The Federal Reserve made its latest decision on interest rates on Wednesday, and the response from Wall Street was one of concern, as markets fell sharply after the announcement of a three-quarter percentage-point increase. Yet investors seemed a little more comfortable Thursday morning, perhaps accepting that short-term economic headwinds from high interest rates could eventually reduce inflationary pressures for a more extended period of time. As of 9 a.m. ET, stock index futures on the Dow Jones Industrial Average (^DJI 1.18%), S&P 500 (^GSPC 1.26%), and Nasdaq Composite (^IXIC 1.99%) had risen slightly, although the benchmarks failed to reclaim all their lost ground from the previous session.
The homebuilding industry has attracted a lot of attention lately, because rising interest rates have had an impact on home affordability in many key U.S. real estate markets. That had many investors watching for the latest financial reports from Lennar (LEN 1.86%) and KB Home (KBH 4.04%). Even though the immediate stock price movements for these two homebuilders weren't extreme, what their executives said about the current environment for housing shows that market conditions are turbulent at the moment and could turn ugly in a prolonged recession.
Lennar plows ahead
Shares of Lennar were actually higher by nearly 2% in premarket trading on Thursday. The Miami-based homebuilder's fiscal third-quarter results for the period ending Aug. 31 showed more strength than expected, and that offset worries about what the future could bring.
Operationally, Lennar looked strong. Revenue jumped 30% year over year to $8.4 billion. Lennar delivered 13% more homes to buyers, and average sale prices came in at $491,000, $63,000 higher than in the previous year's period. Gross margin improved by nearly 2 percentage points to 29.2%, as higher materials and labor costs failed to offset the higher revenue Lennar was able to reap. The company also pointed to its debt-reduction strategies and relatively flat land costs as contributing factors to its financial performance. Adjusted earnings of $5.18 per share were up 58% and topped what most investors had expected to see.
Executive board chair Stuart Miller did note that new orders declined 12% from year-ago levels. However, he emphasized the long-term national shortage of available housing in keeping demand strong, and even though higher interest rates are affecting sales, Lennar anticipates keeping a steady pace of housing starts to meet the needs of buyers while carefully managing production to keep costs down and stay nimble in the face of macroeconomic uncertainty.
KB Home gets more selective
Shares of KB Home, meanwhile, were down more than 1% in premarket trading. The L.A.-based homebuilder had record results in its fiscal third quarter ending Aug. 31, but it, too, cited changes in buyer behavior that could have impacts down the road.
KB Home's financials were healthy, with revenue rising 26% year over year on a 6% rise in home deliveries. Average selling prices were up 19% to $508,700, as strong pricing power allowed KB Home to boost its gross margin by more than 5 percentage points to 26.7%. The homebuilder also reduced the percentage of sales it spent on overhead expenses, cutting external sales commissions and controlling costs elsewhere. Earnings of $2.86 per share were up a whopping 79% from year-ago figures.
CEO Jeffrey Mezger believes the long-term outlook for housing remains favorable, but inflation, higher interest rates, and other worries have made many prospective buyers rethink and delay purchases. A backlog of 10,700 homes should keep KB Home moving forward over the next three quarters, though, and the homebuilder is tightening up its process in making land investments to reflect uncertainty.
Overall, the Fed's moves haven't yet overcome the favorable long-term trends supporting the housing market. However, if rates rise significantly further, it's likely that KB Home and Lennar could see more dramatic impacts affecting their respective businesses.
