Why Lennar Is Getting Hit Worse Than D.R. Horton in This Crummy Housing Market

Homes under construction at Lennar’s Lilac Ridge community in Vacaville, California. (David Paul Morris/Bloomberg)

Key Points

• Lennar stock has fallen 26% this year, the largest drop among the 13 home-builder stocks in the iShares U.S. Home Construction ETF.
• CEO Stuart Miller said land costs from options agreements and land banks are the sole driver of the company’s profit margin gap.
• Lennar’s profit margin fell 8.6 percentage points compared with the same quarter in 2023, a sharper decline than peers D.R. Horton and PulteGroup.

It isn’t an easy time to be selling houses—and home builder Lennar knows it all too well. Its stock is in the tank.

Lennar, the nation’s third-largest by market capitalization, had a third-quarter earnings miss last week. But it wasn’t inflation driving up construction materials or tariffs or wages or any of the other usual suspects that stood out. It was one company-specific quirk that is dragging down the stock: land holdings and their impact on profit margins.

Of the 13 home-builder stocks in the iShares U.S. Home Construction exchange-traded fund, Lennar is off the most this year—26%, according to FactSet. The group median is about flat.

On the company’s call, CEO Stuart Miller said plain and simply why Lennar’s profit margins have taken such a bit hit: land costs.

Lennar has moved most of its land off its balance sheet, controlling future home sites through options agreements and land banks—at a cost.

“That is the entire margin gap,” Miller said. “It isn’t labor, it’s not materials, it’s not overhead. It is land—land that was identified, underwritten and committed to in very different market conditions.”

Selling homes at the company’s 15.8% margin helps Lennar sell through its more expensive land, Miller said.

“The alternative of holding price and selling fewer homes leaves us carrying the same expensive land for longer and generating less cash, or perhaps writing off deposits with the same problem and less runway,” he said.

It’s hard to find a builder with margins that haven’t narrowed in today’s slow and expensive housing market. But Lennar’s margin was 8.6 percentage points lower than the same quarter in 2023, a year when investors and analysts were watching closely for signs that margins would stabilize. That’s a significantly sharper decline than peers D.R. Horton and PulteGroup , according to the companies’ most recent quarters.

Land costs will be a drag on Lennar’s margin even when margins for its peers recover, Seaport analyst Kenneth Zener wrote on Sunday.

“With 476,000 lots controlled, or 5.9 years, we do not see a
near-term land deflation catalyst to provide Lennar a vertical cost advantage vs equally competitive peers, limiting valuation upside, unless options are walked away from,” he said.

Zener downgraded the stock to Sell from Buy in April. On Sunday, he lowered his price target to $70 from $74.

Lennar’s targeting of first-time buyers, who are most vulnerable to mortgage rate increases, is another headwind, KBW analyst Jade Rahmani wrote on Monday.

Rahmani expects Lennar’s land and entry-level home affordability pressure to weigh on the builder’s return-on-equity, he wrote.

The company’s situation is unique—but that doesn’t mean it’s smooth sailing for other builders.

With the 10-year Treasury yield, a barometer for mortgage rate movements, stuck just below 5% and 30-year fixed mortgage rates averaging about 7%, investors will be keeping their eyes on guidance from all home builders.

The next test is KB Home , a roughly $2.9 billion builder of customized homes. The company reports earnings after the market closes on Tuesday.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

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