Homebuilders Lennar (NYSE:LEN) and KB Home (NYSE:KBH) both reported stronger-than-expected quarterly profits yesterday after the market closed. However, elements of both companies’ results indicate that the growth of the housing market is, as many had expected, slowing tremendously due to rising interest rates. The sector may even be in a mild recession.
On the other hand, the companies’ results and comments did not suggest that the housing sector is crashing yet.
Homebuilders’ Results and Comments
Lennar’s fiscal third-quarter earnings per share (EPS) came in at $5.18, versus analysts’ average outlook of $4.86. Its revenue jumped 29% year-over-year (YOY) to $8.93 billion, just $100 million below analysts’ mean estimate.
However, the homebuilder’s new orders fell 13% YOY to 17,248 homes, while its backlog was roughly flat YOY. Further, its gross margin slipped to 29.2% from 29.5% during the previous quarter.
“Sales have clearly been impacted by rising interest rates, but there remains a significant national shortage of housing, especially workforce housing, and demand remains strong as we navigate the rebalance between price and interest rates,” said Lennar Executive Chairman Stuart Miller.
Meanwhile, KB Home reported fiscal Q3 EPS of $2.86, well above analysts’ average outlook of $2.67. Its top line surged 25% YOY to $1.84 billion, just $60 million below the average estimate. Further, its operating income margin climbed 6.1 percentage points YOY to 17.7%.
On a negative note, however, KB Home provided fiscal fourth quarter housing revenue guidance of $1.95 billion to $2.05 billion, well below the average outlook of $2.34 billion.
“The long-term outlook for the housing market remains favorable. However, the combination of rising mortgage interest rates, ongoing inflation and other macro concerns has caused many prospective buyers to pause on their homebuying decision,” said KB Home CEO Jeffrey Mezger.
Takeaways Regarding the Overall Housing Market
The homebuilders’ results certainly indicate that the housing market has cooled off substantially. Indeed, the 13% YOY decline in Lennar’s new orders and the YOY drop in its gross margin — along with KB Homes’ lower-than-expected topline guidance and the companies’ somewhat cautious comments — show that the housing bubble is certainly behind us.
However, despite the Federal Reserve’s actions that are clearly having a negative impact on the sector, there’s no indication that the space crashing yet. Indeed, the data and comments suggest that the housing sector may be heading for a proverbial “soft landing,” although a sharp downturn in the medium term can’t be ruled out.
The sector’s resilience thus far may be due to a number of factors, including the still-strong labor market, low housing supply, very high rents, and the exodus of many Americans from cities to the suburbs during the pandemic.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
