The COVID-19 crisis has ruined what was set to be the best year for housing in over a decade. The economy was strong, inventory was lean, margins were high, and demographics were on the builders' side. Let's take a look at one of the builders and see how the crisis has affected them. The current environment looks to be challenging for the homebuilding sector, but things might not be as bad as feared. The fundamentals of the housing market are unchanged, with more demand than supply. Investors worried about a replay of 2007 and 2008 should take comfort that this environment is completely different.
The quarter was mainly pre-COVID
PulteGroup (NYSE:PHM) reported first-quarter earnings of $0.74 a share compared to $0.59 a year ago. Revenues increased 14% to $2.2 billion, which was comprised of a 16% increase in units and a 2% drop in average selling prices. The drop in average selling prices was driven by a change in product mix (more first-time homebuyers) and in geographic focus. New orders increased 16% to 7,495 homes, and the dollar value of new orders increased by 19% to $3.3 billion.
Pulte's first quarter was the story of pre- and post-COVID. "The U.S. housing industry carried tremendous momentum into 2020, until the devastating effects of the COVID-19 pandemic began impacting the country," said Ryan Marshall, PulteGroup president and CEO.
As the coronavirus spread and state and local governments implemented various restrictions and stay-in-place orders, we experienced a material slowdown in consumer traffic and sales activity beginning in mid-March.
In the first week of March, orders exceeded 800 homes. By the last week of March, it had fallen to 140. April has been a little better than late March, with 900 sales for the month as of April 23. The Del Webb active adult community segment saw the biggest decline in orders.
Cancellations and Backlog
Addressing the issue of orders and cancellations on the conference call, Chief Financial Officer Robert T. O'Shaughnessy had this to say:
First, to date, buyers have wanted to close. Relative to the size of our backlog, we are seeing minimal cancellations with most, as you would expect, driven by job loss resulting from the coronavirus. Through the first three weeks of April, we've had 360 backlog units canceled, which represents only 3% of homes in backlog. Based on these numbers and our experiences to date, it's clear that our homebuyers are willing and even anxious to get into the safety of their new home.
Pulte entered the COVID-19 crisis with a backlog of 12,629 homes valued at $5.8 billion, which does give the company a decent amount of business going forward.
We aren't seeing price cuts to move inventory
Pricing has held up as well. This is a fundamentally different situation from 2018, when we saw some softness in pricing as a result of rising interest rates and declining affordability. The COVID-19 issues aren't necessarily fixed by lowering prices. The supply/demand imbalance also favors stronger pricing. Pulte mentioned that, in a few isolated markets with elevated spec inventory, some builders are putting financing incentives in place or using elevated broker fees, but pricing is remaining solid. The existing home inventory is also tight as a drum, and foreclosures are at the lowest level in decades.
Inventory was tight to begin with, and has been running at 3-4 months' worth of existing home sales for the past several years. Six months of inventory is normally considered a balanced market. That said, stay-at-home orders are depressing inventory even more than usual, although much of that will probably go back on the market once things return to normal. Any addition of these properties shouldn't affect new home pricing that much.
How the homebuilders fare this year will largely depend on how long the COVID-19 dislocation lasts. So far, the worst fears haven't been realized. Pulte has taken steps to increase liquidity by drawing down lines of credit, delaying land purchases for up to 90 days, and suspending the share buyback. Pulte has nearly $2 billion in cash on its balance sheet and a decent backlog of homes to work with. While Pulte has suspended the buyback, the dividend payout ratio is a manageable 13%. At 7.4 times 2019 earnings and a 1.9% dividend yield, Pulte is attractively priced, especially if the COVID-19 crisis is beginning to wind down.