In August, Warren Buffett’s Berkshire Hathaway conglomerate disclosed that it had taken a roughly $800 million position in Lennar (NYSE:LEN), a major American homebuilder. Impacted by high interest rates and a weak housing market, shares of Lennar are down more than 30 percent on a trailing 12-month basis. Why did Buffett and his team buy Lennar, and what could Berkshire’s interest signal about the US housing market as a whole?
Lennar Valued at 11x Earnings
Even with news of Berkshire’s stake in the business, shares of LEN are still priced at 11.7 times trailing 12-month earnings and 0.9 times sales. Although this P/E ratio may seem quite low in today’s market, it’s worth noting that LEN shares have consistently traded below 15 times earnings for about a decade. So, while LEN may look cheap compared to the broader market, it doesn’t look massively undervalued when compared to its own price history.
This valuation dynamic is also reflected in analyst price forecasts. The consensus price for LEN shares is $128.21, a gain of a little less than 8 percent from the most recent price of $118.77. While decent, analysts don’t seem to be expecting market-beating returns from LEN in the immediate future. Lennar also offers a current dividend yield of 1.7 percent, somewhat bolstering the expected total return.
Where Berkshire Might See Value in Lennar
The first characteristic of Lennar that stands out as a positive for Buffett is its wide moat. Lennar is one of the largest housing developers in the United States, accounting for more than 10 percent of the domestic development market by revenue. This large competitive position in bolstered by Lennar’s focus on comparatively upscale properties in desirable markets. Even so, Lennar has been forced to offer sharp price reductions and buyer incentives to keep its sales up in today’s increasingly challenging housing market.
Historically, Lennar has also delivered many of the financial characteristics Buffett is known to favor. Returns on equity, for instance, were consistently above 15 percent from early 2021 through late 2024 and haven’t dipped below 10 percent since 2018. As of Q3’s earnings report, the business still had a strong balance sheet, showing total assets of $34.9 billion against total liabilities of $12.1 billion. Even the business’s trailing 12-month return on invested capital of 9.2 percent dwarfs the sector average of 3.8 percent.
Management is also using a considerable amount of cash to buy back its sold-off shares, a method preferred by Buffett for returning cash to shareholders when stock prices become attractive. In Q3, for instance, Lennar bought back $507 million worth of its own shares. This came on top of $517 million in buyback spending in Q2. Given that Lennar’s market cap is a bit over $30 billion, this pace of buybacks could meaningfully concentrate shareholder ownership if management keeps it up.
Lennar as a Play on a Housing Market Rebound
Although Lennar has many of the characteristics that Buffett is known to look for when picking businesses, it’s unlikely that LEN will deliver strong returns unless the housing market begins to recover. In this sense, Lennar looks like it could be as much a bet on the characteristics and trajectory of the housing market as a whole as it is an investment in a single large and successful business.
Despite current weaknesses, America’s real estate market is still defined by a housing shortage estimated at 4.7 million homes as of July. Affordability problems, high mortgage interest rates and increased economic uncertainty have kept many buyers on the sidelines, leading to a drop in the overall housing market. The mismatch between supply and demand, however, suggests that home prices will keep rising over the long run, likely benefiting large homebuilders like Lennar that can ride out market challenges and eventually realize better sales and margins when the market begins to pick up again.
Though he has become famous for picking individual stocks for their value while being largely agnostic about macroeconomic volatility, there are precedents for Buffett making investment decisions on such supply and demand mismatches. In the late 1990s, for instance, Berkshire Hathaway made a large bet on silver on the rationale that mismatches between annual demand and annual production would eventually drive prices substantially up. While it may seem odd to compare the housing market to silver, a similar dynamic in housing may have given Berkshire an attractive entry point for buying Lennar.
This view of the Lennar investment is also supported by the fact that Berkshire bought about $191.5 million worth of D.R. Horton (NYSE:DHI) around the time it was also buying Lennar. Horton is another large homebuilder that could also stand to benefit from long-term housing market improvements. Given that the stocks appear to have been purchased at roughly the same time, it seems that Berkshire may be staking out a broader position on the housing market in hopes that lower interest rates and an improved macroeconomic outlook will eventually create a rising tide that lifts all boats.
Why Did Buffett Buy Lennar Stock?
At the end of the day, Lennar offers both many of the traits Buffett famously looks for in individual businesses and a convenient play on broader supply and demand trends in the housing market. The stock could also be primed for a rebound in the not-too-distant future, as mortgage interest rates are expected to retreat to below 6 percent by the end of next year as the Fed keeps up its interest rate drawdown. These lower rates will likely stimulate the housing market, potentially setting Lennar and other homebuilders up for a better business environment ahead.
The Lennar investment appears to follow Buffett’s long-term strategy of buying high-quality businesses with competitive advantages in their industries at times when their stocks are sold off due to temporary headwinds or bearish market sentiment. With a strong competitive position and a durable balance sheet, Lennar could be a good play on a future housing market recovery. In the meantime, both Berkshire and other shareholders can take advantage of management’s use of cash to repurchase shares and pay a respectable dividend.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.