The U.S. Commerce Department just reported disappointing housing starts for the month of May. Starts rose modestly, to 974,000, which was up only 4% compared to April and was down 23% compared to a year ago. Despite the overall disappointing number, some builders experienced a substantial rebound during May. One such builder was Lennar (NYSE:LEN), which reported May sales were up month over month and year over year. Granted, sales and starts are different metrics, but things look better in the housing market than the weak housing number suggests.
The housing dip ended in late April
Despite the modest uptick in May housing starts, things completely turned around for Lennar during May. Essentially, from mid-March through April, the industry went through an acute slowdown, but things started accelerating in May, and June activity is even better. On the earnings conference call, CEO Rick Beckwitt described the change:
In May, our new orders increased each week sequentially and were up 7% over the prior year. Our cancellation rate in May also dropped from 18% -- dropped to 18% from the 23% high in April. More importantly, our increase in sales was generally achieved while raising prices and reducing incentives throughout the month of May. We rarely comment on sales activity outside of the quarter we are reporting. However, given these fluid market dynamics, I will give you some insight on June. For the first two weeks of June, our new orders were up 20% over the same period last year. We believe that part of this increase was the recapture of sales activity lost during this year's spring selling season. And there will be a reversion to typical seasonality as we move through the rest of our fiscal year.
Most of the country has rebounded
On the call, management also pointed out the different markets and where they stand. Essentially, they put the markets into one of three buckets: Those largely unaffected by COVID-19, those that were affected but have recovered, and those that were affected and are still lagging. Most of Lennar's markets fit in the second category. The laggards are mainly Los Angeles, the San Francisco Bay Area, and Las Vegas. Texas was a pleasant surprise, with Lennar able to take share from smaller competitors, especially at the lower price points.
Margins should remain strong
The company felt confident enough to reintroduce guidance for 2020, although it did caution that some of the growth in June may have been pent-up demand from March and April. There will also be a dip in deliveries later on in the year due to the pause on land development and spend for six weeks. That said, pricing remains robust as the company has been able to raise prices, and has not needed to use incentives to sell homes. This means gross margins (21.6% last quarter, compared to 20.1% in the same quarter last year) will remain high. On the cost side, labor is a big issue; however, the homebuilding industry initiated a program to train people displaced from the shutdown in the trades and then hire them full-time.
The beginning of a long boom in housing?
Between the COVID crisis and the civil unrest in the cities, people are headed toward the suburbs and single-family homes. There has been a dramatic shortage for the past five years or so, and this additional demand will push prices even higher. While further developments on the COVID side can throw a wrench in things, 2020 may end up being the beginning of a huge multi-year boom in housing and construction.