Investor Essentials Daily

With the current rates, the only supply comes from the homebuilders

May 9, 2024

The average 30-year fixed-rate mortgage has risen significantly from about 3% in 2020 to 7.2%, making home purchasing more expensive and difficult.

Despite the higher rates, buyer demand remains steady, helped by homeowners reluctant to sell their low-rate properties and a general acceptance among buyers that rates may not decrease soon.

This scenario has reduced the inventory of existing homes, pushing demand toward new constructions.

Lennar (LEN), a major U.S. homebuilder, benefits from this shift, maintaining strong sales by focusing on production and leveraging its financial services.

The company is well-prepared to capitalize on the ongoing demand for new homes amid a housing shortage.

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With interest rates remaining higher for longer, mortgage rates have also remained at elevated levels. Currently, the average 30-year fixed-rate mortgage sits around 7.2%, up from approximately 3% in 2020.

This significant rise in borrowing costs has undoubtedly made the process of purchasing a home much more difficult and expensive for potential buyers.

In an environment of higher mortgage rates, one would expect to see homebuying demand weaken as affordability decreases. However, data shows that buyers are not struggling as much as expected. There appear to be two key trends helping to sustain purchase activity.

Many existing homeowners, who locked in low fixed rates in recent years, are reluctant to sell their properties. Moving would require taking on a new mortgage at today’s much higher interest rates, instead of keeping their low-rate loans.

As a result, there is less existing home inventory on the market. All new housing demand is being directed towards homebuilders rather than existing property listings.

Furthermore, prospective homebuyers seem to have accepted that mortgage rates will likely remain elevated for the foreseeable future.

Purchase demand has remained steady as buyers recognize they may not see rates decline back to 3% any time soon. This realization is convincing more people to purchase homes now rather than wait and see if borrowing costs fall further.

For homebuilders like Lennar (LEN), this combination of constrained existing home supply and persistent buyer demand bodes well for future sales.

As one of the largest home construction companies in the United States, Lennar is well-positioned to capture additional market share as demand shifts toward new home purchases.

Lennar has a long track record of adapting its strategy to changing economic conditions. Even during downturns, Lennar focuses on maintaining production levels while prioritizing profitability through efficient operations.

This “production first” approach helps Lennar gain scale advantages over competitors during expansionary periods.

Additionally, Lennar’s financial services division reduces reliance on housing cycles by providing mortgage originations for its homebuyers.

Lennar has organically grown into the nation’s second-biggest homebuilder through strategic acquisitions and geographic expansion plans.

With a demonstrated ability to navigate cycles, Lennar is well-positioned to capitalize on the current environment. Management expects demand for new single-family homes to remain robust over the long run due to the housing shortage.

If resale activity remains constrained and buyers continue adjusting to higher rates, Lennar’s sales volumes could exceed expectations over the next decade as it gains additional market share.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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