I’ve been writing about the long-term shortage in housing for a few years now.

I don’t expect this situation to be resolved anytime soon, especially considering it took 15 years of under-building to get us here.

Coming out of the Great Recession, homebuilders were reluctant to build too many homes. So the number of homes built lagged household formations by a wide margin for years.

Then, all of a sudden, the pandemic hit. All of a sudden, just about everybody was looking to move, and the major homebuilders just couldn’t seem to keep up with the red-hot demand.

We all know what happened next. Just three years ago (in the early days of the pandemic), median home prices stood at $329,000. Today, it’s $431,000 – a 31% increase.

_{Source: Federal Reserve Bank of St. Louis}

Now, a recent poll found that 84% of Americans believe now is the wrong time to buy a home — the highest percentage on record for this survey.

It’s easy to see why…

Millions of Americans are locked into 3% mortgages. And after a dozen rate hikes from the Federal Reserve, mortgage rates haven’t been this high since 2000.

_{Source: Federal Reserve Bank of St. Louis}

The typical house note now eats up 35% of the median household income. The historical average is about 25%.

Thanks to high mortgage rates, major homebuilders like D.R. Horton (NYSE: DHI), NVR (NYSE: NVR), and Lennar Corp. (NYSE: LEN) have dropped substantially since peaking in July this year…

A Vote Of Confidence From Buffett

Let’s be honest. A lot of investors may feel uncertain about owning shares of the major homebuilders right now. But remember, there still aren’t enough homes to go around. According to the National Association of Realtors, only 1.1 million units are listed for sale nationwide, exactly half of the normal inventory of 2.2 million.

Also, in case you missed it, the homebuilding sector got a resounding endorsement from a very influential investor in the second quarter. According to the latest 13F SEC filings, Berkshire Hathaway wagered $800 million on the trio of builders mentioned above.

While Buffett’s 152,000-share stake in Lennar may not be as big as our own over at Capital Wealth Letter, it’s certainly nice to be on the same side of the table as Berkshire Hathaway.

These are all new positions opened for the first time between April and June. We can’t know for sure yet whether these investments were made by Warren Buffett or one of his lieutenants. But in my opinion, they have the Oracle’s fingerprints all over them. He has previously made a clarion call for investments in single-family housing. Berkshire’s longstanding interest in this sector dates back more than two decades to the acquisition of Clayton Homes for $1.7 billion in 2003.

The Latest On Lennar

Lennar just delivered another 18,559 homes last quarter at an average sales price of $448,000. While unit volume was up 8%, pricing cooled somewhat. Margins also contracted a few points, taking a bite out of the bottom line. Still, earnings of $3.87 per share comfortably topped Wall Street’s $3.52 target.

As you can see from the chart below, we have held LEN since March 2020. And during that time, we have doubled our money – compared to a 41% return for the S&P 500.

Lennar continues to do a good job of navigating through macro cross-currents. Soaring mortgage rates remain a headwind, but incentives are in place to help coax buyers, including discounted closing costs and rate “buy-downs” that make monthly notes more affordable. In Colorado, for example, Lennar offers upfront payments that effectively lower fixed mortgage rates to 4.25% on qualifying move-in-ready homes.

These rate lock promotional tools are working. Lennar took in orders for 19,666 new homes last quarter, a healthy increase of 37%. The company now has a future construction backlog of 21,000+ homes worth nearly $10 billion in revenues.

Closing Thoughts

Overall, the constrained national housing market remains “constructive” for builders. Lennar is using this opportunity to clean up the balance sheet. After repaying $475 million in loans last quarter, it now has more cash than debt on the books.

Management is looking to deliver about 22,000 new-built homes next quarter, with both prices and gross margins (24.5%) stabilizing. The upbeat outlook is encouraging. So if you own LEN, I wouldn’t worry just yet. After all, the long-term housing shortage isn’t going away anytime soon.

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