Housing Stocks Roll Along
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recovery is afoot in the housing industry, says the top executive at one of the leading homebuilders in the country. Indeed, the most recent S&P/Case Schiller home price index shows a 1.5% increase in U.S. residential home prices in July versus June levels. Year to date, prices have climbed some 5.9% through July. Indeed, conditions in the housing market are looking up, although any recovery is still occurring from an extremely low base.
The said recovery does not come without its naysayers but nonetheless profits and rising home values don't lie. Housing stocks, for their part, have been on a tear. The mere mention of a possible bubble -- even a baby bubble -- underscores the nomadic journey that the stocks in this sector have taken.
Lennar Corp (NYSE: LEN) reported its fiscal third quarter results this week. A 28% jump in new-home deliveries catapulted this company to deliver more than a fourfold increase in bottom line growth to $87.1 million, or 40 cents a share, from $20.7 million, or 11 cents per share, in the year ago period. The results include nearly $13 million income tax benefits. Sales came in at $1.1 billion, which represents a 34% increase from last year. Importantly, home values are showing improvement and at Lennar the average selling price increased by almost 5% to $258,000.
Recovery has to happen in the local markets before broad-based evidence can be recognized, says Lennar CEO Stuart Miller. He recognizes that the despite a positive trend, the stabilization and recovery in the housing market is very "uneven," according to statements made in the earnings conference call. He points to a recovery that must take root at the local level before there is any broad-based recovery. Indeed, home foreclosures continue to plague the industry and Americans, many of whom still owe more on their mortgages than home values dictate.
Lennar's pipeline of orders represents some 4,513 homes -- a good start. It is almost an 80% increase over year ago levels and paves the way for a busy year. Miller remains optimistic, stating:
"...the market has stabilized and the recovery is well underway. Low mortgage rates, affordable home prices, increased buyer confidence and an extremely favorable rent-to-own comparison are driving growth in each of our markets."
Nonetheless, "massive vacancies" remain in the real estate market, according to FBN Securities cited in Barron's. Indeed, the 13.95% vacancy rate as of the second quarter exceeds rate levels for the four-decade span beginning in 1965, not to mention the fact that residential mortgage debt levels -- while below where they hovered prior to the market collapse -- are still at $9.5 trillion. Household mortgage debt has fallen $1 trillion since 2007 as many attempt to get their fiscal house in order.
Lennar shares have nearly doubled year to date. If this homebuilder is in fact leading the housing market through recovery, fundamentals had better remain intact or stocks could be in for more whipsaw action. Housing stock valuations have skyrocketed this year and companies while hopeful are only beginning to climb out of the doldrums.
Bolstered by improving sales and a tax benefit, KB Home (NYSE: KBH) reversed a loss in its third quarter reporting a profit of $3.3 million, versus a $9.6 million loss last year. One quarter does not a trend make, but given the results at homebuilders positioned in different parts of the country the signs are encouraging. KB Home is experiencing recovery in its key markets in California.
KB Home quarterly sales and home orders were up 16% and 3%, respectively. The company has not been profitable since 2011 and shares are trading at about their best level in 52 weeks.
Online real estate company Zillow (NASDAQ: Z), whose stock has essentially doubled year to date, has a modern day vantage point perspective on the housing market. It's an online marketplace for home buyers and renters that attract tens of millions of users each month on its web and mobile applications that have information on some 110 million homes. Rentals are a growing part of Zillow's business, according to CNBC.
The company has a popular mobile rental application on iPhone and Android in addition to its desktop application that boasts of some 400,000 rental listings. Zillow attracts some six-million users to its rental site each month. On the home sales front, Spencer Rascoff, Zillow CEO, recently told CNBC that housing prices only have one direction to go, and that's up -- especially in cities like Miami and Phoenix where conditions are improving.
Based on the results from the Case Schiller index, Rascoff may be on to something. Indeed, recovery in one form or another appears to be real -- but is it sustainable? The last thing that investors or homebuilders needs is to be led blindly into another housing bubble. While housing stocks may have presented a buying opportunity in recent months, many are now largely deemed expensive. It may be time to take some profits until the recovery strengthens in more pockets of the housing industry.
GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Zillow. Motley Fool newsletter services recommend Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
