The housing market slowed considerably last Fall. After a strong couple of years, home prices had appreciated considerably in most markets. At the same time, mortgage rates broke out to a seven-year high. As a result, the housing market cooled off.
We will get some key updates on the new home market from two of the largest homebuilders when KB Home (KBH) and Lennar (LEN) report fiscal first quarter results this afternoon and tomorrow morning, respectively.
The housing market is seasonally stagnant during the winter months. Over that time, homebuilders reported weak results. Net orders, the leading indicator, fell 12% in the fourth quarter for KB Home and 2% for Lennar (pro forma from the CalAtlantic acquisition).
Homebuilders have remained positive on the housing market long-term given the supply deficit of new homes, the strong demographics and macroeconomic outlook in the US.
However, homebuilders decided not to provide an annual forecast given the limited visibility in the market.
Offsetting that, most homebuilders have said that traffic and buyer interest remained strong and improved as we worked through the winter. That optimistic view has supported homebuilder stocks, which bottomed on Christmas Eve, along with the broader equity market.
Before the market opens tomorrow, we will get an update on how the spring selling season is faring so far from two of the largest homebuilders.
KB Home will report first quarter results this afternoon and management will provide guidance for the second quarter on the call at 17:00. Last quarter, net orders fell 12% last quarter and 21% on the West Coast. Higher end markets have been softer during the downturn as strength in home prices became a headwind. Management cited a lack of supply, having fewer communities in the Bay Area of California. Management said orders fell 15% in December due to those tough comparisons. However, they remained optimistic for fiscal 2019 as the company is well positioned for 10-15% community count growth for the year including sizable growth in the Bay Area in the first half of the year.
- KB Home guided for Q1 revenue $800-860M, average selling price (ASP) $375-385K, gross margin 16.6-17.2%, adj. operating margin 3.4-4.4%; SG&A margin 12.7-13.5%; community count +6-10%.
- Analysts expect first quarter EPS down 38% year-over-year with revenue down 5%.
- With a $2.07 billion valuation, the stock trades at 9x EPS and 1.0 book value.
The average mid-cap homebuilder trades at a very reasonable 9x forward EPS estimates and 1.3x book value.
Lennar will report fourth quarter results tomorrow morning and management will host a call at 11:00. The company is still integrating the CalAtlantic acquisition, which made it the largest US homebuilder in terms of market value. Last quarter, orders grew 44%, but they actually fell 2% pro forma, accounting for the Cal-Atlantic deal. Lennar said that traffic had picked up as rates pulled back in December. Management is willing to sacrifice price for pace to maintain net margins, something that has been echoed by peers. Still, order guidance for the first quarter was down ~10% on a pro forma basis, according to the JP Morgan analyst on the call last quarter.
- Lennar guided for Q1 deliveries 9.0-9.5K, orders 9.7-10.K; ASP $410K; gross margin 20-20.5% and over 50K delivers for the year.
- Analysts expect first quarter EPS down 32% with revenue up 37% (Lennar closed the CalAtlantic deal halfway through February last year).
- With a $15.6 billion valuation, the stock trades at 8.5x EPS and 1.5x book value.
Recession fears have exploded since the yield curve inverted last week, but a pullback in mortgage rates should help spur demand in the housing market. An update on the spring selling season will provide an important read-through on the housing market tomorrow.