Housing Sector Gains Traction in Fourth Quarter

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The first estimates of 2012's fourth quarter GDP is out, and going by the initial impression, it appears the revival in housing is gaining more traction as we progress in the current quarter. Although the economy shrank 0.1% during the quarter, it should be seen as a necessary moderation after a strong third quarter. The US economy expanded 3.1% in the third quarter, and all other things remaining equal, the economy is not heading back into recession as some analysts would like to believe.

Beyond the headline figures, detailed private spending figures painted an encouraging picture. While consumer spending growth rates improved to 2.2% during the quarter, up from 1.6% in the previous quarter, residential investment growth picked up momentum to 15.3% in an indication that the housing recovery has gathered pace.

The Federal Reserve's latest Beige Book report also indicated that housing activity continued to improve in most districts, with one reporting double-digit gains. Sales of single family homes increased in most districts, though often at the higher end of the market. Inventories of unsold homes were either tight or falling, resulting in steady or rising selling prices. Construction expanded in most districts and housing activity in New York was firm prior to the Hurricane Sandy. Commercial real estate markets also improved in most districts.

All these developments augur well for housing companies such as Beazer Homes (NYSE: BZH), KB Home (NYSE: KBH), and NVR (NYSE: NVR). While some of this positivity has already flown in the markets, it is reassuring to see positive performance backed by some authoritative data. For example, Beazer Homes generated $7.7 million in adjusted EBITDA in the latest quarter, up $3.9 million from last year.

To top it all, the company ended the quarter with a backlog that was 39% higher in units and 52% higher in value, than at the end of the first quarter last year. The fact that the volume growth is getting complemented by price recovery is particularly noteworthy. It enabled the company to increase gross margins in all of its operating segments.

As we have seen in the recent months, this is not an isolated case. Beazer Homes’ larger competitor KB Home, also reported a 20.5% top line growth in the latest quarter ended Nov. 30. It was also heartening to see a massive improvement in operating profit for the quarter as well as for the full year. Although higher gearing ensured the gains did not filter to the bottom line, it was still a stellar show for investors – something reflected in its stock price, which is moving in an upward fashion.

Similarly, NVR posted a 27% growth in top line for the latest quarter, beating analysts’ expectations. Unlike its smaller competitors, NVR is a profit-making company and the top-line growth in the most recent quarter led to nearly doubling of its net profit to $60 million.

The housing sector also enjoys a distinct advantage of being governed very efficiently now after what happened a few years ago. While increasingly stringent lending standards may be keeping away many potential buyers from buying new homes, these requirements are expected to help the sector in the long term, especially the bigger players.


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