Nation's second-largest homebuilder expects continued softening into 2023
Housing industry woes exacerbated by a perfect storm of challenges emerging this year – high labor costs, supply chain issues, and materials value spikes among them – are reflected in the fourth quarter earnings report from Miami-based Lennar Corp., the nation’s second-largest home construction company.
To be sure, the earnings report wasn’t all bad: Net earnings per diluted share rose 16% to $4.55; net earnings increased 11% to $1.3 billion; deliveries were up 13% to 20,064 homes; and total revenues spiked 21% to $10.2 billion. What’s more, net earnings, deliveries and revenue for 2022 were the highest in the company’s history, company officials said at Friday’s earnings call.
Yet new orders decreased 15% to 13,200 homes while new orders dollar value fell 24% to $5.5 billion, and homebuilding operating earnings increased a mere 4% to $1.8 billion.
The balance sheet offered a glimpse into what next year might look like in the housing industry. “Sales and sales prices are down materially across both the new and existing home markets,” Stuart Miller, executive chairman, said. “And given commercial underwriting and lending criteria, new for-rent properties are being curtailed as well.”
The upshot: “Our current view is that production of single-family and multifamily dwellings nationally will be down between a quarter to a third in 2023, exacerbating the national housing supply shortage,” Miller added. “Numerically, that means that approximately 1.5 million homes produced over the past couple of years per year will drop to around a million homes produced.”
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Miller described the current landscape: “But even as demand has cooled very quickly, the overhang of a now-correcting, although disrupted, supply chain, stubbornly high labor and materials costs, and production or cycle times that have grown by over two months have created an unusual wedge that homebuilders have been left to navigate.”
Rick Beckwitt, co-chief executive officer and co-president, echoed Miller’s assessment. He invoked the significant mortgage rate increases emerging this year as a major factor in company earnings given resulting erosions in affordability and homebuyer confidence.
“While we continue to have many strong markets in our more challenging areas, we’ve had to adjust base sales prices, increase incentives, and provide mortgage rate buydowns to maintain or regain sales momentum,” Beckwitt revealed. “Our sales strategy has been to find the market clearing price for each of our homes on a community-by-community basis as quickly as possible and price our homes accordingly.”
The strategy pivot required a more acute analysis of markets, he added: “This requires a detailed understanding of community- and product-specific pricing, financing programs, traffic trends, inventory levels, and buyer sentiments. During the fourth quarter, our new sales orders declined 15% from the prior year on a 4% lower year-over-year community count. Our year-end community count was lower than we projected at the beginning of the year as we walked away and renegotiated our many communities.”
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The strategy allowed the company to sell homes and avoid building up finished inventory, Beckwitt said, resulting in its ability to outsell the competition while increasing its market share. Yet he acknowledged challenges exacerbated in eight markets – those in the company’s so-called “category 3” markets – experiencing more significant softening and correction. Those markets were: Orlando and Pensacola, both cities in Florida; Northern Alabama; Austin, TX; Phoenix; Utah; Reno, Nev.; and Portland, Oregon.
“We had to offer mortgage buydown programs and normalized incentives,” he explained. “Our category 2 markets, which reflect markets where we’ve made more significant adjustments and have successfully regained sales momentum, include 23 markets. These include Jacksonville, Ocala, Atlanta, Coastal Carolinas, Raleigh, Virginia, Maryland, the Philadelphia metro area, Chicago, Minnesota, Nashville, Dallas, Houston, San Antonio, Colorado, Tucson, Las Vegas, California Coastal, the Inland Empire, the Bay Area, Central Valley, Sacramento, Seattle, and Boise. While inventory is limited in each of these markets, we had to offer more aggressive financing.”
Against the complexity of such patchwork, Miller suggested the company’s fabric remains strong.
“Fortunately, we are well positioned with well-structured contracts and shorter-term deal structures that enable our capital allocation to be micromanaged constructively,” he said. “We started the quarter with $2.5 billion of expected land closings. We ended the quarter with three quarters of that spend, either walked from, renegotiated to produce a responsible margin, or pushed for reconsideration at a later time. As with our trade partners, our land partners or sellers understand that we’re maintaining volume and increasing market share while taking the first hit to our margin.”
Miller reiterated, however, the importance of teamwork to navigate waters expected to remain choppy well into next year: “They will need to work together and participate, or will need to move on,” he said of the company’s trade partners.
