Transcript of LENNAR EARNINGS CRACK: Why Homebuilders Are Quietly Slashing Sticker Prices
Wall Street Truthbombs
0:00A builder in South Carolina spent this0:02past week advertising a 3.99%0:06mortgage. The same flyer discloses an0:08annual percentage rate of 6.854%.0:12Hm. Both numbers are true. Only one of0:15them is real. By the end of this video,0:17you're going to know exactly what a0:19builder rate buy down is worth in actual0:22dollars. or the answer is a lot smaller0:24than the sign says and where the subsidy0:27on a new house quietly moved to this0:29year while everybody was watching the0:32interest rate. You've driven past the0:34sign. I know you have. Every American0:36has the monument sign at the entrance to0:39a new subdivision. [snorts]0:41stone base, landscaping, perfectly0:44fresh, and a number on it about 3 feet0:48tall. From 700 ft away at 50 mph, you0:53can read that number perfectly. Even I0:55can with my messed up contact lenses.0:58And then there is the asterisk. And1:01under the asterisk, there is a paragraph1:03set and type so small that you'd have to1:06stop the car, get out, walk up to the1:08sign to read it. I would have to put on1:11my glasses. That paragraph is today's1:14entire episode because it's not1:16marketing. It's legally required1:19disclosure and it tells you the truth1:21the big number is hiding. So, let's1:24start with what happened this past week.1:27On Wednesday of last week, LAR reported1:30its third quarter earnings. Net earnings1:32fell to $284 million from 591 million a1:37year ago. That's a drop of about 52%. I1:41did the math so you don't have to.1:43Earnings per share went from $2.291:46to $119,1:48which is a drop of about, here's my1:50math, 48%. And the reason those two1:53percentages are different is that LAR1:56bought back enough stock to cushion1:59about four points of it. Crazy, right?2:02Gross margin came in at 15.8%. A year2:05ago, it was at 17.5%.2:09At the pandemic peak, my friends, it2:11was, get this, 29.5%.2:15Now, before I go any further, I want to2:18correct something that you're going to2:19hear all weekend. Okay? Lenar is not the2:23largest home builder in America. Dr.2:26Horton is. Horton closed more than2:2887,000 homes last year against LAR's 822:33and a half thousand uh and did more2:36revenue. Uh Lenar is number two2:38actually. If somebody can't get that2:40right, be careful because the rest of2:42what they tell you, well, you know.2:45Okay, let's dig let's dig a little2:47further into this. But before we do,2:49please click like and don't forget to2:50subscribe. It's important to be in the2:52know and this is exactly how you do it.2:55Okay, let's jump in. So, here's the real2:58promotion. This is a LAR offer that ran3:01in Greenville, South Carolina with an3:04agreement window from the 14th to the3:0720th of September. select homes, you3:10have to finance through their mortgage3:12arm and the deal is 3.99%3:16in year 1,3:194.99 in year 2, and then 5.99 for the3:24remaining 28 years. Whoa. So, the first3:28thing to understand is that the sub 5%3:30rate is not your mortgage. It is a3:332-year promotional period. Your actual3:36rate for the life of the loan is3:38actually 5.99%.3:42And now the asterisk. Okay, that same3:45disclosure lists an APR of 6.854%.3:50What's an APR, you ask? Well, it's the3:53number that federal law forces a lender3:55to publish that rolls all the points and3:58the fees into one comparable rate. So,4:01you can compare apples to apples. It is4:04the anti-marketing4:06number. It exists specifically so you4:09can compare two offers that look4:11different on a sign. So compare it. The4:14average 30-year fixed mortgage on lender4:16rate sheets on Thursday was last week4:18was 7.19%4:20against 6.854.4:23That's a difference of 34 basis points.4:2634 hundredths of 1%. That's what a basis4:29point is. Let that land for a second.4:31The sign says 3.99%4:34which is 320 basis points below the4:37market. The permanent rate is 5994:42120 basis points below. Okay. And the4:45builder's own legally required measure4:48of what that whole package is worth4:5134. And it gets better. The average4:5330-year FHA rate uh on uh Thursday, last4:58Thursday was 6.81%. So against an in FHA5:02loan that 6.854 APR is actually slightly5:06above the market. Now let's be clear5:10here. I'm not accusing anyone of5:11anything. Every one of those numbers is5:14disclosed. That's the point. The5:16information isn't hidden. It's just5:18printed well a lot smaller. Now let me5:21show you why builders do it this way.5:23Because the economics are brutal and5:26almost nobody runs the actual5:28arithmetic. You're going to hear that a5:30builder can easily give up 5% of the5:33price to buy your rate from seven uh5:36from 7% uh 7.2, excuse me, down to 4.9.5:41Now, that's not true at all, and it's5:43not even close. The American Enterprise5:46Institute's housing center put a number5:48on this. Buying a mortgage rate down by5:50one full percentage point permanently5:52cost a builder roughly 3.2% of the sale5:55price. So, let's do the math. It's all5:58in the math, my friends. Going from 7.2%6:01to 4.99%6:02is 2.21 percentage points. Now, if you6:06multiply that by 3.2 and you get about6:107.1%6:11of the price, not five, seven, and Lar's6:15entire gross margin is 15.8%.6:20So buying one so buying one buyer's rate6:23down for four uh four from from uh6:26excuse me to $499 for 30 years would6:30consume roughly 45% of everything that6:33the company even makes on that house.6:36Now they do this before they pay a6:38single salesperson. Okay? That is why6:40you get a 2-year teaser instead of a6:4330-year rate. Okay? A 2-year step down6:46costs around 2% of the loan. The6:48permanent version costs three to four6:50times that, my friends. The builder's6:52not being cheap. The builder cannot6:54afford the real one, and nobody's hiding6:57that either. Lenar's chief financial6:59officer was asked point blank on last7:02Thursday's call to quantify what a buy7:04down cost them. Her answer, quote, "It7:07depends on whether it's a fixed loan or7:09an ARM." Okay. It depends on whether7:12it's a government or a conventional. the7:14second largest home builder in America7:16would not put a number on it. Now,7:19here's the part that nobody has7:21published yet, at least, and it's the7:24reason I built this whole episode.7:26Everyone assumes builders are shoveling7:28more and more incentive money at buyers.7:31Go look, LAR sales incentive rate was7:3414.3% a year ago. Last quarter, it was7:3812.9%. This quarter it is 12%. It's7:41actually it's going down three quarters7:43in a row. So, did buyers get a worse7:45deal? Well, let's run it. A year ago,7:47the average LAR home sold for $383,0007:51with a 14.3% incentive. That is a7:55subsidy of $54,7697:59per house. That's pretty pretty exact8:02math right there. This quarter, the8:04average home sold for $372,0008:07with a 12% incentives. That is $44,640.8:13So, the incentive actually fell by8:15$10,129.8:19I did the math so you don't have to. And8:21the price fell by 11,000. Add those8:24together and the total give back per8:26house changed by 871 bucks. $8718:31on a home approaching $400,000.8:34That is 210 of 1%. Lenard did not stop8:38subsidizing your house. It moved the8:40subsidy. It took 10,000 off the rate uh8:43buy down and put 11,000 onto the sticker8:47price. And those two things are not the8:49same thing at all. A rate buy down is8:53invisible to your neighbors. A price cut8:55is permanent and it shows up in every8:57appraisal and every comp on that street9:01forever. One of them props up the9:03neighborhood. the other one reprices it.9:06That's the real story of this earning9:08season and it's not the one anyone is9:11telling you right now. Now, I owe you9:13the other side cuz you guys, you know, I9:15like to give you both sides and this9:17version of story is going around that9:19says builders about are about to freeze9:21construction. The data actually says no.9:23The Census Bureau published August9:25housing starts last Thursday. Single9:28family starts came in at 918,0009:31annualized. That's up 7.6% 6% from July9:34and up 5.2% from a year ago. That's not9:37a freeze. And Lenar said on its call9:39that starts and sales and deliveries all9:41came within a couple hundred homes of9:44each other, which is them deliberately9:46keeping the machine running. Stuart9:49Miller said it about as plainly as a9:51public company executive ever says9:53anything. Actually, quote, it's what he9:56said. We are compromising margin in9:59order to maintain volume. Of course, we10:01understand that this is a choice. It is10:04deliberate and it is not something the10:06market is doing to us. That is a chief10:08executive telling you that he picked10:10this. He is not a victim. Now, two more10:14honest corrections here. Builder10:15sentiment did not fall. Excuse me, it10:18did fall. The National Association of10:20Homebuilders, the NAHB index, went to10:2432. Uh but it fell three points from 3510:28and it landed exactly where it was 1210:30months ago. That's a slide. It is not a10:34crash. A 66% uh excuse me and 66% of10:38builders are now using incentives up10:41from 63. But the average price cut has10:45been stuck at 6% for 6 months at this10:48point. More builders are discounting.10:50They're not discounting deeper. And the10:52claim that new homes are holding up. The10:54housing market, while resales are10:56frozen, is pretty much backwards. New10:59home sales are down 6.3% from a year11:02ago. Existing home sales are down 1.2%.11:06And there are 9.6 months of new homes11:09sitting unsold against 4.9 months of11:12existing ones. But I have to also put a11:15little asterisk, another asterisk here.11:17It varies from market to market. So, as11:21I'm describing this, you might be11:22saying, "Well, I'm not seeing that where11:24I live." Well, of course, it changes11:27from area to area. So, if you're11:30confused and you want to know more11:32details, you can probably find that data11:34out on the internet or you can ask a11:36real estate agent. So, let's get back11:39into this. New construction is the11:41weaker half of this market at this11:43point, not the prop. So, what do you11:46actually do with all of this? Right? If11:48you're shopping uh a new build, ignore11:51the big number on the sign and find the11:53APR. I hope that one really really you11:57know uh lands on you and that you it11:59sinks in. It's on the disclosure by law.12:02So, you have to check out that APR. Then12:04call one outside lender and ask what12:06they would do on the same house with the12:09builder paying you the incentive in cash12:12instead. Sometimes the buy down wins.12:15Sometimes it's worth 34 basis points and12:18a handshake. You cannot know which until12:21you actually make the call. And as I12:23always tell my kids, you can't get if12:25you don't ask. And watch one thing going12:27forward. Uh Miller said mortgage rates12:30sat between 64 and 65 during most of12:33that quarter and are near seven at the12:36moment, which means the 12% incentive12:38rate you just heard about was earned in12:40a cheaper rate environment than the one12:42that we're actually in today. their own12:45home building executive said the12:47pressure ahead might come in the form of12:49the cost of the rate buy down. That's12:52the sentence to remember. Don't forget12:54it. So, your truth bomb for today is12:56this. The builder is not buying your12:58rate buy down to 3.99.13:02His own disclosure says the whole13:04package is worth 34 basis points. And13:07while you were staring at the interest13:08rate on the sign, the subsidy quietly13:11moved to the price tag where your13:13neighbors will be living with it long13:15after your teaser rate expires. Join me13:19every day for Wall Street Truth Bombs,13:20where I drop them right here before the13:22market figures them out.
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