Homebuilder on the Cheap

Company

Lennar Corporation is America’s largest homebuilder by sales. The company’s homebuilding operations include the construction and sale of single-family attached and detached homes, as well as the purchase, development, and sale of residential land.

The Opportunity

Historically low inventory levels

The number of homes on the market today amounts to less than 1.5% of American households – a historically low figure, and a bullish one. This is the direct result of: 1) millennial-in-the-basement phenomenon and 2) persistent lack of construction.

Favorable supply / demand outlook

Before the virus struck, there was a shortage of housing in the U.S. by 3 million units. Indeed, before the crisis, home sales rose by 8% in February at a 6.5 million annualized rate – on track for the best year in more than a decade. With a shortage of 3 million units, and housing starts as of March at a 1.2 million annual rate, the demand for housing is still more than double the expected supply – a very bullish sign for home builders.

Long-term demographic secular tailwind

There are 39.6 million millennials between the prime home-buying ages of 28 and 36. The largest age cohort in the US entering these peak years provides a generational tailwind for home sales, and therefore, home building.

Strength of US consumer

Unlike at the turn of the financial crisis, consumer household debt is down as a percentage of GDP, contracting from 87% from peak 2008 highs to 65% today. Further, debt-service costs as a percentage of disposable income has declined from 13.2% to 9.7%, indicating U.S. households are not overly leveraged and can afford to make home purchases for years to come.

Owning is cheaper than renting

Buying has rarely held a larger edge over renting than it does right now. At cyclical lows, the ratio of average mortgage payments to average rental payments nears 1.0; at cyclical peaks, it stands near 2.0. Today the figure is around 0.95. This means the national median mortgage payment is less than the national median rental payment right now.

Cheap valuation

At 6.7x P/E, LEN is trading at the cheapest since 2011

Risks

Late Stage of Recovery:

When it comes to early cyclicals (like Housing), investors typically shy away from homebuilders given the late stage of this economic recovery.

Negative Sentiment on Housing:

Marco data from housing starts to new and existing home sales are down YoY, absorbing much of investor focus.