Is the Housing Recovery Slowing Down for PulteGroup and D.R. Horton?

During the last few years, the U.S. housing market has witnessed explosive growth, both in terms of house prices and number of homes sold. In fact, prices are nearing where they were before the crash, which has led some commentators to speculate that a possible bubble is forming. During the last few months, however, it's starting to look like this period of rapid recovery is coming to an end. Is the bubble about to burst, or are we just entering a period of normalization after bouncing back from the worst economic environment since the Great Depression? Let's take a look at some of the macro-economic figures, as well as results from major homebuilders D.R. Horton (NYSE: DHI  ) and PulteGroup (NYSE: PHM  ) .

The big picture
Official figures on the housing market haven't been particularly encouraging over the last few months. In April, home prices recorded their smallest annual gain in 14 months. While prices rose by 10.5% year over year, they were up only 2.1% sequentially. Additionally, the year-over-year gain is lower than the 11.1% posted in March and the 12.2% recorded in February. Several factors are said to be contributing to this slowdown, including tight credit and limited supply. Economists aren't too optimistic about the full year either, with most believing that sales will barely rise this year.

Now, mortgage titan Fannie Mae has also chimed in with a rather bearish forecast for the U.S. housing market. According to Fannie, its monthly national housing survey found that some 57% of Americans believe the U.S. economy is heading the wrong way, which is putting pressure on housing demand. The number of respondents who believed that house prices would rise declined, and the number who believed they would fall increased, both by around two points. According to Fannie Mae, sales volume for the full year is expected to lag behind last year's tally.

Homebuilder earnings mixed
Looking at the April housing figures and Fannie Mae's gloomy take on the market, we would be led to believe that a slowdown in housing is imminent. Is this prognosis also showing up in homebuilder earnings? Let's examine the most recent results from D.R. Horton and PulteGroup, two of the nation's largest homebuilders.

D.R. Horton, which sells homes priced under $250,000 for first-time buyers aside from more upscale offerings, experienced a fairly good second quarter. EPS came in at $0.38, up from $0.32 a year ago and beating the Street's estimates by $0.04. Homebuilding revenue shot up by 22%, while the average selling price increased by 10%. After new-home sales declined by 14.5% in March, the report was a relief to many investors, and allayed some of the fears of a housing market slowdown. However, not all homebuilders did as well as D.R. Horton.

PulteGroup, which generally caters to higher-income families, reported an 8% drop in its first-quarter earnings, with EPS of $0.19, down from $0.21 last year, and just missing the $0.20 consensus. Home closings declined by 10% for the period, while prices simultaneously rose 10% to an average of $317,000. New net orders were down, as well, dropping by 6%, while the average value of these orders increased by 2%. Clearly, the company is suffering from higher mortgage rates, although management is confident that the U.S. housing recovery is still in its early stages.

The bottom line
There have been some worrying numbers coming out of the housing market recently, leading some commentators to wonder whether the period of recovery may be drawing to a close. In any case, Fannie Mae has stated that the recovery may be over, which is, to some degree, backed by recent macro-economic figures. However, homebuilder results are still mixed at the moment, and don't point to a definite top in sales or prices. As such, investors should tread cautiously when assessing homebuilder stocks.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 17, 2014, at 4:22 AM, jabisme wrote:

    I have been looking for a home in N. California for the last 9 months, and it's ridiculous home much home prices have increased. The homes here have been driven up unrealistically by real estate investors, home flippers, and low inventory. Low inventory is due to people still being upside down on their mortgages and not earning enough to move up. It does appear that we are in a bubble, because the jobs have never came back and the ones that have don't pay enough to pay a mortgage or live the American dream.

  • Report this Comment On June 18, 2014, at 4:15 PM, zyx987 wrote:

    I have posted a note twice (yesterday and this morning) and it has not appeared as of 4:14pm today , 18 June 2014

  • Report this Comment On June 18, 2014, at 4:22 PM, zyx987 wrote:

    To shorten my comment, I think that the harsh winter weather across the nation seriously slowed housing starts this year and homebuilders will have stronger quarters in the 2nd half of this year. Prudent (and quite decent) expansion. I'm long PHM and RYL.

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