Don’t look now, but the housing market is starting to show major signs of growth!
On Tuesday, the Commerce Department released surprisingly strong data on new home sales. For the month of May, new home sales hit an annual rate of 546,000. This is well above the 522,000 rate that economists were expecting.
Compared to May of 2014, new home sales were up more than 19%. The report was the strongest showing since February of 2008, when the U.S. economy was entering the financial crisis.
The positive sales figures fell in-line with a steady increase in housing starts over the last several quarters.
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The market for existing homes has been improving as well.
First-time home buyers represent 32% of the market, a sign that new demand is entering the market.
Earlier this week, the National Association of Realtors announced that existing home sales were up 5.1% in May. At the same time, the trade group revised their April figures slightly higher.
First time home buyers have been returning to the market. In May, 32% of existing homes were purchased by first-time home buyers. This is an important point because first-time home buyers represent new demand for housing (compared to existing homeowners trading properties between themselves).
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New home buyers may be finding it easier to purchase homes due to less stringent mortgage requirements from lenders. A recent Wall Street Journal article noted that the percentage of home loans requiring less than a 10% down payment has been increasing over the past few quarters.
While this may become a risk worth watching for lenders, the relaxed standards for securing a mortgage should work in favor of home construction companies who are finally enjoying a period of strong housing demand.
Data on new building permits indicates that homebuilders are gearing up for a busy summer and fall.
According to Bloomberg, the number of new permits increased to an annualized pace of 1.28 million last month. This was the strongest reading since August of 2007. As builders develop these new projects, the stage is set for higher sales in the second half of this year.
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With all signs pointing to a strong housing market this year, we’ve got our eye on three healthy home building stocks.
For the last fiscal quarter, Lennar Corporation (NYSE:LEN) reported sales of 4,302 homes, which represented a 19% increase over the first quarter last year. This was an especially impressive performance given extreme weather the company faced during the fiscal quarter that ended February 28.
The company currently has a backlog of 6,817 homes representing $2.4 billion dollars worth of future sales.
Lennar is also benefiting from a strong residential rental market. In March, the company announced that it opened its first community of rental homes in Nevada, and the company has been constructing 20,000 apartment units which it plans to rent out. This appears to be a very timely investment given rising rental rates and historically low vacancy rates.
The company is scheduled to release earnings Wednesday (June 24) before the market opens. Analysts are expecting earnings of $0.64 per share on revenue of $2.02 billion. In addition to the headline earnings and revenue figures, we will also be watching the company’s backlog carefully to see if Lennar’s book of business continues to grow. We’ll also want to hear more about how the company’s rental business is progressing.
For 13 years straight, D.R. Horton, Inc. (NYSE:DHI) has been the largest U.S. home builder. In 2014, the company closed 30,455 homes.
DHI reported fiscal second quarter results (quarter ending March 31) that beat expectations. The company closed on 8,243 homes which represented an increase of 38% over last year. More importantly, DHI’s backlog of homes under contract was 12,177, representing a value of $3.6 billion dollars. As these homes are completed and delivered in the third and fourth quarter, earnings should continue to grow.
Shares of DHI closed at $27.61 on Tuesday, and have been moving higher following the strong housing data over the past week.
The next earnings report will be July 23, before the market opens. Analysts are expecting earnings of $0.50 on sales of $2.71 billion. While the company’s earnings announcement is still a month away, we expect shares of DHI to continue to drift higher as investors allocate more capital to home builders following the strong real estate data.
Toll Brothers Inc (NYSE:TOL) is known for its luxury homes, typically selling for prices well over a half million dollars. In the last quarter, the average price of the homes delivered was $713,000. But looking forward, that price point is likely to increase significantly as the average price of new contracts signed last quarter was $826,000.
Luxury homes should continue to do well in this market, and Toll Brothers may even see a surge in orders in the second half of this year as affluent home buyers decide to bite the bullet and build their dream home before rates begin to rise in earnest.
TOL’s current backlog is for 4,387 units which represent $3.48 billion dollars worth of homes under contract. Earlier this month, Analysts at Credit Suisse upgraded the firm to outperform, raising their target price to $42. While we don’t place too much stock in analyst recommendations, the positive publicity could help to drive retail investor interest in the stock.
With the macro data improving for home builders and individual companies reporting strong sales and backlog figures, we’re looking for opportunities to build positions in these profitable home construction stocks.
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