After two years of surging home prices, suddenly the market is worried about a crash in the housing market.
With mortgage rates rising fast, home prices already stretched, and fears of a recession sweeping the market, the pieces seem to be in place for a pullback in home prices.
Despite the beginning of a decline in home prices, the U.S. still has a national housing shortage as homebuilders pulled back in home construction in the decade following the housing crisis, and as of 2019 the U.S. had a shortage of 3.8 million homes, according to Freddie Mac.
Homebuilder stocks have fallen over the last year on fears of a new housing bubble, but the housing shortage should help support long-term demand in the sector. That's one reason to give Lennar (LEN 0.98%), one of the nation's biggest homebuilders and a top value stock to buy right now, a closer look.
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All about Lennar
Founded in 1954, Lennar has been publicly traded for 50 years and brings in more than $25 billion in annual revenue. Nearly all of that revenue comes from homebuilding, although it also engages in other real estate services like mortgage origination, title insurance, and other closing services.
Despite the slowdown in the housing market over the last few months, Lennar's recent results have been strong.
In the third quarter, deliveries in the quarter jumped 13% to 17,248 homes, and revenue rose 29% to $8.93 billion. On the bottom line, adjusted earnings surged 48% to $1.51 billion, or 58% on a per-share basis to $5.18, thanks to share buybacks. Over the last year, shares outstanding have fallen by 6%, and in the third quarter, it bought back 9.4 million shares for $847 million, showing it's taking advantage of the pandemic windfall in the housing market.
There are signs of slowing demand at Lennar. New orders in the quarter declined 12% to 14,366 homes, though backlog dollar value still increased, up 8% to $12.9 billion.
Management's guidance called for new orders in the fourth quarter to be flat with third-quarter levels, though it sees an increase in deliveries to 20,000 to 21,000, showing revenue should grow sequentially.
CEO Stuart Miller also expressed long-term optimism about demand even in the face of rising interest rates, saying, "Sales have clearly been impacted by rising interest rates, but there remains a significant national shortage of housing, especially workforce housing, and demand remains strong as we navigate the rebalance between price and interest rates."
The surge in home prices may be over, but with the shortage in housing and a slowdown in existing home sales after so many homeowners refinanced during the pandemic, there will be a floor on demand for homebuilders like Lennar.
Why Lennar stock could bounce back in 2023
While the homebuilding sector is down across the board this year, there are already signs that it could recover over the coming year, especially if the "Fed pivot," or an end to rising interest rates, comes sooner than expected.
When the October consumer price index reading came in lower than expected on Nov. 10, homebuilder stocks surged, including Lennar's, which jumped 12.6% on the news. That jump seems to indicate that the market has already priced in the downturn in home prices.
Meanwhile, the latest existing home sales report shows that inventory remains tight as the housing supply is down significantly from a year ago, with 1.22 million units on the market.
With the existing home supply tight, that means prospective buyers will have to turn to homebuilders like Lennar. With millennials entering their prime family formation years, housing demand is likely to remain strong, even if interest rates remain high.
Because of the housing shortage and strong demand from homebuyers, Lennar should be able to continue to deliver solid profits even in a high-interest-rate environment.
Currently, the stock trades at a price-to-earnings (P/E) ratio of less than 6, and even though analysts expect EPS to decline next year, the stock still looks cheap at a forward P/E of less than 8. Additionally, Lennar offers a 1.7% dividend yield and should continue to return capital to shareholders through buybacks, making it a great value stock to own right now.
Buying during the great financial crisis paid off handsomely, with the stock returning more than 1,000% from its nadir in 2008. Taking advantage of the latest pullback in the housing market should also deliver above-average returns over the long run.
