MW Home prices are falling, but job security has become a new concern, Lennar says

By Tomi Kilgore

The home builder's stock sinks as profitability is being sacrificed - through higher incentives and lower prices - to boost sales

Shares of Lennar Corp. sank to their lowest prices in more than a year after the home builder said increased selling incentives, amid a weakening housing market, will continue to cut into profits.

The good news was that Lennar $(LEN)$ beat expectations for fiscal first-quarter profit, revenue and home sales, and provided an outlook for new orders in the current quarter that was above Wall Street expectations.

The bad news, however, is that sales strength is coming at a cost. Incentives to sell homes, such as interest-rate buydowns and lower prices, are running more than double what the company considers normal, which led to a quarterly miss and a downbeat outlook on gross margins, or profitability on home sales.

Read: Mortgage rates are falling, but it's not helping sell more homes. Are lower house prices next?

And now there's a new concern that is holding back home buyers.

"Until recently, consumers have been generally confident that they will remain employed and that their compensation is safe," said Lennar co-Chief Executive Stuart Miller, according to a FactSet transcript of the company's postearnings call with analysts. "But more recently, even that safety has been called into question, as ... wavering consumer confidence have challenged the consumer's desire and ability to transact."

That corroborates recent data from government-sponsored mortgage backer Fannie Mae that showed consumers are growing increasingly worried about their personal financial situations.

See related: Federal jobs went from reliable to risky overnight. Here's where Americans can find stable work now - and in the future.

Lennar's stock slumped 3.9% in afternoon trading, to put it on track for the lowest close since Nov. 9, 2023.

That weakness also weighed on the shares of other home builders. The iShares U.S. Home Construction ETF ITB dropped 1.7% Friday, with 42 of its 46 equity components losing ground. The ETF is now trading about 27% below its record close seen on Oct. 18.

For the first quarter ended Feb. 28, Lennar said it delivered 17,834 homes and booked new orders for 18,355 homes. Both topped the average estimates of analysts surveyed by FactSet for deliveries of 17,262 homes and new orders of 17,866 homes.

But the average sales price fell 1% from a year ago to $408,000 per home, which missed the FactSet consensus of $412,970 per home.

That pushed gross margin down to 18.7% from 21.8% a year ago, and below the FactSet consensus of 19.1%.

The reason for the weak margins is that incentives were running at 13%, meaning the actual price offered was discounted 13%.

"These are outsized for the moment, and normalized incentives should be around 5% to 6%," Lennar's Miller said.

For its current fiscal second quarter, Lennar expects to deliver 19,500 to 20,500 homes, which surrounds the FactSet analyst consensus of 20,033 homes.

But profitability will continue to be an issue "as we continue to price to market to meet affordability," said Chief Financial Officer Diane Bessette.

The average sales price per home is expected to fall to $390,000 to $400,000, from $426,000 a year ago and below the current FactSet consensus of $411,240. And gross margin is expected to fall to approximately 18%, from 22.6% a year ago and below recent expectations of 19.5%.

The company also reported first-quarter net income that declined to $519.5 million, or $1.96 a share, from $719.3 million, or $2.57 a share, a year ago. The FactSet consensus was for earnings per share of $1.96.

And total revenue grew 4.4% to $7.63 billion, beating expectations of $7.43 billion.

Given the better-than-expected results in the face of such a challenging housing market, Miller remained upbeat about the company's prospects, saying he believes market conditions are bound to recover.

"As and when interest rates normalize, we believe that pent-up demand will be activated and our margin will quickly recover," Miller said.

Lennar's stock has slid 11.9% so far this year, while the ITB home-construction ETF has declined 8.3% and the S&P 500 index SPX has given up 3.9%.

Aarthi Swaminathan contributed.

-Tomi Kilgore

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March 21, 2025 15:16 ET (19:16 GMT)

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