Lennar's Third-Quarter Earnings: What You Need to Know

In a recent speech at Fordham University Graduate School of Business, the president of the Federal Reserve Bank of New York cited housing -- and homebuilders in particular -- as one of the most promising sectors of the current economy. And today we see why.

Earlier this morning, Lennar Corp (LEN 1.75%) reported markedly improved third-quarter results. For the three months ended August 31, the nation's third largest homebuilder by volume said that its earnings per share rose by 35% compared to the same period last year.

"We continue to see long-term fundamental demand in the market driven by the significant shortfall of new single-family and multi-family homes built over the last five years," said Stuart Miller, Lennar's chief executive officer. "While there may be bumps along the road that may impact the short-term pace of the recovery, the long-term outlook for our business remains extremely bright."

You can see the source of Miller's optimism in the chart and table below, which show that new orders, deliveries, and backlog at the company all grew by double-digit margins in 2012.

Source: Lennar Corp.

The one concern in the market right now revolves around mortgage rates, which have shot up by more than 100 basis points since the beginning of May. As the chairman of the S&P/Case Shiller home price indexes also noted today, "Following the increase in mortgage rates beginning last May, applications for mortgages have dropped, suggesting that rising interest rates are affecting housing."

These headwinds aside, the underlying fundamentals of the housing market seem to almost guarantee a brighter future for homebuilders like Lennar. As William Dudley of the Federal Reserve discussed in the aforementioned speech (emphasis added):

[T]he excess supply of housing created during the boom appears to have been largely worked off. As a result, house prices are now rising in most areas of the country and homebuilding activity has strengthened. Moreover, there is further scope for gains in homebuilding. After all, the current annualized rate of housing starts -- around 900,000 -- is considerably below the rate consistent with the country's underlying demographic trends and the expected long-run rate of household formation. By these metrics, housing starts should ultimately climb back to about a 1.5 million annualized rate.