Trade war hurts Lennar as wealthy Chinese home buyers remain cautious

By Ankit Ajmera

(Reuters) - Lennar Corp forecast current-quarter earnings below Wall Street estimates on Tuesday, as wealthy Chinese buyers shun buying homes in the United States due to uncertainty triggered by an escalating trade row between the countries.

Shares of the No.2 U.S. homebuilder reversed course to drop as much as 6.4% in afternoon trade after the company warned that more tariffs on Chinese imports could increase raw material costs and dent margins.

"The high-end coastal markets (in California)...with $1 million plus homes are heavily influenced by what's being impacted with the Chinese buyer," President Jonathan Jaffe told analysts on a post-earnings conference call.

Order value in Lennar's west region, which includes Arizona, California, Colorado, Nevada, Oregon and Washington, fell 7.8% and was the weakest among its five geographical divisions for the quarter ended May.

The region accounted for about 42% of Lennar's homebuilding revenue last year.

Lennar said its costs rose by $500 per home on average in the latest quarter after President Donald Trump imposed additional tariffs of up to 25% on $200 billion of Chinese goods in early May.

The company forecast third-quarter earnings per share to be in the range of $1.25 and $1.35, below the average analyst estimate of $1.52, according to IBES data from Refinitiv.

Lennar's disappointing commentary coincided with dismal data from the Commerce Department on Tuesday that showed U.S. new home sales dropped 7.8% to a seasonally adjusted annual rate of 626,000 units last month, the lowest level since December, dragging on the entire housing sector.

Shares of other homebuilders, including D.R. Horton Inc, PulteGroup Inc and Toll Brothers Inc, fell 2% to 5%, while the S&P Composite 1500 Homebuilding Index declined 3.9%.

The effects of the trade war were offset by gains from near two-year low mortgage rates that have encouraged customers, especially first-time home buyers, to make purchases.

Lennar said home sales increased 5% to 12,729 units in the three months ended May 31, beating the company's prior forecast of between 11,700 and 12,000 deliveries.

However, analysts are less optimistic about sales for the remainder of the year, pointing to tapering gains from the Trump administration's tax cuts.

"Quick drops in mortgage rates often have an effect of pulling forward contracts from home buyers, which can leave an air-pocket of demand in subsequent months," Raymond James analyst Buck Horne wrote in a note last week.

Lennar reaffirmed its full-year home sales target of over 50,000 homes, while second-quarter orders edged up 0.5% to 14,518 units, ahead of the 14,300 units estimated by the company.

Gross margins in the second quarter fell to 20.1% from 21.6%, due to a "greater-than-expected" rise in incentives offered, the company said.

Lennar earned $1.30 per share in the quarter, beating estimate of $1.14.

(Reporting by Ankit Ajmera in Bengaluru; Editing by Anil D'Silva and Sriraj Kalluvila)