By Dan Burrows, InvestorPlace Feature Writer
Home builders like Lennar Corporation (LEN) and KB Home (KBH) are slated to post quarterly results this week, but these backward looking numbers won’t reflect how complicated the outlook for the housing market has become.
We already know that the housing market had a rough first quarter. The unusually cold and snowy weather put a whammy on new housing starts. Indeed, groundbreaking on new homes fell 17% to hit a level last seen a year ago. Other data was mixed.
We also know that tumbling oil prices have been weighing on the housing market. Just look at KB Home, which has exposure to Texas.
The state’s economy is slowing down amid lower oil prices, as fewer dollars become would-be home builders’ income. That slowdown is causing deep pain to KB Homes profits and share price.
Indeed, for the most recent quarter, analysts on average expect KB Homes earnings to drop to 2 cents per share from 12 cents per share last year, according to a survey by Thomson Reuters. As a result, KBH stock is having a rough time even as the broader industry is putting up gains. KBH is off 18% for the year-to-date, but the iShares Dow Jones US Home Const. (ETF) (ITB) is up 4%.
But the biggest news for home builders will come from the meeting of the Federal Reserve Open Market Committee (FOMC.) It’s a good bet that the Fed will raise short-term interest rates, perhaps as early as June. That rate hike will flow through to mortgages and take at least some of the wind out of demand.
Labor Market Boosts Home Builders
Despite these challenges, the total picture of a much improved U.S. economy is carrying market sentiment and home builders’ share prices. The labor market is creating new jobs at the fastest rate since the late 1990s, which drives demand and even housing formation.
That’s why most home builders are having market-beating years so far. LEN and Toll Brothers Inc (TOL) are up 9% so far in 2015. D.R. Horton, Inc. (DHI) gained 4%. NVR, Inc. (NVR) is up more than 3%. PulteGroup, Inc. (PHM), meanwhile, is off 3% for the year-to-date.
The recent weak housing data means nothing now. Winter is over, after all. As for the FOMC, even if it does raise rates sooner rather than later, the damage to home builder stocks could be rather muted.
The market has had plenty of time to digest the possibility of a rate hike and discount it in home builder stocks. Secondly, the economy is healthy enough that rising mortgage rates won’t shut down demand. Even with a rate hike, they’ll still be quite low.
LEN is forecast to report earnings per share of 45 cents later this week, up from 35 cents a week ago. Revenue is projected to expand more than 10%. If the economy keeps picking up, there’s every reason to expect home builders to shrug off a rate hike, as well as any other macro headwinds.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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