If I had a hammer, I'd hammer home this lesson: The housing market is still strong despite rising interest rates.
Even though the Commerce Department noted new home sales slipped 0.8% in June, homebuilder Beazer Homes (NYSE:BZH) said third-quarter profits surged and new home orders are still on the rise.
Homebuilders tend to be sensitive to interest rate movements. When the Fed was keeping rates down, shares of homebuilders were on a tear and housing prices soared. For the first quarter of 2004, housing prices appreciated 7.7% over the prior year, which followed an 8.1% increase in 2003's fourth quarter. (In my neck of the woods, New Jersey, the average increase was 11%. That could explain why I'm still renting.) According to the Office of Federal Housing Enterprise Oversight, housing prices have appreciated 42% over the last five years and more than 200% since 1980.
Yet the threat of an interest rate hike last December sent homebuilders into a tailspin. When the Fed actually raised them a quarter point at the beginning of the month, they fell hard again. Still, Beazer reported that in the face of this, it had revenues of $1 billion, earnings of $60 million, and a backlog of new home orders that rose 8% for the quarter. Through three quarters, Beazer's new home orders hit 13,205 homes vs. 12,454 last year. It raised earnings guidance to as high as $16.75, well above the $16 a share that analysts have forecast.
Other homebuilders are also reporting pent-up demand that at least for the next quarter bodes well. Toll Brothers (NYSE:TOL) reported its backlog increased 69% to $3.7 billion; Hovnanian Enterprises (NYSE:HOV) had a backlog increase of 52% to more than 9,000 homes; and Ryland Homes (NYSE:RYL) recorded a 36% increase in backlog to $2.4 billion. But the backlog is a tricky metric to measure homebuilders by as it can mask crumbling fundamentals.
In addition to interest rates, the industry, which also includes top builders such as Lennar (NYSE:LEN), D.R. Horton (NYSE:DHI), and Pulte Homes (NYSE:PHM), also needs to keep an eye on inflation since it can drive rates higher. For the time being, at any rate, it is being held in check.
Although one Fool wonders whether the underlying fundamentals of homebuilders make them a sound investment, Will Rogers' famously quipped, "Buy land. They're not making any more of it." And if you can build a house on it, all the better.
Fool contributor Rich Duprey doesn't own a home, and he doesn't own any of the stocks mentioned in this article.
