U.S. homebuilders have been rallying this year on slight improvements in the housing market. Are they about to move with improvements in their own operations?
As a group within the S&P 500, homebuilders have surged 71 per cent in 2012 and nearly 160 per cent over the past year, making them by far the best performers among the 154 industry groups in the benchmark index.
The reason behind the gains have related largely to signs that the long-depressed housing market has bottomed out and might be in the early stages of a recovery. In particular, housing starts and building permits have risen to their highest levels since 2008, in the days prior to the worst of the financial crisis. Builder confidence has also been improving steadily.
On Wednesday, the National Association of Realtors reported that existing home sales rose 2.3 per cent in July over the previous month. While that was shy of expectations for a gain of 3.2 per cent, the move was in the right direction and sale prices increased as the number of distressed home sales fell.
“The improving sales add to mounting evidence that the worst is now over for the U.S. housing market,” said Krishen Rangasamy, senior economist at National Bank Financial, in a note.
But improvements in the big picture are now starting to be felt at the level of the individual company. Toll Brothers Inc., a builder of luxury homes, reported its fiscal third-quarter results on Wednesday, blasting past expectations. It reported net income of $61.6-million (U.S.) or 36 cents, up from 25 cents a share last year and ahead of analysts’ estimates of just 18 cents a share. Revenues surged 41 per cent, and gross margins ticked higher.
The shares rose 4.9 per cent in afternoon trading, along with other stocks in the sector. D.R. Horton Inc. rose 4.6 per cent, Lennar Corp. rose 4.2 per cent and PulteGroup Inc. rose 5.5 per cent.
“We are enjoying the most sustained demand we’ve experienced in over five years,” said Douglas Yearley, Toll Brothers’ chief executive, in a statement. “The housing recovery is being driven by pent-up demand, very low interest rates and attractively priced homes. Customers who have postponed buying for a number of years are moving into the market.”
If you think that sounds like corporate bravado, here’s what Mr. Yearley said two years ago in a statement: 2010, he said, was another challenging year because of “the persistent drag of high unemployment, reduced home equity, weak consumer confidence and frustration with the nation’s economic and political climate....”
The tone has clearly improved, which suggests that economic reports on housing might now take a back seat to corporate reports.