There are several ways to measure the strength of the housing market in the United States. One is to look at macroeconomic figures such as new home sales and existing home sales. These numbers often provide information about the bigger picture. Another way is to look at the earnings of companies that are active in the housing market, most notably homebuilders. Lennar Corporation (LEN 1.87%), one of the biggest homebuilders in the U.S., recently came out with its quarterly earnings report and had some interesting things to say about the market. In this article, we'll take a look at the macro figures, as well as earnings from Lennar and competitor KB Home (KBH 2.73%).
May housing numbers
The May home sales report was encouraging and allayed some fears of a significant slowdown after a few less-than-stellar monthly reports. Last month saw the highest rate of existing home sales in nearly three years with purchases rising 4.9% to an annualized rate of 4.89 million.
Perhaps more importantly for homebuilders, new home sales rose to a six-year high, up 18.6% to an adjusted annual sales rate of 504,000. At the same time, the increase in house prices slowed, which indicates that the recovery may be entering a more mature stage.
The slump in the housing market earlier this year now seems to have ended, according to some analysts, amid a steady improvement in jobs numbers and lower mortgage rates. The average rate on a 30-year, fixed-rate mortgage has declined to 4.17%, from 4.41% at the beginning of April. Sentiment among homebuilders is also improving, and the market appears to be rebounding from a weather-related low earlier this year, with residential construction expected to pick up this quarter.
While Lennar's earnings were more or less flat year over year, its earnings per share of $0.61 soundly beat the $0.51 consensus estimate. Revenue shot up 27% to hit $1.82 billion, which also easily topped the $1.68 billion consensus. Deliveries were up 12%, and the average sales price of these homes rose by 14%. Lennar's management, which seemed to back the view that the housing market is steadily improving, had the following to say:
While the spring selling season was softer than anticipated by us and the investor community, the homebuilding recovery continued its progression at a slow and steady pace. The fundamentals of the homebuilding industry remain strong driven by high affordability levels, favorable monthly payment comparisons to rentals and overall supply shortages.
Other homebuilders also seem to be doing well. KB Home reported earnings before the bell on Friday which had investors fairly pleased. Revenue rose by 8% to $565 million, largely driven by a 10% increase in average selling price as the company delivered fewer homes than it did last year. Operating income soared to $34.3 million from $8.7 million a year ago. EPS of $0.27 per diluted share easily beat the $0.20 consensus and was up from a loss of $0.04 in the prior year.
The results from these two homebuilders seem to back the most recent macro figures in this instance. This suggests that the housing recovery remains intact, although it has slowed down to a steadier and perhaps more sustainable pace.
The bottom line
In the last few months, investors have been worried about the state of the US housing market because the macro figures weren't particularly encouraging. However, these fears may now prove to have been exaggerated, as housing seems to be coming out of a weather-related slump that occurred earlier in the year partially because of better affordability and an improving employment picture. Earnings from homebuilders such as Lennar and KB Home seem to confirm that the recovery remains ongoing, albeit at a somewhat slower pace.