Home prices continued their year-long advance according to the S&P/Case Schiller Home Price Indices. And the National Association of Home Builders recently announced that builder confidence continues to climb. This is good news for investors in the homebuilder sector.
A glance at home prices
The S&P/Case Schiller Indices are the leading measure of U.S. home prices. The latest data released on September 24 showed prices continued to rise through July 2013. The outfit reported that prices rose 12.4% in the 20-City Composites year over year. Further, prices rose 1.10% from June.
"Home prices gains are holding their 12% annual rate of gain established by the two Composite indices in April," said David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices.
While home prices in all cities have increased, the monthly rates moderated in July compared to the increases from April to June. The chairman also noted that "more cities are experiencing slower gains each month than the previous month, suggesting that the rate of increase may have peaked."
Finally, the 1% spike in mortgage interest rates over the summer caused mortgage applications to fall -- an indication the rate increase affected the housing recovery. This trend in mortgage applications continued in September and may be a sign the housing market recovery is slowing.
Home builders' confidence on the rise
Home builder confidence in the housing market has been improving for four consecutive months according to the report for September released by the National Association of Home Builders/Wells Fargo Market Index (WMI).
This survey has been conducted by the NAHB for 25 years in order to gauge builder perceptions of current single-family home sales and sales expectations. It is an indicator for the next six months ranging from good or fair to poor. The survey considers the expected rate of prospective buyer traffic as "high to very high," "average," or "low to very low."
In sum, scores from each component are then figured into a seasonally adjusted index. Any number over 50 indicates that more builders view conditions as good. The number is holding steady at 58 even though NAHB agrees the spike in interest rates has cooled the market.
Although the market may be slowing, a more solid recovery in the long term will be a plus for home builders like Lennar Corporation (NYSE: LEN ) , Ryland Group (NYSE: RYL ) , and Toll Brothers (NYSE: TOL ) .
Lennar aims for first time buyers
Lennar is one of the nation's leaders of homebuilders focused on single-family dwellings designed for the first-time home buyer.
The builder reported third-quarter earnings per share of $0.54 compared to $0.40 in the third quarter of 2012. Further, revenues were $1.6 billion -- an impressive increase of 55%. Moreover, deliveries increased by 37% as new orders rose by 32%. However, the rise in home prices has caused some potential buyers to back off.
The outfit's CEO, Stuart Miller, noted the "sticker shock" for buyers has cooled demand, but expectations for the future are optimistic. In sum, third-quarter earnings came in at $120.7 million -- up by more than $33 million over the same time period in 2012. This was due to solid growth in home building revenues and pricing margins.
Ryland builds for owners buying up
As for Ryland, this home builder's dwellings are aimed at present owners looking to "buy up." This is a key factor because buyers in this market are less price-sensitive than first-time buyers. So they may not be scared off by rising mortgage rates -- which remain near historic lows.
The company will release its third-quarter 2013 results on Tuesday, October 29. Meanwhile, for the six-month period ending on June 30, the company reported pre-tax earnings of $67.6 million, compared to pre-tax earnings of $11.0 million for the same period in 2012.
Ryland said the improvement was primarily due to a rise in closing volume and higher housing gross profit margin. In particular, revenues increased 70% to $841 million from $494 million for the same period in 2012. This was due to a rise in closings of about 54% coupled with an 11% increase in average closing price.
Toll Brothers' luxury niche
Finally, Toll Brothers niche is in luxury residential communities. And like Ryland buyers, Toll's customers are also less wary of rising home prices.
For the third quarter, the company reported $1.6 billion of revenues and net income of $75.7 million, compared to $1.2 billion of revenues and net income of $75.7 million for the same period in the previous year.
The report also noted that rising home prices, reduced inventory, and low mortgage rates have resulted in increased demand, but a full recovery "depends on these factors as well as a sustained stabilization of financial markets and the economy in general."
The bottom line
Each of these homebuilders has performed quite well in 2013. And the fact that Lennar, Ryland, and Toll Brothers cater to different buyers indicates the nascent housing recovery has been broad-based. While the housing market recovery has been bumpy, a more sustained recovery will boost each of these outfits. The question for investors with a long-term view is how far off a sustained recovery will be.
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