What Happened?
Shares of homebuilder Lennar (NYSE: LEN) fell 6.7% in the morning session after the company reported weak first-quarter 2025 results, with its backlog declining 22% year over year, raising concerns about the strength of its near-term sales pipeline.
The more pressing issue, however, was the sharp decline in gross margin, driven by rising land costs and a slight drop in home prices. Also, while sales increased by 5%, supported by a 6% rise in home deliveries, the company had to rely on incentives, such as interest rate buydowns, which involve paying an upfront fee to reduce mortgage rates. This strategy came at a cost, leading to lower operating margins and resulting in a more than 20% year-over-year drop in EPS.
Looking ahead, Lennar expects to deliver up to 20,500 homes in the second quarter, with gross margins projected to remain around 18%, reflecting continued pricing pressures.
Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The market seemed to focus on the negatives.
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What The Market Is Telling Us
Lennar’s shares are not very volatile and have only had 8 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 8 months ago when the stock gained 6.2% as investors seemed to be rotating out of large-cap tech winners like NVDA, GOOGL, and MSFT and into smaller cap stocks, with housing stocks as a bright spot in particular.
The rotation was likely sparked by the inflation report by the Bureau of Labor Statistics. It revealed that CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) for the month of June 2024 came in better than expected at 3% year on year (the lowest level in more than three years).
The inflation prints supported the argument that the Fed would start cutting rates in the year as the headline figures moved closer to the 2% target.
Lower rates greatly impact the housing market, which had been tepid in the previous year-plus. Specifically, lower rates make homebuying more affordable for consumers because on the same value home, monthly payments are less with a lower mortgage rate. Before rates began to rise 2022, many potential homebuyers anchored on a home value they could afford--let's say $450,000. As rates rose, the home they could afford with the same monthly payment fell--let's say towards $300,000. However, they weren't very excited about buying a lesser home after having their eyes on higher-value homes. Many chose not to transact.
On the other side of the coin, many homeowners with mortgage rates in the 2-3% range chose not to sell because of the prospect of having top buy a new home with a 6-8% mortgage rate attached to it. Demand suffered. Supply suffered.
Lennar is down 14.2% since the beginning of the year, and at $115.29 per share, it is trading 40.1% below its 52-week high of $192.45 from September 2024. Investors who bought $1,000 worth of Lennar’s shares 5 years ago would now be looking at an investment worth $3,928.
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