest rates hit affordability

During the fourth quarter, the housing market seemed to show signs of improvement with the reduction in short-term interest rates. However, mortgage rates rose almost 100 basis points, hurting affordability despite a strong demand for housing and a shortage in the supply of homes. This has resulted in a more challenging environment for the homebuilding industry.

As mentioned on the quarterly conference call, affordability has been a limiting factor for demand and access to homeownership, with inflation and interest rates hindering the ability of consumers to secure down payments or mortgages. Higher interest rates have also locked households in lower interest rate mortgages and curtailed the ability of homeowners to move into bigger houses as they expand their families. Although the employment rate has remained healthy, interest rates have caused many homeowners to remain on the sidelines in terms of new home purchases.

At the start of the fourth quarter, Lennar anticipated an ease in affordability and priced accordingly. However, as mortgage rates continued to climb, the company adjusted its pricing and offered incentives to help consumers with affordability. This led to its fourth quarter performance falling below expectations. Higher incentives impacted margins. As a result, the homebuilder moderated its expectations for the upcoming quarter.

Lennar anticipates the broad-based demand cycle to re-establish as rates stabilize or moderate and as pent-up demand continues to build against short supply.

Q4 performance

Lennar generated revenue of $9.9 billion in Q4 2024, down 9% year-over-year.  Adjusted earnings per share decreased 22% to $4.03. Revenues from home sales declined 9%, mainly due to decreases in deliveries and average sales price.

In Q4, deliveries fell 7% to 22,206 homes. New orders decreased 3% to 16,895 homes, falling short of the expected 19,000, while new orders dollar value dipped 1% to $7.2 billion. Average sales price dropped 2% to $430,000, due to pricing to market through higher incentives and product mix. The company ended the quarter with a backlog of 11,633 homes with a dollar value of $5.4 billion.

Outlook

For the first quarter of 2025, Lennar expects new orders to range between 17,500 and 18,000 homes. Deliveries are expected to range between 17,000 and 17,500 homes. Average sales price on these deliveries is expected to be $410,000-415,000. Gross margins are expected to be between 19% and 19.25%.