There's no place like home. At least that's what holders of homebuilder stocks must be thinking after being spoiled with great gains over the past few years. While most sectors sputtered along with the economy, sales of new homes skyrocketed as borrowing costs tanked to historic lows.
But since interest rates hit rock bottom in June, one is left wondering if the homemakers that were having a ball are now about to meet with a wrecking ball. We'll know more come tomorrow when Lennar (NYSE:LEN) and KB Home (NYSE:KBH) report their quarterly financials.
Each company has produced explosive growth during the housing boom. Lennar and KB Home achieved earnings growth of 30% and 47%, respectively, in fiscal 2002. Single-digit P/E multiples may scream value on the surface, but these are still cyclical beasts. Earnings growth under the uninviting environment of rising mortgage rates may do more than just slow down. Profits might fall.
That is why all ears will be tuning in to hear what the companies say about their fourth-quarter outlooks. While Lennar and KB Home have already announced a 22% and 16% spurt in new home orders, respectively, for the August quarter, it's more than likely that the bulk of those orders came earlier in the period as prospective buyers were swayed by historically low rates.
While it's never too late to refinance your home or set your sights on new digs, the homebuilders have to deal with the elasticity of demand. If higher rates mean that the value of the new housing dollar is shrinking, the alternatives -- either building fewer homes or marking them down -- aren't very attractive.
Others in the new home construction business like D. R. Horton (NYSE:DHI), Pulte Homes (NYSE:PHM) and Centex (NYSE:CTX) will be tuning in because their stocks are likely to move in sympathy with Lennar and KB tomorrow. Just like the real world, everyone is keeping an eye on the next-door neighbor.
You probably know that our Home Center is an excellent resource to gauge the housing market and go over the various financing options, but have higher rates scared you away? Do you think mortgage rates will rise or fall over the next year? All this and more -- in the Buying or Selling a Home discussion board. Only on Fool.com.
