Warren Buffett’s Berkshire Now Owns 12% of This Homebuilder — Just as America’s Housing Market Deteriorates

Warren Buffett's Berkshire Hathaway has recently acquired a significant stake in Lennar Corporation, a prominent homebuilder, amid challenging conditions in the U.S. housing market. Berkshire invested nearly $200 million in early October, purchasing approximately 2.42 million shares of Lennar, bringing its total ownership to about 29 million shares. This investment now represents roughly 12% of Lennar, valued at around $2.2 billion.

This acquisition occurred on October 1 and 2, coinciding with rising mortgage rates, which have reached a three-year high. According to a report from Freddie Mac, the average rate for a 30-year fixed mortgage hit 7.40%, marking the highest level since November 2023 and reflecting a consecutive seventh week of increases. Lennar's stock closed at $76.68 on Friday, a decline of 33.23% over the past year, and it recently faced scrutiny from short-seller Hunterbrook due to its dealings with Millrose Properties.

Despite the lack of commentary from Berkshire regarding its investment strategy, analysts speculate that the company sees potential in Lennar as a builder capable of weathering prolonged downturns in the housing sector, especially at a time when the market has already priced in some of these challenges.

Lennar has reported a difficult third quarter, with revenue dropping by 8.5% to $8.05 billion and adjusted earnings per share of $1.23 falling short of the $1.30 forecast. The company’s net income plummeted by nearly 52%, and its gross margin on home sales decreased from 17.5% to 15.8%, despite offering incentives that accounted for nearly 12% of sales prices. In light of these challenges, management has reduced its full-year delivery estimates to between 80,000 and 81,000 homes.

Stuart Miller, Lennar's CEO, acknowledged the worsening conditions since the last earnings call, attributing the decline to various economic factors. The yield on the 10-year Treasury note reached 5.22% recently, and consumer sentiment has dipped to 51.7. In many of Lennar’s markets, approximately 50% of potential buyers are unable to qualify for a mortgage, exacerbating the company’s challenges.

A notable aspect of Lennar's strategy is its minimal ownership of land, which historically has been a significant risk factor for builders during downturns. Currently, Lennar owns about 2% of its home sites and manages around 476,000 lots through third parties, primarily land bankers. This approach reduces its exposure to land-related financial burdens, with homebuilding debt constituting just 16.6% of total capital.

As a result, Lennar operates more like a manufacturer, having reduced its average build time to a record 116 days and lowered construction costs by 14% since late 2023. Miller pointed out that the current margin pressures are largely due to older land contracts that were established under less favorable pricing conditions. He emphasized that the company is focused on maintaining volume and managing its land challenges effectively.

However, Lennar’s land-light strategy is not without its own costs. Rising option fees and extended holding periods for land have increased pre-acquisition expenses to $7.3 billion, an area that has drawn criticism from Hunterbrook.

Looking ahead, Lennar has projected its fourth-quarter gross margin to range between 15.5% and 16.0%, anticipating 19,500 to 20,500 new orders based on expected mortgage rates around 6.8%. With rates currently above this threshold, the upcoming earnings report will be critical. Analysts will closely monitor whether new orders meet guidance despite the elevated rates and if margins hold steady or decline further.

Berkshire Hathaway's investment suggests a long-term confidence in Lennar’s operational model. However, it does not guarantee that the housing market has reached its lowest point. For many potential homebuyers who currently cannot secure financing, the key to market recovery remains a decrease in mortgage rates.

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