Housing Woes Hammer Lennar

The beleaguered homebuilder says the sector may get even worse

by Ben Steverman

Disappointing results from the U.S.'s third-largest homebuilder renewed concerns Tuesday that the ailing housing sector could get worse before it gets better.

Lennar Corp. (LEN) reported a loss of $1.55 per share, vs. $2 in earnings a year ago.

With a glut of new and existing homes on the market, Lennar said it has aggressively cut prices. This strategy has the effect of moving inventory, but it cut into profit margins, the company said.

The housing market "continued to deteriorate throughout the second quarter," President and CEO Stuart Miller said in a statement. He added: "The remainder of 2007, we continue to see weak, and perhaps deteriorating, market conditions." Lennar expects to lose money in its third quarter too.

Bank of America analyst Daniel Oppenheim said in a note that "tighter lending [rules] and further concern about housing have led to even more buyer caution."

In the current market, Lennar is using the "appropriate strategy" by boosting incentives and cutting prices to attract buyers. "Buyers are extremely price sensitive, so that the builders with higher incentives receive significantly more order market share," Oppenheim wrote. (Bank of America owns Lennar stock and does business with Lennar.)

Standard & Poor's analyst Thomas W. Smith downgraded Lennar shares from hold to sell on Tuesday. Smith lowered his earnings estimates, cutting his fiscal 2008 earnings estimate from $3.40 per share to $1.45. (S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies.)

Lennar's worst results came in its eastern and western regions, with Oppenheim believing California and Florida were the problem areas.

Stocks in the housing sector were trading lower on Tuesday, down more than 1% by midday on Tuesday.

Besides Lennar's earnings report, traders have received other housing news. Data released Tuesday showed new home sales fell 1.6% to a pace of 915,000 in May. Also, the S&P/Case-Shiller index of home values in 20 metropolitan areas fell 2.1% in April vs. the same month a year ago.

Steverman is a reporter for BusinessWeek's Investing channel.