Lawler on Homebuilders Lennar and KB Home

Lennar Corporation, the second largest US home builder in 2013, reported that net home orders in the quarter ended May 31, 2014 totaled 6,183, up 8.4% from the comparable quarter of 2013. Sales per active community were down about 7.5% from a year ago. Home deliveries last quarter totaled 4,987, up 11.7% from the comparable quarter of 2013, at an average sales price of $322,000, up 13.8% from a year ago. The company’s order backlog at the end of May was 6,858, up 11.3% from last May, at an average order price of $343,000, up 13.6% from a year earlier.

Here is a comment from Lennar’s CEO in its press release.

"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. Demand in most of our markets continues to outpace supply, which is constrained by limited land availability."
With respect to land, the company said in its conference call that it owned or controlled bout 164,000 homesites at the end of May, up 18.3% from last May ... That lot inventory was 7.6 times Lennar’s expected level of home deliveries in 2014 – which is a lot!

In its conference call officials said that the company’s sizable land/lot position left it “well positioned” to take advantage of an increase in demand from first-time home buyers, but officials said that demand from first-time home buyers last quarter remained very weak – which officials attributed mainly to continued very tight mortgage lending standards. Officials also highlighted the company’s relatively new multifamily rental segment, which it apparently started on concerns that a higher share of householders, especially young adults/new householders, may be more likely to be renters and/or live in urban areas than has been the case in the past.

KB Home, the fifth largest US home builder in 2013, reported that net home orders in the quarter ended May 31, 2014 totaled 2,269, up 4.9% from the comparable quarter of 2013. Net orders per community last quarter were down 2.2% from a year ago. Home deliveries last quarter totaled 1,751, down 2.6% from the comparable quarter of 2013, at an average sales price of $319,700, up 10.1% from a year ago. The company’s order backlog at the end of May was 3,398, up 8.6% from last May.

In an excessively long opening remark on the company’s earnings conference call, KB Home’s CEO Jeff Mezger made two observations that raised analysts’ eyebrow: he said that (1) while mortgage credit remained tight, the company has seen evidence of easing in credit standards; and (2) the company has seen some “re-emergence” of first-time home buyers. Not surprisingly he faced questions on these observations in the Q&A session. On mortgage credit standards, Mezger pointed to “still high” but lower average credit scores on mortgage bonds issued, and to “anecdotal” reports of reduced “credit overlays” from “some lenders.” (No story here!). On the re-emergence of first-time home buyers, Mezger said that there’s been an increase in first-time home buyer purchases in some areas of Texas where job growth has been strong.

Here are net orders for the quarter ended May 31, 2014 for three large home builders. (Note: Hovnanian reported result for the quarter ended April 30, 2014, but it showed net orders for May 2014 in its earnings presentation).

Net Home Orders,
3 Months Ending:
5/31/2014
5/31/2013
% Change

Lennar
6,183
5,705
8.4%

KB Home
2,269
2,162
4.9%

Hovnanian
1,799
1,862
-3.4%

Total
10,251
9,729
5.4%


Earlier this week, Census estimated that new SF home sales in the first five months of 2014 totaled 194,000 (not seasonally adjusted), up just 0.5% from the first five months of 2013.

Net, the “spring” new home buying season, while not really a “bust,” fell considerably short of “consensus” forecasts at the beginning of the year. While results varied considerably among large publicly-traded builders, overall net home orders appear to have fallen considerably short of builder expectations as well, and net order per community appear on aggregate to have declined about 6% YOY. The 13 large publicly-traded home builders I track in aggregate increased the number of lots they owned or controlled from the fall of 2011 to the fall of 2013 by about 30% -- with the bulk of the gain occurring since the middle of 2012 – and in aggregate these companies planned to increase both community counts and sales by 15-17% this year. One reason net orders have been below consensus is that many builders raised prices aggressively last year. Now that builders have substantially larger land/lot inventories – and a lot more of it is developed now compared to a year ago – it is a pretty good bet that builders’ “pricing power” has fallen sharply, and that new home prices will on average (and adjusted for mix) show little if any increase for the remainder of this year.

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