Lennar signals trouble in the housing market

Lennar (LEN) reported mixed results for its fiscal Q4, with EPS of $4.06 missing consensus estimates of $4.17 and revenue falling 9.3% year-over-year to $9.95 billion, below expectations of $10.13 billion. This marks a significant decline from $5.17 EPS and $10.97 billion in revenue in the prior-year quarter. The miss was largely attributed to lower-than-expected new orders and deliveries, reflecting challenges in the current housing market.

Guidance for Q1 FY2025 provided limited relief. Lennar forecasted new orders between 17,500 and 18,000, below analyst expectations of 20,000. Deliveries are projected at 17,000 to 17,500 units, a sequential decline from the 22,206 units delivered in Q4. Gross margins on home sales are expected to compress further to 19%-19.25%, down from 22.1% in Q4. Management withheld full-year margin guidance, signaling uncertainties in navigating the housing market’s headwinds.

Key metrics showed deterioration in the company’s performance. New orders fell 2.7% year-over-year to 16,895, well below the estimated 19,174, while backlog decreased 22% to 11,633 homes. Gross margins on home sales contracted by 210 basis points year-over-year to 22.1%, reflecting pricing pressures as Lennar prioritized moving inventory amid a challenging market environment.

The primary drivers of the weaker results were rising mortgage rates and affordability concerns, which have cooled housing demand. Lennar noted that average selling prices decreased by 2.5% to $430,000, as the company adjusted pricing to stimulate sales. Affordability remains a significant issue, particularly in regions like Florida, where supply has increased and economic headwinds, including hurricanes, exacerbated the slowdown.

The broader housing market has softened under the weight of higher interest rates, which have risen sharply in 2024, diverging from the Federal Reserve’s recent rate cuts. Mortgage rates, tied more closely to 10-year Treasury yields, have remained elevated at approximately 6.8%-7%, straining affordability for potential buyers and pushing many to the sidelines. Lennar’s management highlighted that demand has slowed dramatically in response to these rising costs.

Following the earnings report, Lennar’s stock dropped 6.9%, extending a broader decline that has seen the stock lose 25% over the past three months. The disappointing results also weighed on peers such as KB Home and Toll Brothers, which saw their shares decline modestly. The lack of robust guidance and continued margin compression contributed to investor concerns about the company’s near-term prospects.

On a positive note, Lennar maintains a strong balance sheet with $4.7 billion in cash and equivalents against $2.3 billion in homebuilding debt, leaving it with a net cash position. This financial strength has enabled the company to return capital to shareholders, including $521 million in share repurchases during the quarter. Lennar also announced plans to spin off its land assets into Millrose Properties, a move designed to reduce capital intensity and increase operational flexibility.

The Federal Reserve’s decision to cut rates by 25 basis points this week could eventually provide some relief to the housing market, but mortgage rates remain stubbornly high. Lennar’s management acknowledged that while declining rates might help affordability, higher-for-longer policy expectations and persistent inflation create uncertainty for demand in the near term.

Looking ahead, investors will need to monitor Lennar’s ability to manage its backlog and maintain pricing discipline amid continued pressure on demand. The Q1 guidance for declining deliveries and margins reflects the challenging environment, and the company’s commitment to prioritizing volume over margins suggests further compression is likely. While the spin-off of Millrose Properties offers potential financial stability, broader market conditions remain a critical determinant of Lennar’s trajectory in 2025.