Higher interest rates? Soaring prices at the pump? Consumers earmarking their big-ticket purchases to take advantage of employee pricing promotions from Detroit's automakers? All of these things should have punctured through the housing bubble, leaving homebuilders in a sudsy mess.
In theory.
In reality, real estate developers are doing just fine. The housing boom may be a bubble, but it's apparently wrapped in a much thicker skin than industry pundits are giving it credit for.
This morning Lennar (NYSE:LEN) became the latest homebuilder to raise its profit targets. The company is now looking to earn at least $2 per share when it posts its August quarter results next week. Wall Street was expecting bottom line results to come in at $1.92 a share. The company wound up delivering 10,900 homes -- a hundred more than its original goal.
Gross margins rose from 23% to better than 26%, as the amount that prospective homeowners are willing to pay for a new house continues to escalate quicker than Lennar's construction costs. The good times are likely to continue in the near term as home orders are clocking in 20% higher than at this point last year.
One can argue that Florida developers like Lennar and St. Joe (NYSE:JOE) are in a unique situation, with two frustrating seasons of exceptionally intense hurricanes leading residents to scurry for new digs. However, real estate prices keep climbing all over the country. Homebuilders everywhere continue to top forecasts. Rate hikes, pricey fuel, and summer car deals haven't slowed that momentum down.
So it's been a lot like a game of chicken. When the Fed raises rates, as it did yesterday, homebuilders lose ground. Yesterday found Pulte Homes (NYSE:PHM), D.R. Horton (NYSE:DHI), Centex (NYSE:CTX), and KB Home (NYSE:KBH) shedding between 3% and 5% of their value. But then the companies seem to bounce back when results surpass the expectations. Case in point? Lennar's stock opened 3% higher this morning on the news.
You won't find tumbleweeds and cobwebs in our Home Center. Despite the higher prices, consumers still have an appetite for house-hunting. That doesn't mean that the housing sector will thrive forever. I do find the trend toward interest-only mortgages troubling. However, as long as new orders keep climbing, the developers will keep building.
In theory.
Longtime Fool contributor Rick Munarriz has been living in the same place since 1999 -- but did refinance twice when borrowing costs got dirt cheap. He does not own shares in any of the companies mentioned in this story. T he Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
