1 Possible Bright Spot in the Housing Market

The housing downturn and expiration of federal tax credits continue to be a pain for homebuilders. NVR (NYSE: NVR  ) , the biggest builder by overall market capitalization, saw a disappointing 46% year-over-year fall in its second-quarter earnings, as new home orders and settlements plummeted. Analysts were expecting it to post even lower profits.

Let's go over NVR's numbers to find the key takeaways for investors.

In detail
NVR's total revenue slumped 28% from the year-ago quarter, to $695.9 million, dragged down by a 28% plunge in homebuilding revenues and a lower number of new orders, which fell by 4% in the quarter. Settlements were down 34%, while cancellations rose slightly -- from 12% last year to 12.5% this time.

The federal tax credit, the sales-boosting dose of steroids which existed last year, has expired. First-time homebuyers are now at bay and this is affecting the entire industry.

Like NVR, a number of its peers have felt the pain of falling orders. D.R. Horton's (NYSE: DHI  ) and KB Home's (NYSE: KBH  ) new orders declined 23% and 11%, respectively, in their second quarter.

Tightening of credit requirements affected NVR's smaller mortgage banking business, leading to a fall of 29% in loan production. As a result, income from the segment dropped 46% for the quarter.

NVR's total net income slipped to $38.4 million, from $71.3 million in the year-ago quarter, as home closings and revenues took a hit.

Though the future business indicator of backlogs went up by 5% on a unit basis, it would be prudent to note here that these include houses which were sold, but not settled. Given the fall in settlements in the quarter, the backlog's rise may not be a reason to cheer yet.

Speaking of leverage
Amid the negative numbers, there are certain interesting things worth noting about NVR. For example, while most homebuilders have very high levels of debt on their balance sheets, NVR looks relatively underleveraged with a debt-to-equity ratio of just 5.9% in the latest quarter.

An interest coverage ratio of more than 200 and a cash balance of $927.4 million give the company a lot of latitude to assume more debt and take aggressive chances when opportunities come along. To utilize some of its excess cash, NVR last year announced a $300 million repurchase program.

Another factor that sets the company apart from its peers is its less-land policy. NVR doesn't buy land upfront like others, but goes for land options. This insulates the company from land-related volatility -- at least, that's how it works in theory.

However, NVR recently entered a joint venture with a Morgan Stanley affiliate to buy a land portfolio of 5,600 home lots in the Washington, D.C., metro area. This is an important market for NVR, and it definitely sees potential there. But its current numbers may have a different story to tell.

NVR's quarterly new orders and settlements in the mid-Atlantic region (which includes Washington) fell 6.5% and 36%, respectively. If buyers in the region are showing caution, NVR's optimism may be misplaced, even in such a relatively strong region.

The Foolish bottom line
While the current quarterly numbers look weak, NVR's healthy balance sheet is a bright spot. It could be the stock to watch out for in the housing industry once the overall housing scene shows some visibility.

Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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