Berkshire-Backed Lennar Slides After Weak Q3 Earnings
On Aug. 14, regulatory filings revealed that Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) had accumulated an approximately $800 million stake in U.S. homebuilder Lennar (NYSE: LEN). These filings have a lag and show Berkshire’s position as of June 30.
Surely, Berkshire is happy with the construction stock’s performance since then. From June 30 to Sept. 18, Lennar has provided a total return of approximately 21%. This comes as homebuilding stocks have recovered strongly, with the SPDR S&P Homebuilders ETF (NYSEARCA: XHB) rising more than 16% over that period.
Expectations of lower interest rates have buoyed homebuilder stocks.
However, Sept. 18 also marked Lennar’s first big test since Berkshire revealed its position. The company reported its Q3 2025 earnings after the market closed, providing the latest indicator of the housing market’s health. Let’s break down the results and gain an updated perspective on the stock.
Lennar Takes Nearly 50% Profit Cut as Selling Prices Sink
In Q3, Lennar reported revenue of $8.8 billion, a decline of approximately 6.5%. This moderately missed expectations of $9 billion, or only a 4.4% decline. After excluding the mark-to-market gains of its technology investments, Lennar’s adjusted earnings per share (EPS) came in at $2.00. This was a massive 49% drop from the prior year. Additionally, the figure missed Wall Street estimates of $2.14, or a 45% drop.
Notably, these large drops in sales and EPS came even though Lennar delivered 21,584 homes, slightly more than it did in Q3 2024. This is partially because the company has been offering significant discounts, dropping its average home selling price by over 9% to $383,000.
This has put a significant damper on Lennar’s gross margin, which fell by 500 basis points to 17.5%. Clearly, soft housing demand is putting significant pressure on Lennar’s top and bottom lines. Still, falling interest rates are one tailwind the company has on its side.
Interest Rates Are Falling, But Lennar Projects Stable Q4
With the Federal Reserve dropping interest rates by 25 basis points, homebuilders like Lennar got exactly what they wanted. These cuts increase the company’s ability to affordably finance new building projects and eventually boost sales as mortgage rates fall.
Still, mortgage rates are far from a perfect relationship with the Fed Funds Rate. However, they have already started to fall in anticipation of the Fed rate cut.
As of September 18, the 30-year fixed mortgage rate fell by 9 basis points to 6.26% in one week. Overall, the 30-year rate has been down by around 50 basis points since the end of June.
Notably, Lawrence Yun at the National Association of Realtors has called 6% the “magic” mortgage rate that could reignite home sales. He now believes the 30-year could fall to that rate by the end of 2025.
However, Lennar doesn’t expect its business to improve much in the fourth quarter. It expects to deliver between 22,000 and 23,000 homes, which is around a 4% increase at the midpoint compared to actual deliveries in Q3. It also sees gross margin at 17.5% and average selling prices between $380,000 and $390,000.
This suggests that the steep discounts the firm is offering will continue. Overall, the lack of improvement in Lennar’s outlook despite falling rates is likely why shares fell by more than 3% in after-hours trading on Sept. 18.
Interest Rates Remain Key to Lennar Surging or Suffering
Looking further, markets put the probability of another 25-point cut in October at 92%. They also see an 82% probability of the Fed Funds Rate falling 50 basis points from current levels in December. Those cuts would be welcome developments for Lennar.
Still, these forecasts could shift significantly based on new data, and predicting interest rate movements is notoriously difficult. However, generally speaking, markets and Federal Reserve forecasters alike see the Fed Funds Rate moving down considerably over the coming years.
Lennar trades at a forward price-to-earnings (P/E) ratio of approximately 15x. That’s nearly 50% higher than its average forward P/E over the past three years of around 10.3x. This suggests that markets are putting a lot of weight on Lennar’s ability to benefit from lower interest rates.
Lennar's earnings could recover significantly if interest rates move in the right direction and the economy avoids recession. This could allow shares to return to all-time highs, requiring around a 32% gain. However, if this doesn’t happen, there could be significant selling pressure on the stock.
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