Lennar Corp. (NYSE: LEN) is projected to exceed its initial expectations for home construction this year due to its successful strategy of reducing prices and offering incentives, which has attracted buyers and led to successful closings.
Stuart Miller, the executive chairman of the Miami-based homebuilding company, stated that economic conditions have stabilized, and buyers have adapted to higher interest rates. With a shortage of new homes in the market, there is a significant demand for housing, and buyers are willing to close deals at the right price. Additionally, the supply chain has become more manageable, and construction costs are no longer experiencing substantial increases.
Miller emphasized that the housing supply shortage will persist for several years as it will take time to resolve the 15-year production deficit. While more existing homes may enter the market, sellers will also require new homes to move into. Consequently, the demand is shifting towards more affordable housing options.
According to a Portland Business Journal report, Lennar Northwest is the leading homebuilder in Portland, having sold 450 new detached homes in the metropolitan area, generating $266 million in sales volume in the 12 months ending on June 30, 2022.
During the fiscal second quarter that ended May 31, Lennar saw a 3 percent increase in home deliveries, totaling 17,074. New orders experienced a slight 1 percent increase. For fiscal 2023, Lennar anticipates delivering 68,000 to 70,000 homes, surpassing its previous guidance of 62,000 to 66,000 homes.
Miller highlighted the pressing need for workforce housing and referred to it as a social imperative. Rather than focusing on driving prices up, Lennar aims to expedite the construction pace while maintaining prices.
Co-President and co-CEO Jon Jaffe stated that Lennar increased its construction starts during the second quarter, differentiating itself from other homebuilders who started fewer homes. This has positioned Lennar as a major player in the construction industry, accounting for over 70 percent of the business for many of its trade partners.
Jaffe also noted that Lennar reduced the start-to-completion time for new homes by four days in the second quarter. Although construction costs increased by 8 percent year-over-year, they decreased by 3 percent compared to the first quarter.
Jaffe expressed optimism that the disruptions in the supply chain have mostly been resolved, with only a few exceptions remaining.
In the second quarter, Lennar reported a net income of $874 million, a decrease from the $1.3 billion earned in the same quarter of the previous year. Revenue for the quarter was $8.05 billion, down from $8.36 billion.
The average sales price of a Lennar home was $449,000, lower than the peak value of nearly $500,000 recorded the previous year. This decrease in price was a significant factor contributing to the company’s lower profits. Furthermore, administrative expenses related to homebuilding increased, reducing profit margins, primarily due to higher broker fees and increased marketing expenses.
In Portland, the average price of a Lennar home in the year ending on June 30, 2022, was $591,190 for a 2,152-square-foot home.
Co-President and co-CEO Rick Beckwitt mentioned that order cancelations decreased as Lennar adjusted prices and offered incentives, including lower mortgage rates through its lending arm, to assist buyers. Lennar continuously adjusts pricing and incentives on a nearly daily basis.
Beckwitt described two categories of home markets in the regions where Lennar operates. Fourteen markets with low home inventory and strong economies required fewer price adjustments and incentives. These markets include Southeast Florida, Palm Beach/Treasure Coast, Southwest Florida, Tampa, New Jersey, Philadelphia, Charlotte, Coastal Carolina, Indianapolis, Dallas, Houston, Phoenix, San Diego, and Raleigh, North Carolina. Due to substantial home price increases, South Florida rarely required discounts.
On the other hand, 26 markets required more significant price adjustments and incentives, such as reductions in closing costs and mortgage rate buydowns. These markets encompass Jacksonville, Orlando, North Alabama, the Gulf Coast, Atlanta, Virginia, Maryland, Chicago, Minnesota, Nashville, Portland, Utah, Colorado, Las Vegas, San Francisco, Sacramento, the Central Valley of California, Seattle, and Austin, Texas.
Lennar plans to continue its home production across the country. Beckwitt stated that the company currently has 1,263 active communities, and this number is expected to increase by high single digits by the end of the year. Lennar typically acquires land shortly before a home is ready to sell, with approximately 70 percent of the land in its communities already under contract.
Miller stated that Lennar anticipates an improvement in profit margins on home sales this year. However, he did not provide specific projections for the fourth quarter due to the remaining economic uncertainty.