Lennar (LEN)
Q4 2012 Earnings Call
January 15, 2013 11:00 am ET
Executives
David M. Collins - Principal Accounting Officer and Controller
Stuart A. Miller - Chief Executive Officer, Director, Member of Executive Committee and Member of Independent Directors Committee
Richard Beckwitt - President
Jonathan M. Jaffe - Chief Operating Officer and Vice President
Jeffrey P. Krasnoff - Former Chief Executive Officer, President, Director, Member of Executive Committee and Member of Stock Option Committee
Bruce E. Gross - Chief Financial Officer and Vice President
Analysts
Ivy Lynne Zelman - Zelman & Associates, LLC
David Goldberg - UBS Investment Bank, Research Division
Paul Przybylski - ISI Group Inc., Research Division
Michael Jason Rehaut - JP Morgan Chase & Co, Research Division
Stephen Kim - Barclays Capital, Research Division
Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division
Rob Hansen - Deutsche Bank AG, Research Division
Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division
Adam Rudiger - Wells Fargo Securities, LLC, Research Division
Presentation
Operator
Thank you for standing by, and welcome to Lennar's Fourth Quarter Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Mr. David Collins for the reading of the forward-looking statements.
David M. Collins
Thank you, and good morning, everyone. Today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Lennar's future business and financial performance. These forward-looking statements may include statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results.
Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption, Risk Factors, contained in Lennar's annual report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.
Operator
I would now like to introduce your conference host, Mr. Stuart Miller, CEO. Sir, you may begin.
Stuart A. Miller
Yes, thank you, and good morning, everyone, joining us for our fourth quarter and year-end 2012 update. We're certainly pleased to share our results with you this morning. I'm joined by Bruce Gross, our Chief Financial Officer; and Dave Collins, our Controller. Additionally, Rick Beckwitt, our President; and Jon Jaffe, our Chief Operating Officer, are with us. And Jeff Krasnoff, as always, Chief Executive of Rialto, is here to participate as well.
We have recently been together and completed our year-end review and our 2013 look ahead with our regional and division presidents, and we'll share with you some of our insights. And this morning, with some remarks on the overall state of the housing market, Jon and Rick will provide further color on our homebuilding operations. Jeff will update the Rialto segment, and Bruce will provide some detail on our Financial Services segment, as well as some more color on our overall numbers. As always, after that, we'll open up to questions, and we request that during our Q&A time period that each person limit themselves to one question and one related follow-up. So with that, let me begin.
2012 was a turnaround year that confirmed that we had been -- what we had been seeing and communicating for several quarters, and that is that we are in fact in the early stages of the housing recovery. The recovery began in micro markets across the country, and it's continued to spread to larger pockets. In the second half of this year, recovery had taken hold across the country and has readily been seen in spite of generally negative economic data. While the current, more positive economic data still lags behind what we continue to see in the field, it, along with information from reliable economists, have instilled a new level of consumer confidence in the housing market.
While there have been and still are economic and political uncertainties ahead, we feel that this housing recovery is fundamentally based and driven by a long-term demographic need for housing. 2012, therefore, we believe, is just the beginning of the recovery as single-family starts come off their lows at just under 600,000 compared to the 50-year household formation average of 1.25 million households per year. Recent years' low housing starts and household formations have created a large pent-up demand of homebuyers who started reentering the housing market in 2012 and are likely to continue to do so into 2013 and beyond.
As of this incremental pent-up demand unwind, homebuilders are gaining pricing power. And after years of home prices falling, in 2012, the trend turned positive, initially stabilizing and then allowing for price increases across the country. Prior to this reversal, the fear of purchasing a home and losing equity kept many would-be purchasers sidelined in spite of historically low interest rates and fully loaded monthly ownership costs being low. With the added pressure of price increases, on-the-fence consumers have generally begun to come to the market to take advantage of low home prices and low interest rates.
Further fueling pricing power has been the record low levels of both new and existing home inventories as the staff inventory has been absorbed. New single-family homes for sale in November were up slightly from their all-time record low of 142,000 homes to 151,000. While existing single-family home inventory continue to decline through 2012.
Additional drivers for homeownership have been the continual increases in rental rates, which, on average, increased about 4% this year as vacancy levels reached their lowest levels in over a decade at 4.5%. It's estimated that there was slightly more than 200,000 multi-family units started in 2012, which is well below the long-term average of 340,000 per year. Across the country, homeownership monthly payments are more favorable versus rental rates. With the difference greater than it's been since the early 1970s, rental rates are projected to continue their upward trajectory due to a general lack of supply.
While rents continue to increase, the cost for monthly homeownership remains at very low levels. Impacts from rising home price increases have been largely offset by decrease in interest rates, which reached a low of 3.35% in December. If consumers are able to obtain a mortgage, they are doing so and in turn, saving money on their monthly expenses. The highly conservative mortgage market, however, is still restricted to many consumers. But with further regulatory clarity, as we've seen in recent weeks, the mortgage market should continue to open up at its margins.
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