Riding cyclical homebuilders through structural deficits
The bull case presented for Lennar is that structural housing deficits and a regression to mean demand outweigh the extreme volatility of the homebuilding cycle.
The argument
The guest highlighted that Greg Padilla bought Lennar in 2011 when new home builds were severely suppressed at 500,000 versus a historical average of 2 million. Despite experiencing six drawdowns over 30% and three over 50%, the long-term thesis was validated as the company transitioned to a less capital-intensive asset-light model, owning only 20% of its land through partnerships compared to 80% historically.
The thesis, stress-tested
✓ What validates it
- ✓New housing starts returning to historical averages
- ✓Successful execution of the asset-light land partnership model
▸ Risks discussed
- ▸High interest rates can discourage land partners from scaling
- ▸Extreme cyclicality and susceptibility to macro housing downturns
Hear it yourself
"$7 During these lean years, new home builds were suppressed falling from an average of about 2,000,000 to only 500,000. Padilla saw the structural tailwind as his thesis included a regression to the mean, where new builds would eventually catch up to the normalized demand. Now part of the reason that Greg held on to them for so long is that their business model has changed. So in 2011, they could"
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