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Berkshire Hathaway has gone on a buying spree in beleaguered homebuilder Lennar, accumulating almost a 10% stake. The position is a "classic" value play, according to a CFRA analyst. Berkshire Hathaway bought almost 2.7 million Class A shares of Lennar over three trading days ended Monday, bringing the position to 23.7 million shares worth $1.8 billion, according to a securities filing late Monday. The Omaha-based conglomerate also owns 528,000 of Lennar's Class B shares, each of which carries 10 times the votes of a Class A share. Lennar surged as much as 6.6% at one point Tuesday, to a high of $83.24. The Miami-based company has plunged more than 32% in the past year. Dimming affordability Berkshire's latest purchases have come as interest rates rise, which hurt homebuilders by raising the rate on 30-year mortgages and dimming affordability. The nationwide average 30-year fixed mortgage rate reached 6.95% last week, up from the prior week's average of 6.76% and last year's 6.26%, according to Freddie Mac. The State Street SPDR S&P Homebuilders ETF (XHB) is down almost 16% since the end of June. "Berkshire likes to buy undervalued assets," said Catherine Seifert, an analyst at CFRA Research. Betting on Lennar is a "classic Berkshire value play." The move isn't a stretch for current Berkshire CEO Greg Abel, who took over last year from Warren Buffett. Berkshire has "a pretty significant presence" in the homebuilding market, Seifert said, after its acquisition of Taylor Morrison. Berkshire also owns building material companies, including paint manufacturer Benjamin Moore and Johns Manville, a maker of roof tiles. In 2003, Berkshire bought Clayton Homes, a maker of manufactured and modular homes, for almost $2 billion. Weak results Lennar last week reported weak results in the fiscal third quarter ended Aug. 31. Earnings per share totaled $1.23, missing Wall Street analysts' consensus estimate of $1.29, while revenue slumped 8% from the same period a year ago. Even more importantly, Lennar forecast fourth-quarter guidance below expectations, citing affordability challenges from rising interest rates. On management's conference call with analysts, CEO Stuart Millar said 30-year mortgage rates at 7% constrain affordability and reduce the pool of qualified buyers. Plagued by a mismatch between supply and demand, the housing sector has helped dampen consumer confidence. A shortage of new housing supply is pushing up the price of existing homes and making new homes harder to afford. Higher mortgage rates have priced millions of first-time buyers out of the market altogether. Steeped in a deep value investment philosophy that often veers toward the contrarian, the tough housing environment could provide rich targets for Berkshire, which sat on a war chest of some $367 billion at the end of June. On Friday, Buffett officially stepped down as chairman effective immediately, succeeded by his son Howard Buffett.
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