Cut the price, and they will buy. Dealing with the affordability crisis. Sales volume is up, but shares have plunged by nearly 50%.

By Wolf Richter for WOLF STREET.

Lennar, one of the largest homebuilders in the US, reported Q2 earnings this evening. In terms of the travails of the housing market, they’re revealing. Lennar targets the mass market and sales volume. In this “affordability crisis,” as it’s often called – where no homeowner wants their home to become affordable – Lennar has been cutting sales prices and piling on incentives to boost its unit sales in a very tough market.

The average sales price, including incentives, fell further, both per home sold and per square foot. It largely came at the expense of gross margin, which fell to 15.6%, from 17.8% a year ago, and from 29.5% in Q2 2022, at the FOMO peak. Efforts to whittle down construction costs – they declined by “13% over the last several years,” it said – also helped. But land prices rose.

The average price per home delivered in Q2 fell by 4.6% year-over-year to $371,000, “primarily due to continued weakness in the market” and “reflecting approximately 12.9% in incentives, along with base price adjustments necessary to sustain volume in a market where affordability remains the defining constant,” the company said. That price is back where it had first been in 2017 and is down by 24.4% from Q3 2022.

But that decline in the average sales price comes after massive price increases, including 25% in less than two years, when homebuyers were eager to pay whatever, and Lennar let them.

lower prices do the trick in a tough market amid the “affordability crisis” where no homeowner wants their home to become affordable: Lennar’s deliveries rose by 2% to 20,519 homes, though its revenues from homebuilding fell by 3% due to the lower sales prices.

“Our strategy consistently has been to execute around the affordability challenge rather than wait it out. We have prioritized volume to create durable scale advantages, to deliver that volume at lower prices, and ultimately improve margins,” the company said.

“Our costs are down materially over the past two years, volume is holding, our asset-light balance sheet is functioning extremely well and improving, and our technology initiatives are defining a new Lennar,” the company said.

“We remain deeply committed to building the homes America needs, at prices families can afford, and to generating the returns our shareholders deserve,” it said in the earnings report, and we’ll get to those returns that shareholders deserve in a moment.

“Gross margins decreased primarily due to lower revenue per square foot and higher land costs year over year, which were partially offset by a decrease in construction costs, reflecting the Company’s continued focus on cost-saving initiatives,” it said.

“Our construction costs improved another 2% sequentially and 13% over the last several years. Our cycle time reached a new record low of 121 days, down from 122 days last quarter and 132 days a year ago. We reduced our inventory to 2.1 homes per community from 3 homes per community last quarter, and our inventory turn stands at 2.5 times,” it said.

To return to its phrase, “generating the returns our shareholders deserve”:

• Operating earnings from homebuilding plunged by 32% year-over-year to $489 million.
• Net income plunged by 36% year-over-year to $305 million. Compared to Q2 2022 ($1.32 billion), net income plunged by 77%.
• Earnings per share dropped by 31% to $1.24. Compared to Q2 2022 ($4.50), EPS plunged by 72%.

Lennar has been giving up a big portion of its gross profits, net profits, and earnings per share by offering lower prices to gain market share in a tough market steeped in the affordability crisis, and it has been working on bringing its construction costs down to mitigate the effects of those lower prices.

In terms of sales volume in a tough market, where home prices are too high, this strategy has been successful. Lower the price, and they will buy. This is exactly what today’s affordability-wrecked frozen housing market needs. Bring on the affordable supply.

But the price of Lennar’s shares [LEN] has plunged by 49% from the peak in September 2024, to $92.43 currently, including today’s after-hours drop of 2.6%, and are back where they’d first been in March 2021 (data via YCharts).

In case you missed it: Supply of Existing Single-Family Homes at 10-Year High, Condo Supply at 12-Year High, Sales still in Freezer

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