Lennar Corp. (LEN) is betting big on meeting the "dominant need" in housing by being a production-first builder.
"At the local levels, the need for workforce housing is a dominant need and it's become a social imperative," Stuart Miller, chairman of the board at Lennar, said on the earnings call with analysts Thursday. "There's a void that needs to be filled... And what we're going to do is instead of driving price, we are going to drive pace and hold price."
The builder's core strategy of selling after completion to keep excess inventory in check follows its second quarter earnings on Wednesday that blew past Wall Street's expectations.
Adjusted earnings per share came in at $2.94, beating the $2.31 estimate from analysts, according to Bloomberg. Revenue in the quarter totaled $8.0 billion, up from the $7.29 billion expected by analysts.
Lennar said new home orders rose 0.5% year over year to 17,885, above the 16,501 purchase contracts the company was forecast to sign. For the quarter, most of the new orders came from the East and West regions.
Lennar also put its hammers to work as it ground through its backlog of homes for sale, which dropped 29% for the year to 20,214, slightly lower than analysts' estimates of 20,437. Additionally, cancellations sank by 13.5%, allowing new home deliveries to increase by 3% for the quarter.
Starts in focus
Lennar didn’t slow down its speed of construction of new homes. In fact, the homebuilder pushed the gas pedal on the excavator this quarter.
"We really accelerated our starts in Q2, recognizing the market opportunity where the industry was pulling back," Jonathan Jaffe, Lennar's co-CEO, said on the earnings call.
"And given that we didn't have an inventory buildup because of our strategy, we felt there was an opportunity to be more aggressive with starts and take advantage of the lack of resale inventory as well as the lack of new-sale inventory," Jaffe added.
Existing home sales contracted in April because there were fewer deals to be had, pushing more homebuyers to the newly built market and sending sales upward.
Mortgage rates also aren't helping buyers, offering a key opportunity for builders. The rate on the 30-year fixed mortgage dipped to 6.69% from 6.71% the previous week, Freddie Mac reported Thursday. Rates this year have seesawed between 6% and 7%.
"The strong demand for housing that had been curtailed by sticker shock and affordability challenges has returned," Miller said, "while the housing market adjusted prices, incentives, including rate buydowns and production costs in order to enable customers to afford needed shelter."
But even those incentives aren't needed as much. The percentage of incentives was 8.4% in the quarter, down from 10.2% in the first quarter.
Rising rates also continue to keep inventory tight, discouraging homeowners from listing their homes for sale and making the new home market more attractive.
"We feel comfortable that we'll be able to sell at an accelerated pace because we'll have the inventory," Jaffe said. And by "providing that inventory with a backdrop of really healthy demand for housing. So that gives us confidence that we'll be able to continue to accelerate our sales pace, managing that start pace."
Outlook looks good
Lennar raised its full-year guidance to deliver between 68,000 and 70,000 homes, up from its previous forecast of 62,000 and 66,000 units, “signaling a new level of confidence in the new home market despite current mortgage rates re-approaching the 7% threshold,” Buck Horne, analyst at Raymond James & Associates, wrote in a note to clients following the earnings release.
For the third quarter, the homebuilder expects to deliver between 17,750 and 18,250 homes. Although the average sales price on homes is down 10% from last year, Lennar expects pricing to remain constant throughout the year.
"We have seen in our numbers that net average sales prices on home closings have dropped approximately 10% or 11% on home sales from the peak of approximately $500,000 in 2022 to approximately $450,000 now, and we expect that pricing is going to remain constant throughout the year," Miller said.
The company also adjusted its gross margin outlook to between 23.5% and 24.0%. Meanwhile, executives on the call gave some insight for the next quarter by saying sales activity and cancellation rates in the first weeks of June have been consistent with the second-quarter results.
Still, some analysts on Wall Street remain on the fence about Lennar’s output compared to its peers like D.R. Horton (DHI), one Deutsche Bank analyst pointed out.
"The reality is that the cumulative profits generated by DHI are comparable to those from LEN, but DHI is far better positioned to continue to grow volumes and profits from here and that is the opportunity cost of exercising moderation in the face of strong demand," Joe Ahlersmeyer, an equity research analyst at Deutsche Bank, wrote in a note to clients before the earnings release.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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