Lennar reported mostly positive third-quarter financials last week but was humbled by a lower-than-expected gross margin forecast, which has raised concerns among investors that the company hopes to rectify in forthcoming quarters, as Co-Chief Executive Stuart Miller noted in a call with analysts. The homebuilder reported a gross margin of 22.5% in the three months that ended on August 31, a decrease from 24.4% a year earlier and below its guidance of 23%.
The Miami-based company, boasting a market capitalization of $50.2 billion, conveyed expectations that its Q4 gross margin will remain flat as consumers adjust to the changing economic and interest-rate landscape. This represents a shift from previous signals which indicated fourth-quarter margins would be in the range of 24.5% to 25%. Rafe Jadrosich, director and senior equity analyst at Bank of America, commented on the situation, stating, "Previous guidance had implied a pretty significant quarter-over-quarter improvement in Q4 gross margin, and now it has it as flat.
Mortgage rates have come down, so typically you would expect there to be a tailwind to demand and help margins. Their commentary on the earnings call was that there's a lag benefit." Miller indicated that mortgage rates were "sticky" around 7% during the first half of Q3, with consumer confidence slow to materialize.
He explained that the company’s restructuring toward a high-volume, return-on-inventory model has put additional pressure on margins. In periods of reduced demand, Lennar has deployed incentives such as rate buydowns to attract first-time home buyers and sustain high volumes—an effect that is likely to be reflected in their margins, according to Jadrosich. Mortgage rates began to decline in the latter half of Q3 and are expected to continue falling following the Federal Open Market Committee's decision to lower the fed funds rate by 50 basis points to a target range of 4.75% to 5%.
Miller expressed confidence that the company is poised to benefit from the strong demand for affordable offerings, as it continues to seek short supply within a more enticing interest rate environment. Nicole Garner, a real estate broker with Windsor Hill Real Estate Group in The Woodlands, Texas, a suburb of Houston, mentioned that Lennar typically builds affordable homes in the area.
She indicated that demand will stay robust for lower-priced homes, especially as interest rates decline. Garner elaborated, "In the greater Houston area, Lennar largely constructs entry-level homes, so in that price category, they are appealing to first-time home buyers and small families, but they are also attracting a substantial number of investors due to the affordability of their homes." Garner highlighted that now represents an advantageous entry point for first-time buyers and those seeking more affordable housing, as falling interest rates coupled with a relatively steady supply of new listings create optimal conditions.
She warned that as interest rates drop further, a growing number of buyers and investors will be pursuing homes, resulting in heightened competition and an eventual increase in pricing. "Entry-level buyers should get in now," she advised. "At the luxury level, this rate drop won't exert as significant an impact.
It fundamentally relates to liquidity—luxury buyers typically have more cash to offer, enabling them to negotiate more effectively. Also, there are fewer buyers in this segment, resulting in diminished competition and urgency." Lennar’s financial performance for the quarter exceeded most expectations.
The company reported fiscal Q3 earnings of $4.26 per diluted share, a rise from $3.87 a year prior, successfully surpassing the consensus forecast in a Capital IQ poll that anticipated earnings of $3.63 per share. Revenue grew to $9.42 billion from $8.73 billion, exceeding analyst expectations of $9.16 billion. Wedbush analysts Jay McCanless and Brian Violino shared insights in a note to clients after Lennar's earnings call, indicating that the homebuilder would likely encounter challenges, including lower consumer confidence and permitting complications that are resulting in delays for new communities.
This will compel the company to focus on increasing absorption rates within existing communities—a strategy often referred to as "gapping out." According to the analysts, "Lennar indicated that the community count should rise from Q3 to Q4 but did not clarify whether this growth would adequately address the gap out issue." Price: 184.29, Change: +2.10, Percent Change: +1.15.