Berkshire Hathaway Acquires Nearly 10% Stake in Lennar, Boosting Homebuilder’s Shares

Workers construct wood framing for a new home at the Lilac Ridge community, developed by Lennar Homes in Vacaville, California. (David Paul Morris | Bloomberg | Getty Images)

Berkshire Hathaway has aggressively expanded its position in the struggling homebuilder Lennar, accumulating a stake approaching 10%.

According to a CFRA analyst, this acquisition represents a classic value investment strategy.

Securities filings from late Monday reveal that Berkshire purchased approximately 2.7 million Class A shares of Lennar over three trading days ending Monday. This increases their total holding to 23.7 million shares, valued at roughly $1.8 billion. The Omaha-based conglomerate also holds 528,000 Class B shares, which possess ten times the voting power of the Class A stock.

Following the news, Lennar’s stock jumped as much as 6.6% on Tuesday, reaching a peak of $83.24. Despite this rally, the Miami-based company’s shares have declined by over 32% over the past year.

Dimming Affordability

Berkshire’s recent acquisitions coincide with a rising interest rate environment, which negatively impacts homebuilders by increasing 30-year mortgage rates and reducing housing affordability. Freddie Mac reported that the national average for a 30-year fixed mortgage climbed to 6.95% last week, up from 6.76% the previous week and 6.26% a year ago. Consequently, the State Street SPDR S&P Homebuilders ETF (XHB) has fallen nearly 16% since the close of June.

Lennar’s stock has decreased by nearly a third over the past year.

“Berkshire has a history of acquiring undervalued assets,” noted Catherine Seifert, an analyst at CFRA Research. Investing in Lennar aligns with a “classic Berkshire value play.”

This strategy is well-suited for CEO Greg Abel, who assumed leadership last year following the legendary Warren Buffett.

Seifert highlighted that Berkshire already maintains a substantial presence in the residential construction sector, notably through its acquisition of homebuilder Taylor Morrison. The conglomerate also owns building materials companies, such as paint manufacturer Benjamin Moore and Johns Manville, a producer of roofing materials. Additionally, in 2003, Berkshire acquired Clayton Homes, a manufacturer of modular and manufactured homes, for nearly $2 billion.

Weak Financial Results

Last week, Lennar disclosed disappointing financial results for its fiscal third quarter, which concluded on August 31. The company reported earnings of $1.23 per share, falling short of the Wall Street consensus estimate of $1.29, while revenue experienced an 8% year-over-year decline.

More concerning was Lennar’s fourth-quarter guidance, which fell below market expectations due to affordability issues stemming from elevated interest rates. During the analyst conference call, CEO Stuart Millar explained that 30-year mortgage rates hovering around 7% severely restrict affordability and shrink the pool of eligible buyers.

The housing sector, plagued by a persistent supply-demand imbalance, has contributed to weakened consumer confidence. A scarcity of new housing inventory is driving up prices for existing homes, rendering new properties increasingly unaffordable. Furthermore, elevated mortgage rates have effectively locked millions of first-time buyers out of the market.

Guided by a deep value investment philosophy that frequently embraces contrarian positions, the current challenging housing landscape may present lucrative opportunities for Berkshire. The conglomerate concluded June with a massive cash reserve of approximately $367 billion.

On Friday, Buffett officially resigned as chairman, with his son, Howard Buffett, immediately succeeding him in the role.

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