2023 has been a difficult year for housing inventory, and some industry experts believe land scarcity is about to make the problem worse.
The amount of ready-to-build land across the United States is dwindling and it’s becoming increasingly expensive to develop it. However, Lennar and other homebuilders are pursuing new land development strategies to navigate these costly challenges.
Lennar’s CEO Stuart Miller warned investors on a recent earnings call that land scarcity may cause housing inventory to get worse before it gets better. The company has been able to grow by acquiring companies with land pipelines, but for many other homebuilders, the cost of buying and developing land is dragging down balance sheets.
“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 Lennar’s Q3 earnings call. “This will continue to limit available inventory and maintain supply/demand imbalance.”
To overcome this challenge, Miller said Lennar will refine its land strategy by building partnerships with land bank companies that will purchase and develop land on their behalf. The companies will then deliver “just-in-time finished home sites” to Lennar, which will enable development at scale.
The strategy of partnering with infrastructure development firms is becoming an increasingly effective tactic and has enabled speedy and profitable development for homebuilders across many high-growth areas like Florida and Arizona.
“About 85% of our $1.5 billion land acquisition was finished homesites purchased from various land structures,” Jonathan Jaffe, co-CEO president & director of Lennar said on an earnings call. “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.
Lennar started the third quarter with 18,675 homes and ended it with 43,600. They also owned or controlled a total of 391,000 homesites at the end of the quarter.
Owning land is expensive for homebuilders, but Jaffe expects Lennar’s strategy of reducing cycle times and the amount of owned land will increase cash flow significantly and improve churn, which was up 18% compared to last year.
Lennar’s community count was also at 1,253 at the end of Q3, which was a 5% year-over-year increase. This number is expected to reach high single digits as 2023 comes to a close.
“We were quick to reduce costs as the market corrected and we have held costs down as the market 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.
Overall, Lennar delivered 18,559 homes, which was an 8% increase year-over-year while selling 19,666 homes, a 37% increase over last year. Overall, the quarterly start pace was 4.9 homes per community, compared with 5.3 homes per community last quarter.
The homebuilder continues to benefit from a slow real estate market. Existing home sales fell 2.2% between June and July, making it the slowest start to the third quarter since 2010. Record low inventory continues to fuel demand for new home construction, and Lennar is playing a crucial role in helping to fill that void.
Lennar’s year-to-date results have been promising, and the homebuilder also expects to end the year strong. According to Miller, the firm is forecasting at least 21,500 homes, and net new orders are expected to be between 16,200 and 17,200 with a gross margin of 24.48% to 24.6%.
“We are positioned for a very strong 2024 right now,” Miller said. “We have the land. We have it identified. It is under contract in our pipeline. It is under development.”
Lennar expects to enter 2024 with a 10% initial growth expectation, and its current land development pipeline has the firm well-positioned to achieve its goals.
