Lennar’s (LEN) CEO Stuart Miller warned about the next big headache for housing — land.
"We believe that the new supply of homes will be limited as developed land is scarce and increasingly more expensive to develop," Miller said on the company's quarter earnings call Friday after blowing past quarterly orders and raising its fourth quarter deliveries forecast. "This will continue to limit available inventory and maintain supply/demand imbalance."
Homebuilders are hungry for land. Yet, the US, a country that offers wide open spaces, is short of land for housing. Builders like Lennar have been able to grow through acquisitions of companies with coveted land pipelines.
But buying land isn’t cheap. It can cost anywhere from a few thousand dollars per acre to tens of thousands of dollars for the lot, squeezing cash flows and balance sheets. That has prompted Lennar to hone in on its land strategy.
“In our third quarter, we continue to effectively work with our strategic land and land bank partners to purchase land on our behalf and then deliver just-in-time finished home sites to our homebuilding machine,” Jonathan Jaffe, co-CEO president & director of Lennar, said on the earnings call.
“About 85% of our $1.5 billion land acquisition with finished homesites purchased from various land structures. We have made significant progress again in the third quarter as our year's supply of owned homesites improved to 1.5 years from 2.2 years, and our controlled homesite percentage increased to 73% from 79% year over year, respectively,” Jaffe added.
Lennar owned 107,000 homesites and controlled 284,000 homesites for a total of 391,000 homesites by the end of third quarter. Meanwhile, the homebuilder started with 18,675 homes and ended the quarter with approximately 43,600 total homes in inventory.
“The reduction in cycle time and the reduction in owned land will increase cash flow as well as help improve inventory churn, which now stands at 1.3 versus 1.1 last year, an 18% increase,” Jaffe said.
The community count at the end of the third quarter was 1,253, a 5% increase from a year ago, and executives are expecting community count growth to reach high single digits by the end of this year.
Separately, one of the deals the builder hasn’t dusted off is its plan to take Quarterra Multifamily public. Quarterra centers around the development, ownership, and management of multi-family, single-family rental, and land development strategies on behalf of institutional partners.
“We have stopped talking about it because quarter by quarter, we don't want to feel like we're missing expectations,” Miller said. “We don't want to put something out there that just isn't right or doesn't feel right.”
Starts remain steady
Lennar’s core strategy of selling after completion to keep excess inventory low has allowed the homebuilder to keep a steady foot on the excavator this quarter.
“We were quick to reduce costs as the market corrected and we have held costs down as the market has stabilized, and considerable success in this area is reflected in our margin improvement and as well as in the number of homes that were construction-ready and available for delivery this quarter,” Miller said.
Lennar reported their quarterly starts pace was 4.9 homes per community, slightly lower from the previous quarter of 5.3 homes per community. The homebuilder delivered 18,559 homes, an 8% increase over last year while selling 19,666 homes, a 37% gain year over year.
The muted resale market continues to help the homebuilder. Existing home sales dropped 2.2% in July from the month before to an annualized rate of 4.07 million, according to the National Association of Realtors, marking the lowest sales pace for July since 2010.
It’s a different story for new home construction. Newly built home sales edged up in July, providing some relief in the housing market. The rise in activity stresses the key role homebuilders like Lennar are playing to meet demand.
“Housing supply is short and limited, demand returned to affordable offerings, and builders will need to continue to produce more homes to fill the void,” Miller said.
Lennar is also looking to end the year with a bang.
For the fourth quarter, Lennar expects to deliver between 21,500 to 22,500 homes, while Bloomberg analysts are estimating 20,446 homes. The homebuilder forecasts net new orders to be 16,200 to 17,200 and the gross margin on home sales to be between 24.48% to 24.6%.
“We expect to finish out this year strong, and we also expect to enter 2024 with a 10% initial growth expectation, and we're very well positioned to achieve that level,” Miller said.
"We are positioned for a very strong 2024 right now. We have the land. We have it identified. It is under contract or in our pipeline. It is under development."
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.