2 min read
I recently had a chance to chat with Stuart Miller, the executive chairman and co-CEO of Lennar Corporation, one of the largest home builders in the United States. Stuart has spent over 35 years with Lennar, serving as CEO from 1997 until he assumed his current role in 2018. In addition to his work at Lennar Corporation, he has worked as a past chairman at both the Joint Center for Housing Studies Policy Advisory Board for Harvard University and the University of Miami Board of Trustees, where he still serves on the Executive Committee. He is also currently the chairman of the Miami Dolphins Foundation.
Stuart has a much different backstory than most of today's CEOs. Although in his bio, I mentioned that he has been working for Lennar for 35 years, that's a bit of an understatement, as he has worked his way up in the company starting by mowing lawns for Lennar when he was just 12 years old. Throughout his tenure at Lennar, he's performed practically every single role, so he's grown to know the company like the back of his hand.
With several affordable housing startups building modular or 3D-printed homes beginning to crop up, many would think that legacy home builders like Lennar might feel pressured. However, some of these startups are having a hard time staying afloat, especially as interest rates rise, even though seemingly endless amounts of VC and private equity money were poured into them.
Stuart revealed that Lennar regularly has the opportunity to invest in these companies. However, Lennar has often passed on these investments because these startups often have too broad a focus in an incredibly difficult industry. Lennar does try to make as many strategic investments as possible because, as Stuart notes, both Lennar and the other large home builders simply cannot keep up with the current demand for new construction.
In a normal single-family market, roughly 10 percent of the supply comes from new construction. Today, however, roughly a third of the housing supply comes from new construction, indicating how few existing homes are hitting the market. Given the fact that interest rates are at a multi-decade high, very few people want to move to a different home. When you combine this with the fact that there is already a considerable housing shortage in the United States, Stuart believes that this is where home builders have to step in, as they have a few additional levers they can pull to make homes more affordable. Builders can ramp up production, get buyers into ARMs with more favorable rates/terms, or buy down fixed-rate mortgages.
To enjoy my full conversation with Stuart and view our list of upcoming guests, be sure to check out the Walker Webcast.
Willy Walker: Welcome to another Walker webcast, and it is my great pleasure and honor to have Stuart Miller joining me today. There's an article that just came out about an hour ago on Bloomberg entitled “U.S. Housing Market Becomes Impossible Mess With No End in Sight” by Patrick Clarke. And I can think of no one that I would rather talk to as it relates to that article than Stuart Miller. I'm going to do a quick intro, Stuart, and then you and I can dive into our conversation.
Stuart Miller is Executive Chairman and Co-Chief Executive Officer of Lennar Corporation (NYSE:LEN) and a member of Lennar’s Board of Directors.
Stuart has worked with Lennar for over 35 years, (although I believe he mowed lawns at Lennar Homesite starting at age 11). He became CEO of Lennar in April of 1997 until he assumed his current role as executive chairman in April of 2018.
In 1997, Lennar Corporation spun off its commercial real estate investment, financial, and management activities into LNR Property Corporation, and the company became separately listed on the NYSE. Miller served as Chairman of the Board of LNR until the sale of LNR in February 2005.
Stuart serves on various professional and community boards and committees, including past chairmen of both the Joint Center for Housing Studies, Policy Advisory Board of Harvard University, and the University of Miami Board of Trustees, where he still serves on the executive committee. He is also the current chairman of the Miami Dolphins Foundation. Stuart is a graduate of Harvard College and the University of Miami Law School.
Stuart, I mentioned in your bio that you mowed lawns for your dad at Lennar home sites when you were 11. If entering the family business was always sort of the game plan, why did you go to law school and not business school?
Stuart Miller: Well, the first thing I have to do is make a quick correction. I was 12, so off by a year. And, you know, I don't think I started on the lawn crew with the expectation that I would go into the business that was founded by my father. I did it with a more practical view that I wanted to buy a car when I was 16. So I'm not sure why I was thinking ahead that way, but I wasn't thinking so far ahead as to etch my career in stone.
With that said, I did migrate to almost every position within the company you could imagine over the years. And by the time I graduated law school, I was quite sure that I wanted to go into the Lennar business as it had evolved. But in migrating from an undergraduate to a graduate program, I had studied government when I was an undergraduate. Interestingly, in today's day and times I wrote my senior thesis on factionalism and Palestinian political organization. So it's kind of timely today.
But the natural progression for me seemed to be into the field of law. In hindsight, I would tell you that I think that the legal background, the legal study has been very constructive relative to my business career. I would say that it's as valuable a path for those aspiring to the business world as a business degree. But I did feel that I would be able to pick up some of the business lessons from practical application rather than migration to a business school — and the rest is written.
Willy Walker: Did your brother or sister, either of them, have any interest in going into the family business?
Stuart Miller: No. They really didn't enter the business at any point in their younger years, but they really didn't aspire to the Lennar business. Let's remember that public companies really aren't family businesses. There might be a family founder and evolution to the public company world, but there is a fiduciary responsibility that the next generation doesn't get anointed in the public domain, really has to go through quite a steep learning curve. And I would almost argue maybe it's self-justification or something. I would almost argue that those that are part of what's perceived as nepotism might have to go through even a steeper climb to get to positions of responsibility, lest they be criticized as just the boss's son or daughter.
Willy Walker: Yeah, it's funny. I'm asked often about whether any of my boys are going to come into Walker & Dunlop as I did, and I said, It's a public company. I'm chairman and CEO, but I can't just anoint someone to be my successor.
But interestingly, Stuart - Lennar went public eons ago. I mean, it went public in 1971 with I believe the value was $8.7 million. When I read that made me feel really good that Walker & Dunlop, which was when we went public with the $220 million market cap in 2010, made us look really big at that time. But why did your dad and his partner, Arnold Rosen, take the company public way back when?
Stuart Miller: Well, you know that fascinating question. I was definitely too young to be able to explore the way they thought about it at the time. And even in hindsight, I'm sure the facts have changed. But the fact is that the public transition opens up doors to public finance and a more stable form of finance than the private companies have access to.
In those early years – remember that $9-ish million dollars in 1971 dollars is different than it is today and might even equate to that to $221 million or what your number was. But at the time, capital was there. The ups and downs of a cyclical business augured in favor of finding more stable access points to capital. And my father, Leonard, was a sophisticated business participant. He had endured some very steep downturns in the marketplace and looked to stabilize capital availability and was always focused on preparing for the next downturn. It was almost a PTSD kind of sense of preparation, because every time times got good, he seemed to know that a lesser time was lurking around the corner.
Now, that volatility is not as dramatic today as it was back in those days. There are a number of economic stabilizers that have lengthened the duration of better market conditions, but in those days, stable capital was very important to them.
Willy Walker: One of the sort of, I guess, hallmarks of Lennar during from when it went public in 1971, all the way until the turn of the century and millennium, was that when things got distressed, Lennar kind of stepped in. One of the things I read while doing some research for this was that someone said that when things look their worst is when Lennar shines and that's when you will step in.
Clearly having a counter-cyclical business model that allows you to weather the storms is something that's been ingrained in the company's culture for a long period of time. But I wonder as it relates to you as a leader, other than that, having been the practice of the firm, actually doing it is very different than having it be kind of the hallmark of a company. What was it that you either saw in your dad or did with your dad that has allowed you to continue to, if you will, step in when things look their worst?
Stuart Miller: Well, let's be careful not to rewrite history. So I guess I would say everybody has to scrape their own date. From that scraped knee, we learn lessons. If we go back to the late eighties, early nineties, Lennar was formidably positioned with capital when others did not. To be able to lean into the distress in the commercial markets which is the starting point. The genesis of the ultimate spin off in 1997 of LNR. And that was a moment in time where I made use of that capital position. It was an area that I kind of defined myself and my father's foresight had certainly positioned the company where that opportunity presented itself, and we leveraged that.
But then as I go forward and look to, let's call it 2004, 2005, 2006, as you go into the Great Recession, as it's called, Lennar was less perfectly positioned. And I have to take ownership of that and recognize that, yes, there were lessons learned on my part, but nonetheless, the negative side of lessons that are learned, that is the steppingstone for learning them, something that you kind of have to go through yourself. We had tried to fortify our balance sheet as we grew quite dramatically, but we did it with a lot of joint ventures, a lot of structured programs where the structuring really did not work well as we went through what was ultimately a very severe downturn with a very long duration. And so there were new lessons learned. So, yes, I stand on the lessons that my father brought to me that I watched him endure and I watched him attend to. But lessons are learned on top of lessons, on top of lessons.
As we sit here today in today's kind of turbulent world, I mean, Lennar is so nicely positioned with around a 10% debt to total capital ratio, four-ish billion dollars of cash in the bank, and a rock solid balance sheet fortifying a really strong business position that situates us well for if times get good, we're well positioned. If times get tougher, we're well positioned. And we all know that there's a lot of uncertainty in the economic markets right now.
Willy Walker: Stuart, I appreciate the ‘let's not rewrite history' piece of what you just said, but just because I think that the lessons that you've learned are so interesting. You mentioned that you sold LNR in ‘97, then you turn around and you go, and you acquire U.S. Home Corporation for over $1,000,000,000 in 2000. I'm assuming that 2001-22 as the single family market is beginning its eventual explosion. But that updraft that you were feeling like, well, boy, were we really smart buying U.S. Home Corp. in 2000 to give us the added scale that it did in I think it was Mid-Atlantic and up into New England as it relates to the broadened platform that Lennar had.
So am I correct on that, where you're sitting there going, man, that was a great acquisition for us to have taken that capital LNR and recycle it into the growth of Lennar at that point. And obviously you didn't know that 2007 was coming up on all of us, but that was a tactically and strategically smart move to have been done at that time?
Stuart Miller: So let's go back to 1997. We didn't actually sell LNR, we spun LNR, which meant we really took our balance sheet, we did a very interesting transaction. We spun LNR, which was about two thirds of our balance sheet, and remained with only about $200 million of equity on our balance sheet for the remaining company. We simultaneously merged that with a California based company called Pacific Greystone and basically doubled the size of the equity balance in that merger. So it was somewhat dilutive, and we could walk through those percentages and everything. It turned out to be a really awesome deal for the company.
But you now have a pure-play homebuilder configured and ready to run. Over the next couple of years, we did just that. We leaned into that pure-play configuration. And by 2000, as the market pulled back in the dotcom bubble, everything was kind of depressed. But we could feel and knew that the housing market was still strong and vibrant, and it did defy gravity during that period of time. We leaned in and we made a really strategic deal with the U.S. home. And I would argue that it is still today the best combination deal that was ever done in the industry. Now, don't tell everybody else I said that.
Willy Walker: I want to go to CalAtlantic next. We're going to jump right to that.
Stuart Miller: It's a much better deal than CalAtlantic. But the U.S. Home deal was just really well timed, well configured, and set the company up for tremendous growth and opportunity and profitability as we went through those next years. It was just an extraordinary growth and development time for Lennar. I was very happy that my father and I were able to work through those times. As you might know, he passed just a couple of years later, but nonetheless, we worked through some really exciting times together.
Willy Walker: I mentioned the CalAtlantic deal, as you and, both having acquired companies as much of an acquisition, being strategic or financially accretive. The cultural issues are always sort of fundamental and super important. You've created a very unique culture at Lennar, which I want to focus on in a second. But before I go to that, when you brought CalAtlantic in, one of the things that I was curious about was not so much from a cultural standpoint, but more from a strategic standpoint. The old mantra at Lennar of everything included that had started with your dad and carried through to you where someone was buying a house that had everything included, and now you're even making it so that Wi-Fi is included in the house and things of that nature, which were always sort of add ons for other people. And CalAtlantic my understanding, Stuart, was much more focused on sort of the design of the top of the house and then leaving it to the buyer to kind of customize it from there from a sort of a product development/delivery standpoint. Was that just a different type of strategy, hard to integrate to get to where LNR was versus where CalAtlantic was?
Stuart Miller: Well, interestingly, the answer to your question really starts back with the U.S. Home deal, because U.S. Home was very focused on design studios to appoint the home the way the customer wanted, which was directly opposite of our "Everything's Included” mantra.
We actually built a dual marketing program where the U.S. Home communities would remain design studio oriented and Lennar communities would remain "Everything's Included” communities. And we actually competed side by side under the same umbrella, different brands. We learned at that time because we were able to look side by side just how valuable the "Everything's Included” model was in terms of making for a production oriented program that would actually reduce costs and build value for the customer.
So ultimately, we unified, especially during the Great Recession, unified all that under a single banner of "Everything's Included”, as we found that was a more efficient way to build. It worked better coming out of the Great Recession and with CalAtlantic, we combined the two companies with a drive towards size and scale in markets as a way of driving costs or rationalizing costs for the benefit of value.
Therefore it was an immediate unification under one branding mechanism and so it was a different configuration built on lessons learned from the U.S. Home configuration, which was less efficient but gave us a great learning tool. And by the time we came to CalAtlantic, that deal was much less a financial success, but was much more a combination of size and scale to build value for the customer and cost advantage in being able to bring that value to the customer through the way that we operated the business.
Willy Walker: I mentioned culture and the first time I ever met you, you had a nametag on which you have on right now, which has your name. It's my understanding, I don't know whether it was a training program, or you were up at Disney and seeing the way that they treated all of their colleagues at Disney and sort of grabbed that idea from Disney. But there's no doubt that you, Stuart, have had an incredible impact on the overall culture at Lennar of having everyone feel like they are part of a team, an open floor plan as it relates to your offices, starting all company meetings reading the Little Red Hen.
When I read about that, Stuart, first of all, I love it because I have the same challenge and I'm not nearly as good at it as you are of creating a distinct culture inside of a company and doing things differently that make people feel like they're on a special team.
Being a family company and being as successful as your father was in building Lennar to where it was when you stepped into it, what was it that sort of drove you to say, I got to put Stuart stamp on this company, or there's something that the culture at Lennar, when you stepped in, was either lacking or needed to be moved that made you implement all these different things?
Stuart Miller: Well, that's a really interesting and compound question. Let me start by saying that in all instances, I stand very comfortably on my father's shoulders. He built an incredible foundation. Embedded in that incredible foundation were elements of culture that we still have woven as threads through our company today. His mantra was quality, value, and integrity. Those were his three points of the essence of the company that he sought to build.
And quality, value and especially integrity, are critical components to everything we do at Lennar and are woven through the way that we run through every hallway within the company.
Next, I would say no, I didn't need to put my fingerprint. Everybody brings elements of culture to a company, and a company embraces things along the way that become cultural in nature through the years. The world has changed from the time my father started the company to the time I came into the company. If you remember the old Tom Peters book, “In Search of Excellence,” it was all about the customer comes first and it's all about the customer and the way that we deal with customers. The times were changing, and I was bringing new elements of culture to a company that already had roots of culture of its own. It wasn't just me, it was myself. It was Marshall Ames, it was Jon Jaffee, Alan Pekor. The number of people who I still work with today, 40 years later, we went in search of the things that would create uniqueness. But at the same time, strength of spirit within the company.
And yes, (thank you for remembering) we did go to the Disney School of Management, and we learned quite a bit from one of the most cultural organizations on the planet. How does Disney create such consistency throughout this network of parks and programs and everything in the Disney organization? Well, we wanted to learn, and we did learn something about this name badge that we wear every day. We don't do it as a mandate, we do it because it's an act of friendliness. When two people meet each other, the first thing they do is introduce each other. The second thing they do is they forget each other's name. I want to make it comfortable for people. I don't want to set up a blockade. I want to set up a comfortable environment for people to know if they forgot my name, they can look down, it's right there for them. And I want to build bridges, not walls. And so, you know, it was that kind of attitude.
We have a uniquely Lennar language that is derived from that. Disney calls each person that comes to a park, a “guest.” We call each home that we build a home. It's not a house, we call our communities “communities,” not developments. We don't talk about lots, we talk about home sites. We don't talk about employees, we talk about associates. Our language there is very cultural. We do recite poetry. We read Dr. Seuss. We do some peculiar things. But it's all about how do we bring people together? How do we create commonality? How do we build the notion for each of our over ten 12,000 associates? How do we embed in them what they are supposed to do when no one's around to ask or no one's looking? How do our associates know what is the uniquely Lennar way of handling situations where they're out on their own and they've got to make a split second decision?
Culture is the ties that brings those answers together and keeps people thinking about who we are and what we stand for: integrity first, quality/value, kindness, customer orientation, all of the elements that make us Lennar that's what we want each of our associates tied together with.
Willy Walker: Has HBS ever done a case study on you?
Stuart Miller: No.
Willy Walker: I got to tell you, I said this a couple of weeks ago. I was out visiting with a client of ours in California who said, “Willy, I listen to all your webcasts, but when you get into that soft stuff like H.R. and all that stuff, I don't listen to that stuff. I just listen when you bring on like Peter Linneman to talk about hard macroeconomics and where interest rates are going” and this guy's got a very successful company and he's a really, really nice guy. And I was sitting there going like: It's the soft stuff you just talked about that is what creates alpha. Nobody knows where interest rates are going to go. It's the culture that you built at Lennar that makes the company as successful and enduring as it is.
Stuart Miller: Well, look, there are many ways to find success. This happens to be our way. We're very connected with our people, and we think that our people are very connected with our mission.
Willy Walker: You talked about what your father stood for, if you will, and what the ingrained sort of ethos or culture at Lennar was from your dad. I've heard you a number of times, Stuart, say the mantra, “Evolve or die,” and you're big on innovation and you've always been big on innovation. People don't necessarily think about whether a home builder, single family rental company, multifamily developer, etc., is, an “innovation hotbed”, if you will. How have you built into the culture at Lennar evolving or dying?
Stuart Miller: As I noted before, over time there are new things that get incorporated into the business lexicon. As I entered the business world, it was Tom Peters’ “In Search of Excellence.” If you look more recently at the technology world, the evolution of the way technology has altered the landscape of every business and the businesses that don't adapt, that don't find their way to a modernized approach, whatever that approach might be, they find themselves at a disadvantage and sometimes disintermediated and left behind.
We concluded years ago that we were not going to be the ones left behind. We were going to be at the tip of the spear, and it might cost us money and it might eat into profitability. But we were going to be at the cutting edge of the evolution of the way that our business would develop. We would be durable. We would be long lasting because we incorporated modern technologies in the way that we work.
We started years ago investing in technology companies that were evolving while we were building some of our own technology platforms. We felt that we could learn from others while we evolved ourselves. And that continues to be a core element of the way that we grow our business. If you look, for example, at what we call the ‘Lennar Machine,’ and I've talked about it on some of our earnings calls. It is a configuration of a digital marketing funnel an Internet new home consultant and new home consultant sales engagement program and a dynamic pricing model kind of wrapped together. That machine is a highly digitized, highly innovative program for the way that we acquire customers, handle customers, engage them, find the right product for them, and make sure that we're at the right price so that we maximize the opportunity to make a sale.
That kind of technology is the kind of steppingstone technology that in our world will lead to the use of machine learning and AI, which are catchwords today and definitely catchwords in our industry. But the underlayment of the future applications is going to be built today on the way that we ingest data, the way that we process data, the way that we confirm its authenticity, and then set up the use cases for what ultimately will be more advanced learning mechanisms that help us not just sell homes, but build homes on a production kind of level, maximize efficiencies, bring down costs, and build a better value for our customer and a better bottom line for our shareholders.
Willy Walker: That type of technology you have inside of one Lennar called LEN X, which is your sort of innovation team. Are they focused internally or externally?
Stuart Miller: Both. That's a very important question and notion. The external is critically tied to the internal. What I mean by that is we've invested in a number of technologies always with adjacency to our core business. In other words, a company like Opendoor, it is completely adjacent. People come into our welcome home centers, and they say, “I love your offering, but I got a home to sell.” Well, we used to send them to a realtor and say, “When you sell your home, let us know.” Now we say: “You've got a home to sell – we've got a solution.”
We have a partnership at Opendoor. Opendoor will buy your home, enabling you to purchase our home and we've got a transaction. In working with Opendoor, we look at the technology componentry that they have incorporated into a startup company, and we learn from what they do and how they execute and then take some of those learnings and bring them back to our company internally to rework, rethink and make adjustments to our core executions. So that's why I say it's internally focused as well as externally focused.
Willy Walker: Yeah, I mean, it’s a huge challenge as it relates to this is a business development group looking for acquisitions or is it a team that's focused internally, is driving it and it sounds like you've got it set up on both, which is great, but super challenging, at least from my experience, from having worked with our business development group as well as trying to drive internal technology initiatives.
Stuart Miller: Yeah, most people have confused our initiative as becoming somewhat of a venture capitalist and in fact it was always secondary that we would maybe make money on the investments we were making. We knew that we would make the bigger money on the inclusions, the alterations to our core business that would drive some of the cost parts of our business down. You can look at various pieces of our business. We could walk through those where we've actually seen discernible reduction in cost structures because of the technologies that we've incorporated as part of our endeavors in LEN X.
Willy Walker: One of the sort of technologically driven companies that had a lot of fanfare around it that failed was Katerra and the modular homes. From your take, Stuart, why did Katerra fail because I want to take this to 3D printing. So that's the framework I'm going to kind of innovation on the homebuilding front.
But there was so much money and so much excitement around what Katerra could do to the home building market given its modular sort of design, if you will. Why was it that a startup that had so much behind it ended up hitting the wall, if you will?
I'm not trying to criticize Katerra. I'm talking about really kind of the innovation in the business because you've been so innovative and here was something that had huge capital to it, and one would think it would have been able to at least survive as a homebuilder and kind of had its niche in the market and it failed miserably. And so I guess that's really more of the question than you are saying, Oh, Katerra messed up on X, Y or Z.
Stuart Miller: Yeah. So I wanted to start by saying I don't want to disparage anybody's efforts.
Willy Walker: I got it. That’s what I was trying to say.
Stuart Miller: Let me say by way of amplifying that. I don't care what endeavor someone is looking to innovate or start up. It is hard. It's really hard to do. And so I want to embrace those who are bold enough to get out there, try and sometimes fail. The fact that they do, they provide a steppingstone for the learning process. And I want to admire the Katerra effort in that regard.
Now, with that said, I will say, Willy, that we were there in the beginning as a potential investor and chose not to. It wasn't because the concept wasn't right, it was more because the focus was on a broad measure of items in order to get some of the financial machinery to work. It was broader rather than more focused and myopic in terms of the model of execution. So it just wasn't for us. Why did it fail? I suspect it was a combination of why we didn't invest and the fact that it's just hard. And if you're not just laser focused on getting one thing done, it's very hard to find your way to a sustainable success.
I don't know if you or your listeners have yet read the book, Elon Musk by Walter Isaacson. But if you haven't, if they haven't, I recommend that everybody do. It's a book that as you read it, it makes me feel like I've accomplished nothing in my life because you get that drum beat of what it takes to be gritty and determined and to stay focused on what you're trying to do. Now, Elon has some broader talents and abilities. It's hard to shoot off a rocket ship and build an electric car company at the same time. So that almost flies in the face of what I'm saying.
But these businesses are hard to build. So as we migrate in our conversation to 3D printing or panelized building that are initiatives that we're heavily invested in and that we're working with, we do those primarily to get in at the bottom floor, to begin the learning process, to see what we can learn from the evolution of those businesses and see where the stumbling points are along the way and hopefully be constructive in helping our industry elevate itself to a point where it when labor is stressed, we can overcome that. When prices or costs are too high, we can find ways to bring them down. And if we don't start working in those directions, we're not going to be able to affordably provide the housing that this country needs. As you know, there's a great supply deficit right now. We're running hard to fill the gap. But the fact is, we can't keep up as an industry with the growing supply shortage that exists in the country. We've got to find some new mechanisms and ways.
Willy Walker: You're clearly running hard to supply in, if you will, all three food groups. So in single family and single family rental as well as in multifamily. As you look at the landscape right now, where single family mortgages at 8% and difficulty for people to buy that first home. Given that right now one third of the supply is coming from new homes versus traditionally it's sort of about 10% of supply comes from new homes and the rest is existing inventory.
You said to me when we were last together, Stuart, which I thought was a fantastic question as I was talking about the fact that people who own homes today don't want to put them on the market because they've got these low interest rate loans on them. You said, but isn't it a zero sum game? Isn't housing supply just housing supply? And you caught me there because I immediately in my own mind, we didn't extend the conversation, but I went to well, then that's going to household formation. It's going to immigration policy. And whether you think directionally those have growth drivers in household formation for people to buy either single family or to stay in multifamily.
But as you look across that continuum and where the macro market is today, where are you and Lennar, if you will, over investing to meet the demands? And where are you saying that the market doesn't have great growth drivers over the next 5 to 10 years because of where rates are, because of where immigration policy is, etc.?
Stuart Miller: Okay. Another really interesting compound question, because all three of those areas require a slightly different discussion.
Willy Walker: You know, I ask them, because I know you can take them. So I'm giving you these because I know you're going to think through them perfectly.
Stuart Miller: Let’s do that. First of all, a zero sum game on the 3% mortgage holder not being inclined to sell. Even if they sell, they're selling because they're going to look for another home. So they're adding to supply, but they're subtracting because they're also adding to demand. So that is what I meant by zero sum game. That means that the shortage has to be filled by new production. That's new production of single family for sale, single family for rent and multifamily homes.
If we think longer term, we know that the demand for short supply is going to continue to be weighed in favor of demand is going to be bigger than supply. However, along the way, we have 8% mortgages right now. Higher interest rates make affordability more difficult, so that pushes down on supply. The builders are bridging that gap by using either ARM, adjustable rate mortgage buy downs or 30 year fixed rate buydowns to make for and create affordability for the homeowner to find access to the new home market.
So you're seeing that the builders are still building at an accelerated rate. If you look at housing, it starts where running at about 1,000,003. That's a lot stronger than the 600,000 that existed back in the Great Recession or in the aftermath of the Great Recession. But still, below the million five that people traditionally say is about what's needed for the country.
Willy Walker: And you're supplying about 100,000 a year? Lennar's building about a hundred thousand a year?
Stuart Miller: Let's call it 70,000-ish but growing. So last year there were 66,000. This year, I think we're expected to do about 72,000. You know, we're getting close to our year end, so I can't really talk too much about that.
Willy Walker: All I want to do is scale when you say 1.3 million. You all are supplying a 10th of the market. Less than that. It's like six or seven if I do my math. I'm sorry, but I just wanted people to understand that as the largest homebuilder, how much market share does the largest homebuilder have? And it's a big number.
Stuart Miller: Correct. So on the Single-family side, affordability is stressed, but being made up by the builders contributing part of their margin to make for affordability for the customer. And that's keeping that part of the market rolling forward.
On the multifamily side, which generally averages about 300,000 multifamily for rent apartments to the market. That part of the market is really impaired right now. Now, over the past couple of years, that part of the market's been at a run rate of about 500,000 above trend, and that's still coming through the system right now. I think you're going to see a material slowdown in the construction of multifamily apartments as we absorb the two years of 500,000. Interest rates have definitely changed the dynamics, both in terms of debt service and in terms of cap rate relative to the value proposition of building new construction in the apartment world and then single-family for rent, which we had thought as an industry would be a stabilizer for the new home market is suffering from some of the same attributes as the multifamily market, which is cap rates and debt service eating up NOI or making the value proposition lesser for building single family for rent. That part of the market is still rationalizing.
Bottom line is when you look at all three, they're all stressed in certain ways, but all three make up that 1.5 million home per year need, 1.3 million home per year production right now, 600,000 at the low end. We've got to make up production of for rent, for sale, multifamily, single-family homes for the country. So that means that the longer term prospects for our business, as long as we remain innovative and sensitive to affordability, actually remains pretty good for the industry.
Willy Walker: I find it to be really interesting Stuart, as you talk through the three, if you will, asset classes. I walked out of my meeting with you, I can't remember whether it was two months ago. And one of the things that came to me was you view the market as it's a housing continuum like the single family world in the multifamily world have been historically wildly segmented. We’re Fannie Mae's largest multifamily lending partner for eight of the last ten years. And honestly, I know two people at Fannie Mae who have anything to do with the single-family, the CEO, and the chief investment officer. But other than that, all single-family is over here and all multifamily is over there and they don't kind of talk to each other and they're totally different businesses.
And I walked out of my meeting with you, and I said: Here's someone who understands that this is all housing. When you turned to me and you said to me, you know, isn't a zero sum game? And I was like, wow, the view of Lennar of playing across the continuum rather than just saying we are just a home builder and understanding where to deploy capital into the various, to some degree, it is sort of a life cycle. I mean, you think that most people are as much as they rent and then they form a home and then they move into a home and then sometimes they even move back to being a renter later in life.
But I just think that has significant implications to our industry, like single family finances has sat over here and commercial finances are over here. The commercial services firms like Walker & Dunlop sit just on the commercial side and don't really play on the single-family side. And yet Lennar has played across everybody. It's really interesting.
Stuart Miller: Well, listen, it's given us an open mindedness to the base narrative across the country. That is if you listen to the mayors and you listen to the governors, they need dwellings. They need homes. They need attainable homes, whether it's rental or whether it's for sale and ownership. They need places for people to live that are proximate to where the jobs are. They are dealing with cities that are pushing the workforce, the police officers, the firefighters, the teachers, the nurses, they're pushing them farther and farther away from where we need them to be.
The governors and mayors are dealing with this attainable home, affordable home issue across the country. They're agnostic as to whether it's rental or for sale – it's just got to be a lifestyle that is attainable to people that they need to run their cities.
Now, at the national level, we don't really think about it that way and we don't hear that much discussion about it. And that's a shame because it's a really important issue. And listen, I've always been an advocate for homeownership, but it's for a reason. The average person puts 10% down, it's the only leveraged investment they've got and a 10% down if appreciation is only 1% a year, it's still a 10% return on their investment. And over a 30 year period in the quiet of the night, the paydown of the mortgage is actually happening on a self-amortizing loan so that at the end of the 30 years, they own the home free and clear. And they've also enjoyed the appreciation of 10% a year or more over the ensuing years. It's an incredible retirement plan for the average American.
Willy Walker: There are two things you just said, (and I don't usually talk like this.) But you just said two things, when you talked about mayors and governors. Mayors and governors are the ones who have to make compromises and manage their cities in their states, blue or red, as striking deals. You talk about it as relates to housing? But across it, and I'm sitting there thinking about how challenging things are in Washington and how nothing's getting done. My thought when you were talking about mayors and governors was we ought to get rid of every one of us in D.C. and send every mayor and every governor to D.C. and have them run our federal government because those people know how to actually make compromises and work on both sides of the aisle, whereas everyone who seems to be sent from various counties in states across the country seem to only go with a blue or a red sweater on.
Stuart Miller: Can I just stop you there for one second and say that, you know, I see this across the country and it's so interesting. It doesn't matter if you're talking to a blue or red governor or a mayor. They all have the same refrain: “We need affordable housing.” That's why I say people ask me, are you a Republican or a Democrat? I say, neither. I'm a home builder.
The bottom line is, it's a unifying concept. We need affordable housing. We need attainable housing across the country. So sorry to interrupt on that.
Willy Walker: Oh, not at all. It's very much the issue that everyone wants to talk about. I had a U.S. senator come through here last week for a luncheon that I hosted, and all they wanted to talk about was affordable housing and how do we make more affordable housing.
Just kind of going back a little bit, Stuart to the conversation about Katerra and 3D printing., I know you have a joint venture right now with a 3D printing company and you've got a community that has a hundred 3D homes in it. Obviously, in the context of your business, it's a teeny, little thing. But do you think 3D printing has, if you will, better legs on it than modular in the way that Katerra I mean obviously in the way was going about doing it. Do you think that 3D outstrips modular as it relates to kind of the home building of the future?
Stuart Miller: No, I hate saying this out loud, but I remain agnostic without belief one way or the other, because there are lessons that are going to be learned from both. I think that there might be applications that are differentiated for each of them. There are attributes of the 3D printed home. If you look at its wind load factors and things like that, there are applications there that are very attractive for different geographies. But additionally, the ability to take that product and be flexible with it, the opportunities abound for 3D printed product for a factory built analyzed program. This has a whole different set of attributes that are very positive and constructive.
Question is, can you start to embed the mechanicals in the factory and really create efficiencies there and make it less costly to build and even assemble that on site? We haven't seen that consistently turn out economics, cost factors that actually make these things attractive yet. But it's going to come as we practice, as we learn, and we incorporate scale. Scale is where you start to learn what the real cost factors are going to be, and that's going to take some time.
Willy Walker: Switching gears a little bit, the Missouri court ruling against the National Association of Realtors as it relates to commissions, it will be appealed, but it looks like it will hold whether it gets held on appeal or whether the Justice Department steps in, a pretty big impact on the aggregate cost of housing and if you will, the cost of treating homes. So generally speaking, probably good for removing some of those friction costs, even though I'm certain as a home builder who relies on lots of realtors across the country, they're digesting that and it's going to have a big impact on the realtor market?
Stuart Miller: Yeah. So listen, I speak with great respect for our realtor community that brings so many qualified customers to us each year. But I also say that what is reflected in that ruling is a notion that the cost of acquiring homes across the country is something that is under the microscope.
We're talking about the judiciary here, but whether it's the administrative side of government or the legislative side of government, it has been talked about quite a bit, whether it's on the realtor side, the cost of transacting a title insurance side, all of these areas are focal points because housing is becoming such a critical issue and making it attainable to more people is about rationalizing costs.
So I don't know where in particular I haven't read the ruling, I don't know enough about it. But what I do think as I've read some of the writings about it, is that as a general matter, there is a predisposition to rationalizing the cost of acquiring homes. You've seen this in the banking industry where the customer has been favored in terms of eliminating fees that are overbearing, overpriced, and this has been over the past decades. I think that's coming to housing. And we all ought to be aware of that, that we've got to bring down the costs of acquiring a home.
Willy Walker: I want to end on the philanthropic side in your engagement with the University of Miami, Stuart. I was interested that you have endowed chairs for interdisciplinary chairs, and I thought that was interesting, just given how you built Lennar and the diversity that you put at Lennar. And I'm thinking that you were sitting there saying we need to support professors and chairs of departments that don't just think, if you will, literally on what they came and have they've studied throughout, but that they're pulling from various parts and bringing together various departments inside of the University of Miami. Am I right in thinking about that? And is that reflective of the way you built Lennar?
Stuart Miller: Well, Lennar works as an integrated, interdisciplinary environment that brings a lot of people together to solve problems and to build a better company. And I think that that's a lot about what our culture has been about. It's a lot about the way that we built durability into the programs and the configuration of the company going forward. You asked specifically about my engagement at the University of Miami, I've been the chair of the University of Miami. I am and have been for quite some time now, the chair of the University of Miami Health System. That's counterintuitive. What's a homebuilder know about medicine?
Willy Walker: You know how to run stuff, that’s what you do.
Stuart Miller: Okay. and actually, we've elevated our program so incredibly and I'm just so very proud of it. But in terms of interdisciplinary, medicine and business, law, engineering, and the rest of what we learn within the university system – all of these things play together.
Universities really need to be bastions of bringing people together to solve big problems. The cost of medicine in our country is one of those big problems. Another one is the cost of education in our country. Our universities need to be the tip of the spear in figuring out how to rationalize cost with excellence, bringing excellence to our communities, and doing it at an affordable cost. I like to think that our university system, in conjunction with our community hospital system, Jackson Memorial, we have a very unique partnership there. But we bring the best medicine to the broadest array of our community, and we're doing it better and better and better every year at a lower and lower cost.
I like to think that our university will be the tip of the spear in rationalizing the cost of tuition as we get better financially, better at running the business, and we bring high quality education to a broad range of students. So it is a passion of mine: health, education, and the quality of community life. It's something that we at Lennar think is important. I personally think it is important.
I don't know if you know, we have a Lennar Foundation that focuses on good works for the community. We have job skills training programs and things like that. Lennar contributes $1,000 for every home we build. This year, it will be about $72 million to our charitable foundation. And all of that money goes right into our communities across the country. I hope I don't sound like I'm bragging about something because we're really pretty quiet about this, but it is another thread of our culture. It brings pride to our people that we rise above earning the dollar at the bottom line, and we focus on what we can do to make the world a better place.
Willy Walker: I was going to make a point which kind of underscores a bunch of things of the pride, but then also the humility in it in that the medical center at the University of Miami is named the Lennar Foundation Medical Center and not the Stuart Miller Medical Center.
Stuart Miller: Well, I'm sorry. I gotta burst that bubble Willy, because it's actually the ambulatory center is the Lennar Foundation Medical Center.
Willy Walker: The medical school is after your dad. That I know.
Stuart Miller: It was after my father passed away. He never would have allowed it to happen, but he had to be honored for what he brought, not just in building a fabulous foundation of the company, but also in what he contributed back to his community. So we as a family, we wanted to do that, and it was the right place to be. But it is the Miller School of Medicine.
Willy Walker: Yeah, I love it. Stuart, you've been super generous with your time. It's been a true joy. Thank you. Thank you for running through the history. Thank you for how you built such a great company. And then also your insights in the markets today. I'm greatly appreciative of it. I know everyone who listens to this will learn a lot.
Stuart Miller: Thank you. Thanks for having me.
Willy Walker: Great to see you.
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