The Future of Lennar and Homebuilding Faces Short Term Challenges with Potential for Long Term Growth

History of Homebuilding: Homebuilding has been in decline since April 2022, and it was the following month when public sentiment realized they were facing a housing crisis. Notable causes were the sharp drop in new home building starts, sharp increases in federal funds rate, rising mortgage rates, peak of average/median home sales price, and high months' supply ratio. The crisis is now widely recognized, leading to greater pressure on policymakers to act. Media coverage and grassroots advocacy have brought housing affordability to the forefront, policies both presidential candidates ran on.

Thesis

• 1y Price Target: $149.57, a 13.7% increase from 131.58, 10.5% below analysts’ 23.3% consensus because I believe earnings will grow from 2024’s $3.9B to $4B, with a slightly elevated PE ratio from today’s 9.05x to 9.5x.
• 3y Price Target: $215.56
• Calculations: 
  • 1Y price target - $149.57 = (((35,441,452,000x1.047)x.108)x9.4)/(267,000,000x.9433)
  • 3Y price target - $215.56 = ((((35,441,452,000x1.047)x1.062^2)x.097)x11.9)/(267,000,000x.9433^3)
  • (Forecasted Earnings x PE Ratio of 9.5x/11.9x)/(5.67% decrease from .267B Shares Outstanding)
  • Earnings are reflected from an adapted analyst expectation of 5.7% revenue growth annually for the next 3 years, with 11% profit margin in 2025, 10.2% in 2026, and 10% in 2027, with room to improve once rates drop further past that point. Profit margins are slightly higher than analysts with a consensus of 9.5% by 2028.
• I believe Lennar, as well as the general homebuilding industry, faces tight demand in the near future due to the stagnant elevated mortgage rates, and therefore the stock price may see mild gains in 2025. However the FED says the economy is going strong and there's no need to drop interest rates as much as expected, which strongly hints that demand will recover sometime late this year and the homebuilding industry will see strong long term gains within three years.
• Political Predictions: Trump’s affordable housing policies combined with regulation cuts will outweigh the negative effects of his proposed tariffs and sweeping immigration reforms. Largely, Trump's most newsworthy positions such as deporting millions of undocumented people in addition to his proposed tariffs are unlikely to come into effect and the acts he does pass/executive orders he does use would only be miniscule in comparison to what he had proposed to impose.

• Political Prediction Reasoning: Before Trumps first term he ran on building a huge wall along our Mexican border and upgrading it and making Mexico pay for it. In reality only 80 miles of wall had been built where there was none before, and 654 miles already existed, leaving huge gaps that he promised to fill. Presidents usually do not fulfill every ambitious claim they make. A seemingly more impossible task than building the wall is deporting millions of people, a project debatably more expensive than the proposed wall. Things he has been able to accomplish on the other hand, cut regulations even in a housing market where there was less pressure to. Although he had controlled the senate and house, like he will now, he did three things that benefitted the housing market. Executive Order on Eliminating Barriers to Affordable Housing Development (June 2019), Tax Cuts and Jobs Act (December 2017), and his creation of economic opportunity zones. 
  • Housing Cabinet Picks:
    • Scott Turner (HUD): Focusing on reversing Biden-era housing policies and administering rental subsidies. Hedge fund guy, his confirmation hearing is scheduled for Thursday, January 16, 2025.
    • Doug Burgum (Secretary of the Interior): Could make opportunity zone creation easier, streamline regulations, and promote affordable housing. Generally Doug would be less important than Scott Turner for the housing market.

• General Reasoning: A balanced market requires a balance between supply and demand and taking a quick look at the past 5 years of the FRED's months' supply data, it is at new heights, heights similar to levels during the Great Recession. It indicates a surplus of housing relative to demand. People aren't exactly lining up to buy houses, as the ratio has sharply increased from 5.6  in February 2020, to 8.9 in November 2024. This is primarily due to high mortgage rates and the fact that many homes that were started during the low mortgage rate housing boom of 2020-2021, came to market in 2023 and 2024, coinciding with a period of reduced demand. I noted this specific data because it expands on the fact that there is weak home buying demand right now which is reflected in the recent sharp 24.6% decline industry wide over the past three months following a FED meeting on December 18th discussing the possibility of lower amount of rate drops then planned in 2025. This negative sentiment may persist in the short term. However despite the short-term spike in months' supply, the U.S. still faces a structural housing shortfall of 3–5 million units, as estimated by entities like Freddie Mac. This reflects years of underbuilding relative to population growth, particularly in high-demand metro areas, giving affordable home builders like Lennar plenty of room to grow with excellent catalysts such as strong population growth and housing demand in the Sun Belt. Texas is where Lennar gets almost ¼ of home deliveries, with an average sales price of $253,000, well below the national median of $420,000. If rates stabilize or decline, pent-up demand could return much quicker.
• After this recent homebuilding market crash, Lennar is at a discounted price right now with a PE ratio of 89.05 compared to the rest of the industry at 9.4, which was previously at 12.5 before this correction. Looking at Appendix G points out the fact that market caps could not sustain the level they were at after stagnating demand with signs of future stagnating mortgage/interest rates. However now valuation growth seems to be falling in line with revenue growth, hindering any worries about a large overvaluation due to the market pricing in future expected homebuilding growth