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Coming off a rare top and bottom-line miss last quarter, Lennar (LEN), one of the country's largest homebuilders, rebounded in 1Q25 to easily beat EPS and revenue expectations. The upside results were driven by better-than-expected deliveries of 17,834 and new orders of 18,355 homes, which were up by 6% and 1%, respectively, as well as LEN's focus on better aligning its production pace with sales. However, the solid Q1 performance is being overshadowed by LEN's disappointing Q2 guidance, including an EPS outlook of $1.80-$2.00 that badly missed analysts' estimates.

• Home affordability continues to act as a major hindrance for LEN and other homebuilders. Even for luxury homebuilder Toll Brothers (TOL), stubbornly high mortgage rates have forced it to ramp up incentives to coax its more affluent customer base to take the leap. This was witnessed when TOL reported downside Q1 results on February 18 and guided for Q2 deliveries of 2,500-2,700, missing analysts' expectations and equating to a yr/yr decline of 1.5% at the midpoint.
• For LEN, the impact of home affordability constraints is seen across its Q1 metrics and guidance. To help spur demand, the company has lowered prices -- ASPs for homes dipped by 1% yr/yr to $408,000 -- while also offering incentives such as mortgage rate buydowns. The cumulative effect of these actions is that adjusted gross margin contracted by 340 bps qtr/qtr to 18.7%, while EPS decreased by 17% yr/yr to $2.14.
• Unfortunately for LEN, there doesn't appear to be any relief on the near-term horizon. While mortgage rates have fluctuated a bit over the past several weeks, they remain elevated in the 6.60-6.80% range. Furthermore, the implementation of tariffs is bound to put some upward pressure on manufacturing costs, although LEN has not experienced any impact just yet.
• In addition to high mortgage rates, slipping consumer confidence levels are also weighing on demand. As such, LEN issued conservative Q2 deliveries guidance of 19,500-20,500 homes, reflecting tepid growth of 1.5% at the midpoint. Adding to the concern, the conservative deliveries guidance comes even as LEN continues to ratchet prices lower. For Q2, the company is targeting ASPs of $390,000-$400,000.
• The company isn't seeing the seasonal pickup that's typically associated with the beginning of the spring selling season. Looking beyond the disappointing spring selling season, the longer-term outlook for LEN and the homebuilding industry remains positive.  Positive factors working in LEN's favor include favorable demographics, the chronic undersupply of available homes in the U.S., and the accumulated wealth built up from home price appreciation.

While LEN delivered better-than-expected Q1 results, the homebuilder continues to face challenges related to home affordability due to high interest rates and inflation, leading to a cautious Q2 outlook that is sinking shares lower today.