Warren Buffett-backed S&P 500 component Lennar is Wednesday's IBD Stock Of The Day, as the Miami-based homebuilder builds on a 40% run and its third straight monthly gain. LEN shares angled lower Wednesday.
Lennar surprised Wall Street on Dec. 15 with better-than-expected Q4 earnings and revenue. But Lennar's Q1 guidance came in under analyst predictions, sparking shares to reverse from a record high and tumble more than 3%. Despite the dip on its outlook, the S&P 500 stock gained 21% in December and has continued to rally in January as mortgage rates have hovered around 6.78%.
The Mortgage Bankers Association reported Wednesday that mortgage applications fell more than 7%, sequentially, last week as mortgage rates remained unchanged.
"Low existing housing supply is limiting options for prospective buyers and is keeping home-price growth elevated, resulting in a one-two punch that continues to constrain home purchase activity," Joel Kan, the MBA's vice president and deputy chief economist, said in the press release.
U.S. Housing Market
The big picture in the U.S. is that of a long-term housing shortage. The construction of new homes has not kept pace with the growing population. Rising material costs, supply-chain issues and labor shortages since the Covid pandemic have exacerbated the issue.
The shortage is currently running at a deficit of about 5.5 million homes, according to the National Association of Realtors. The gap is so large it would take more than a decade to close, the NAR says, even if new-home construction accelerates.
That points to a bullish long-term view for homebuilders. Warren Buffett's Berkshire Hathaway backed that view with bets on the supply-constrained U.S. housing market in Q2 of 2023. Berkshire opened new positions in S&P 500 stocks Lennar, D.R. Horton and NVR worth more than $800 million.
In 2023, new-home prices remained strong and demand steady as high mortgage rates left owners of existing homes holding tight — not wanting to sell and move up into more expensive mortgages. Mortgage rates soared for much of last year, moving with Treasury yields.
Fed Rate Cuts: Is The S&P 500 About To Party Like It's 1999 Again?
The Federal Reserve, attempting to cool rapidly rising inflation, repeatedly raised its target interest rates since the beginning of 2022. Higher interest and mortgage rates tend to reduce housing demand, which theoretically should help dampen inflation.
With inflation falling significantly, the Fed is pivoting toward cutting rates, starting sometime this spring. The 10-year Treasury yield is well off its late-October peak, bringing down mortgage rates.
S&P 500 Stock: Lennar Performance
Lennar stock advanced early before falling 0.8% to 149.87 Wednesday during market trade. The S&P 500 component gained 0.5% in January, finding support at its 10-week moving average, and is up more than 40% since the end of October 2023.
LEN stock pulled back to its 10-week line last week as rival D.R. Horton reported mixed results and disappointing orders. DHI stock plunged on that news, though it's back above its 50-day line.
LEN shares have a flat base with an official buy point of 156.01, according to MarketSmith analysis.
On Jan. 9, Lennar hiked its annual dividend by 50 cents to $2 per share. The homebuilder also authorized an increase to its stock-repurchase program to $5 billion.
"Given the strength of our balance sheet, our strong cash position and our operating strategy driving cash flow, we are focusing more of our capital allocation on maximizing total shareholder returns," co-Chief Executive Stuart Miller said in the press release.
The IBD-tracked Building-Residential/Commercial industry group surged 60% in 2023, with homebuilding stocks collectively gaining 30% in the last two months of the year.
Lennar stock has a 95 Composite Rating out of 99. The S&P 500 stock has a 91 Relative Strength Rating. The EPS Rating is 83.
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