Housing Recovery: Numbers Indicate Signs of Rebounding
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The housing market has shown several signs of recovery over the last few months with sales of existing homes, new home sales and home prices all turning positive. Home prices are rising steadily nationwide. According to the National Association of Realtors, the existing home sales increased 7.8% in August to an annual rate of 4.82 million units last month. That was the fastest annual rate since May 2010 and well above analysts' expectations. Sales of new homes are also picking up. Builders started construction on new homes at an annual rate of 750,000, up 29.1% compared with a year earlier
Historically low mortgage rates have helped propel the market forward. More Americans appear to be taking advantage of near-record low mortgage rates and prices that are, on average, much lower than they were six years ago. Federal Reserve’s decision to buy $40 billion in mortgage-backed bonds per month on an open-ended basis in its third round of bond buying and also extending its pledge to almost zero interest rates into mid-2015, enhances housing affordability, which is necessary for better housing performance. The Fed also hopes that lower mortgage rates will accelerate the housing market recovery and boost home prices. That, in turn, could make people feel wealthier and more willing to spend, which would bolster economic growth.
Housing market has been very fragile in the last few years. Homebuilders' sales and profit margins had dropped dramatically from peak levels in 2006. Declining demand for new homes and an excess of supply in the market in 2011 drove homebuilders to make large concessions in prices, largely hurting profitability.
5 Housing Stocks Building Ahead
Here’s a look at the industry’s five stocks that have done fairly well and the share prices shot up more than 50% in the first half of 2012.
The chart shows the companies' stock price performance over the last five years:
The prices of all the stocks have mounted significantly since the beginning of 2012. Lennar Corp (NYSE: LEN), Toll Brothers (NYSE: TOL) and DR Horton (NYSE: DHI) have crossed the 2008 price levels while MDC Holdings (NYSE: MDC) and Pulte Group (NYSE: PHM) have not yet reached their past 5 year levels.
Lennar reported better-than-expected second quarter results. Revenues grew 21.7% compared to the same period a year ago, to $930 million. Shares are up 68.9% year to date. The firm also posted its strongest operating margin 9.2% since the second quarter of 2006. Gross margins also improved to 22.5%, indicating strong pricing trends. However, Lennar's net-debt/capital ratio remains relatively high around 46.5%.
DR Horton reported Q3 net sales order growth of 25% year-over-year. The company posted highest quarterly pretax income since the second quarter of fiscal 2007, earning $72 million in the quarter and $144 million year-to-date. DHI’s pretax operating profit margin for the third quarter was 6.3%. Moreover, the company forecast stronger closing and pretax profit in Q4 for both sequential and year-over-year.
Toll Brothers, the homebuilder of luxury homes reported third quarter revenues of $554.3 million, up 40.6% on the year. Net income rose from $42.1 million last year, to $61.6 million in the third quarter of 2012. Earnings per share came in at $0.42 per share. Profits were boosted by a tax benefit of $18.7 million, partially offset by an inventory write-down charge of $3.1 million. Shares more than doubled over the past year.
MDC and Pulte have significantly negative return on equity and still not showing positive earnings. But shares of Pulte Group have doubled since the beginning of the year.
Is the surge sustainable?
The housing market improvement has been uneven across the country. Most of the gains have, by and large, been observed in high-end communities. In addition, homebuilders are still facing impediments in raising prices in some markets. A speedy housing recovery is unlikely and it will take some time before the markets fully recover. Investors may look for smaller gains as they move into year-end. In the long term housing sector probably going to outperform a lot of other sectors but we’re still looking for accelerated earnings growth.
With raw material prices at historic lows, each of these builders have the opportunity to increase earnings, as well as revenues, quite significantly. DR Horton with a reasonable PE and high earnings looks like a buy but the other builders have still issues with earnings so they are not recommended for a buy right now.
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