Why Is Buffett Buying Homebuilders?

The US housing market has been less than stellar over the past few years. It’s caused many to lament that the American dream of owning your own home is becoming more out of reach for people every day.

Yet there may be bright spots on the horizon. Warren Buffett, perhaps the world’s most famous investor, appears to be betting that the housing market is due for a turnaround.

In the summer of 2023, Buffett’s firm, Berkshire Hathaway, started buying up shares of several homebuilders in a move that puzzled many at the time given that interest rates had risen.

That $800 million investment was split among renowned homebuilders, including D.R. Horton (NYSE: DHI) that now accounts for nearly 2% of Berkshire Hathaway’s portfolio and Lennar (NYSE: LEN) representing 1% of it.

NVR (NYSE:NVR) is the final homebuilder Buffett bought, and NVR now makes up 0.32% of Berkshire’s holdings. All three companies are established players in the market with varying degrees of valuation. While the stocks themselves have merit, it’s clear that Buffett is making a larger bet on the real estate market at large.

So is now a good time to follow Buffett’s example and buy homebuilders?

Why Did Buffett Buy D.R. Horton?

Shortly after Buffett bought his stake in the three homebuilders, it looked like he made a mistake. DHI, LEN, and NVR all dropped in October after KB Homes issued a warning that home sales were slumping. The company expressed concerns that high mortgage rates and property prices, as well as low home availability might affect builders’ bottom lines.

But Buffett seemed to know better. When D.R. Horton released its results from the 4th quarter of the 2023 fiscal year (ending September 2023) it reported revenue that was 4.78% higher than expected. Consolidated revenue of $10.5 billion was also 9% higher than the same quarter of 2022.

Diluted earnings per share of $4.45 was down nearly 5% from last year, but it still came in at 13.35% higher than analysts expected. D.R. Horton is the largest homebuilder in the country, and despite the current real estate market, the company’s leadership believes it is set to succeed in 2024.

DHI was trading at around $100 per share in the fall of 2023, but the stock bounced back to finish the year at $150 per share. D.R. Horton stock rewarded shareholders with a 62.3% return over the past 12 months, and that trend has continued into 2024. The consensus among analysts is to buy DHI, with a price target of $166.

Why Did Warren Buffett Buy Lennar?

Lennar stock has been on a nearly identical journey to D.R. Horton over the past year. LEN share price dropped on the KB Homes news and then reversed course in the final months of 2023.

In the fiscal 4th quarter, Lennar generated $10.9 billion in revenue compared to $10.2 billion last year, a 6.6% increase over analysts expectations.

Diluted EPS of $4.82 outperformed 2022 by nearly 6% and beat estimates by 12.4%. Lennar leadership echoed the reports from D.R. Horton that the company was performing well in the high-interest-rate market, and that the housing market would open up more in 2024.

The earnings release had a similar effect on LEN as it did on DHI. Lennar shares had been trading at around $100 per share but by the end of the year, the stock eclipsed $150 per share. DHI has a 1-year return of 55.7%. Of 23 analysts who have rated it, the current consensus is to Buy with a price target of $165 per share over the next year.

Why did Buffett Buy NVR?

The past 52 weeks have told a similar tale for NVR stock, if not as dramatically as its competitors.

One glaring difference from the 3rd quarter earnings report was that NVR reported revenue that was 9% below what was reported last year and also 3% lower than forecast.

Diluted earnings per share of $125.26, on the other hand, was 5.7% better than last year. It was also 11% better than expectations. Beating earnings estimates has been a trend for NVR, going back for the last four earnings releases. 

NVR share price rewarded investors with a 45.6% return over the past year. Indeed, the end-of-the-year rally took a stock that was trading around $5,400 up to where NVR currently trades at around $7,307 per share.

Analysts are not quite as bullish on NVR with the current consensus rating it a Hold. The price target is $7,430, which is only a 1.7% increase.

Which Homebuilder Is The Better Buy For Buffett?

Strictly following the analysts’ forecasts, Lennar is slated to have the better year among the three Buffett buys. However, the 7.1% predicted growth for LEN won’t get many investors excited. Buffett has already made a hefty return on his investment since August, so he may not fret if the homebuilder stocks stabilize over the next year.

Both Lennar and D.R. Horton have price-to-equity values of around 11, which is near the industry standard. NVR comes in a little higher with a P/E of 15.39. That could indicate that NVR is a touch overvalued at this point.

Lennar and D.R. Horton also pay dividends. DHI has a 0.76% annual dividend yield and pays out a quarterly dividend of $0.30 per share while Lennar has a 1.3% annual yield corresponding to a $0.50 dividend for LEN investors.

Why Did Buffett Invest in Homebuilders?

Warren Buffett invested in homebuilders because their valuations were low relative to future growth prospects.

All three stocks have already rewarded Berkshire Hathaway shareholders though Buffett weighted more of his investment dollars toward D.R. Horton, which can certainly be taken as a vote of confidence for that builder.

In essence Buffett looks to forecast the cash flows produced by these homebuilders over time and discount them back to a present value. When he ran that calculation, he assessed that the prices at which he bought were below their present values.

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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.