11:06 AM EDT, 09/23/2024 (MT Newswires) -- Lennar ( LEN ) reported mostly positive third-quarter financials last week but was humbled by a lower-than-expected gross margin forecast -- a point of concern among investors that the company hopes to rectify in coming quarters, Co-Chief Executive Stuart Miller said on a call with analysts.

The homebuilder reported gross margin of 22.5% in the three months ended on Aug. 31, down from 24.4% a year earlier and behind its guidance of 23%. The Miami-based company, which has a market capitalization of $50.2 billion, said it expects Q4 gross margin to remain flat as consumers adjust to changes in the economic and interest-rate environment, a shift from prior indications for fourth-quarter margins of 24.5% to 25%.

"Previous guidance had implied a pretty significant quarter-over-quarter improvement in Q4 gross margin, and now it has it as flat," Rafe Jadrosich, director and senior equity analyst at Bank of America, told MT Newswires. "Mortgage rates have come down (so) typically you would expect there to be a tailwind to demand and help margins. Their commentary on the earnings call was that there's a lag benefit."

Mortgage rates were "sticky" at around 7% in the first half of Q3, and consumer confidence has been slow to kick in, Miller said. The company's restructuring toward a high-volume, return-on-inventory model has added pressure to margins, the CEO said.

During periods of slow demand, Lennar ( LEN ) has used incentives such as rate buydowns to entice first-time home buyers and maintain high volumes, which "you are going to see reflected in their margins," Jadrosich said.

Mortgage rates started to fall in the back half of Q3 and will likely continue to drop after the Federal Open Market Committee reduced the fed funds rate by 50 basis points to a target of 4.75% to 5%. Miller said the company is well positioned to take advantage "as strong demand for affordable offerings continues to seek short supply in a more affordable interest rate environment."

Nicole Garner, a real estate broker with Windsor Hill Real Estate Group in The Woodlands, Texas, a suburb of Houston, said Lennar ( LEN ) generally builds affordable houses in the region. Demand will remain strong for less-expensive homes, especially with interest rates coming down, she said.

"In the greater Houston area, Lennar ( LEN ) largely builds entry-level homes, so at that price point, they're going to reach first-time home buyers and small families, but they're also going to get a lot of investors because their houses are affordable," Garner said.

Now is a good entry point for first-time buyers and those looking for less-expensive houses due to falling interest rates and a relatively stable supply of new properties on the market, she said. As interest rates drop, more buyers and investors will seek homes, leading to increased competition and, once again, higher prices.

"Entry-level buyers should get in now," she said. "At the luxury level, this rate drop won't have as big of an impact. It boils down to liquidity -- luxury buyers can bring more cash to the table and negotiate a little stronger. And there are fewer buyers at that price point so there's less competition and less urgency a lot of the time."

Lennar's ( LEN ) financials in the quarter were mostly better than expected. The company reported fiscal Q3 earnings late Thursday of $4.26 per diluted share, up from $3.87 a year earlier and topping the consensus in a Capital IQ poll for $3.63. Revenue rose to $9.42 billion from $8.73 billion. Analysts expected $9.16 billion.

Wedbush analysts Jay McCanless and Brian Violino said in a note to clients after Lennar's ( LEN ) earnings call that the homebuilder likely will face some difficulties, including lower consumer confidence and permitting issues that are delaying new communities, leading them to push for increased absorption into existing communities -- a process known as "gapping out."

"Lennar ( LEN ) indicated the community count should rise from 3Q to 4Q but did not indicate whether this growth might solve the gap out issue," the analysts said.

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