Lennar’s Earnings Are a Read on Housing. Demand for New Homes Is Strong.

Analysts estimate earnings of $3.52 a share on revenue of about $8.5 billion for the quarter ended Aug. 31. That’s down from $5.03 a share on revenue of $8.9 million in the same quarter one year ago—but much has changed in the past year. Mortgage rates climbed above 7% for the first time in decades last October and November, cooling demand in the broader housing market. 

During the typically busy spring and summer months this year, existing-home sales were well below year-ago levels as higher mortgage rates sent both buyers and sellers to the sidelines. Leading data suggests the broad pullback has continued into September: A Mortgage Bankers Association index tracking the volume of applications for home purchase loans was 27% lower than year-ago levels last week, the trade group said Wednesday.

“Given how high rates are right now, there continues to be minimal refinance activity and a reduced incentive for homeowners to sell and buy a new home at a higher rate,” Joel Kan, the association’s deputy chief economist, said in a statement.

But sales of new homes have gained as buyers still in the market seek value. New home sales reported by the Census Bureau and Department of Housing and Urban Development climbed to a seasonally-adjusted annual rate of 714,000 in July, the highest level since February 2022.

Demand for new homes amid a scarce supply of previously owned houses boosted builder stocks in 2023. Two exchange-traded funds tracking home builders and related companies, the
SPDR S&P Homebuilders
ETF (XHB) and the
iShares U.S. Home Construction
ETF (ITB), have returned about 34% and 38% year to date respectively, beating the broader S&P 500’s roughly 18% return. Lennar class-A shares are up 29% year to date.

Wedbush analysts Jay McCanless and Brian Violino expect Lennar to report higher-than-consensus earnings of $3.73 a share on revenue of $9 billion. The analysts’ outlook is based on expectations that Lennar will have closed 19,000 units in the third quarter, they wrote. They have a Neutral rating on the company’s shares, with a $123 price target. 

“We anticipate the conference call will be focused on current demand trends and how much, if any, Lennar is having to discount base prices or buy down mortgage rates to maintain pace,” the analysts wrote. “We also expect some insights as to whether or not existing homes are returning as a competitive threat for Lennar and the industry.”

Indeed, much of the 2023’s housing market story has concerned the shortage of previously owned homes for sale but early data show supply could be improving. New listings ticked up unexpectedly in August,
Zillow
said earlier this week. 

There were 350,000 homes listed for sale in August, 4% more than in July, according to Zillow—an atypical increase at a time of year when new listings typically wane. “Competition for houses tends to ease up at this time of year, giving buyers more time to decide and a better chance to negotiate on price,” Zillow senior economist Jeff Tucker said in a statement. “The inventory crunch is still far from resolved, but this was a small step in the right direction.”

Still, demand for new homes continued in August, according to recent builder conference calls.
Toll Brothers
(TOL), a luxury builder based in Pennsylvania, said last month that deposits in the first three weeks of August were higher than they normally are. 

“August deposits are usually down 25% to 30% versus July based on long-term historical trends as summer winds down and kids returned to school,”
Toll Brothers
CEO Douglas Yearley said on an August conference call. “So far in August, deposits are only down 11% and both physical and web traffic is up slightly compared with July.”

Ara Hovnanian, the CEO of New Jersey-based home builder
Hovnanian Enterprises
(HOV), said at the end of August that the company was raising its full-year guidance because of the summer’s strong sales environment. “The sales pace has slowed somewhat in August compared with a blazing comparison for the third quarter but the year-over-year comparison is very strong, and customers seem to be adjusting their expectations to the current interest rates,” Hovnanian said on an earnings call.

Investors will get another read on the market for newly built homes next week. Two government measures of new-home construction, housing starts and authorizations, are expected to be released Tuesday. Housing starts gauge the beginning of construction on a new home, while authorizations, more commonly known as permits, measure how many new units are approved by local municipalities. 

Consensus estimates compiled by
FactSet
foresee the seasonally-adjusted annual rate of housing starts falling to 1.42 million from a preliminary 1.45 million in July. Permits are also expected to fall, to a seasonally-adjusted annual rate of 1.43 million from 1.44 in the month prior.

Write to Shaina Mishkin at [email protected]