Is "classic value investing" making a comeback? Berkshire adds to its position in homebuilder Lennar (LEN.US) against the tide as the U.S. housing market comes under pressure.

According to a securities filing, Berkshire Hathaway (BRK.B.US) has made a major purchase of troubled homebuilder Lennar (LEN.US), with its stake approaching 10%. According to a CFRA analyst, this position is a "classic" value investment. U.S. securities filings show that over the three trading days through Monday, Berkshire Hathaway bought nearly 2.7 million Class A shares of Lennar, bringing its holdings to 23.7 million shares valued at $1.8 billion. The Omaha-based conglomerate also holds 528,000 Class B shares of Lennar each Class B share carries 10 times the voting power of a Class A share. On Tuesday, Lennar surged as much as 6.6%, hitting a high of $83.24, and ended up 6.38%. The Miami-based company has fallen more than 32% over the past year. Background: High interest rates are battering the U.S. housing market Berkshire's latest purchase comes at a time of rising interest rates which have pushed up 30-year mortgage rates and eroded homebuying affordability, thereby hitting homebuilders. According to Freddie Mac, the national 30-year fixed mortgage rate reached 6.95% last week, up from 6.76% the previous week and 6.26% a year earlier. The State Street SPDR S&P Homebuilders ETF (XHB) has fallen nearly 16% since the end of June. With each step up in rates, builders' dilemma deepens: cutting prices to preserve sales volume erodes profit margins, while holding prices lets inventory pile up and what Berkshire is buying is precisely the price squeezed out by this dilemma. "Berkshire likes to buy undervalued assets," said Catherine Seifert, an analyst at CFRA Research. The bet on Lennar is a "classic Berkshire-style value investment." For current Berkshire CEO Greg Abel who took over from Warren Buffett last year the move is not out of character. Seifert said Berkshire already has "a fairly sizable presence" in the residential construction market, following its completion of the Taylor Morrison acquisition. Berkshire also owns building materials companies, including paint maker Benjamin Moore and roofing materials manufacturer Johns Manville. In 2003, Berkshire acquired manufactured and modular homebuilder Clayton Homes for nearly $2 billion. Weak results Lennar last week reported weak fiscal third-quarter results (quarter ended Aug. 31): earnings per share of $1.23, below the $1.29 consensus estimate of Wall Street analysts; revenue fell 8% year over year. More importantly, Lennar issued fourth-quarter guidance below expectations, citing affordability challenges from rising interest rates. On the company's conference call with analysts, CEO Stuart Millar said a 7% 30-year mortgage rate is dampening affordability and narrowing the pool of qualified buyers. For large builders that rely on volume, disappointing guidance usually means more intense competition on pricing and incentives ahead. Plagued by a supply-demand mismatch, the housing sector has been weighing on consumer confidence. A shortage of new-home supply has pushed up prices for existing homes and made new homes less affordable. Higher mortgage rates have squeezed millions of first-time homebuyers out of the market entirely. With a deep-value, often contrarian investment philosophy, the difficult housing environment may offer Berkshire a rich hunting ground as of the end of June, Berkshire sat on an approximately $367 billion "war chest." On Friday, Buffett formally stepped down as chairman, effective immediately, with his son Howard Buffett succeeding him. From an $800 million exploratory stake to an $1.8 billion heavy position Lennar is one of the largest homebuilders in the U.S., long ranking among the top two in the industry by deliveries alongside D.R. Horton, Inc. (DHI.US) (according to public information). The industry's self-rescue tactics are nothing new: during the previous high-rate cycle in 2023, builders widely used mortgage rate buydowns, price cuts and closing rebates to sustain sales. But now that 30-year rates are again approaching 7%, the rising cost of buydowns themselves is eroding builders' profit margins this is the other side of what Millar called a "shrinking pool of qualified buyers," and the direct source of pressure on Lennar's gross margins and guidance. Berkshire is no stranger to homebuilders, but this increased bet on Lennar means a jump in its industry exposure. In August 2023, Berkshire disclosed in its 13F filing for the first time that it had simultaneously established positions in three builders: about 5.97 million shares of D.R. Horton, Inc. (DHI.US), about 11,000 shares of NVR, and only about 153,000 shares of Lennar together worth just over $800 million, with Lennar the smallest position among them. Three years later, the single Lennar position has reached 23.7 million shares, $1.8 billion, and a stake of nearly 10% this builder, precisely when its stock was falling the most (down more than 32% in a year) and its results were weakest, was bought by Berkshire into a major shareholder position. From a tentative small position to a strategic-level holding of nearly 10%, this pace in Berkshire's history of building positions usually means management's judgment is long-term, rather than a trading-oriented swing operation. The timing of the increase is equally intriguing: it came the week after Lennar's third-quarter results missed expectations and its fourth-quarter guidance was cut, and at a moment when 30-year mortgage rates are approaching 7% a typical Berkshire move of "buying at the point of maximum pessimism." And at this time Berkshire has ample ammunition: about $367 billion in cash reserves at the end of June, providing the confidence for what management calls a "classic value investment." On the governance front, this trade is also a footnote to the Abel era: Buffett stepped down as CEO last year and formally stepped down as chairman this Friday, with Howard Buffett succeeding him as chairman and Abel running operations. Berkshire's construction industry chain map (Clayton Homes, Taylor Morrison, Benjamin Moore, Johns Manville) plus a nearly 10% stake in Lennar means the conglomerate's bet on "American housing" is extending from materials and manufacturing to the entire residential value chain. For the market, the signal value of this position-building outweighs its financial significance: $1.8 billion is just a rounding error against $367 billion in cash reserves, but it appeared at the moment of the most fragile sentiment in the housing sector mortgage rates approaching 7%, XHB down nearly 16%, and leading players' guidance disappointing one after another amounting to Berkshire publicly endorsing that "deep value is still alive." CFRA's Seifert characterized the trade as "classic," and the 6% gain the market delivered on Tuesday was speculative capital's immediate vote on the same signal.