Talking Numbers

This stands in the way of a housing recovery

Talking Numbers

PulteGroup's numbers were better-than-expected but there's one thing that may get in the way of better quarters to come.

One of the nation's largest home builders, PulteGroup, reported better-than-expected revenues and earnings. But it also gave a signal that the housing market may not yet be on solid ground in the near-term.

First, the good news for Pulte: Revenues were up this quarter compared to last year. For the three months ending on September 30, the company's home sales were up 21% over the previous year to $1.5 billion. According to the company, it's because both it sold more homes at higher prices. The company closed on 4,817 homes in the last quarter (9% more than last year) at an average price of $310,000 (11% higher than last year).

(Read: Home affordability sinks as housing slows)

And, the company was more profitable than last year at selling those homes. Its reported gross margin was 20.9%, which is 3.9% higher than last year. The bottom line was also better this year than last. Net income came in at $2.3 billion for the quarter but $2.1 billion was from an extraordinary item which, in this case, was the reversal of a deferred tax asset valuation allowance. Take that out and the net income was $173 million, which is still 48% higher than last year.

But don't think everything's all hunky-dory at the moment because here's the not-so-good news, straight from near the bottom of the company's press release:

"Net new orders for the third quarter totaled 3,781 homes, which is a decrease of 17% from the prior year.  On a dollar basis, signup value was $1.2 billion, which is down 8% from the third quarter of 2012.  The Company ended the quarter with 604 active communities, which is down 15% from the comparable prior year period.  PulteGroup's quarter-end backlog of 7,522 homes was valued at $2.4 billion, compared with prior year backlog of 7,686 homes with a value of $2.2 billion."

So, while this most recent quarter had higher closing, orders for upcoming homes declined 17%.

One of the reasons we may see less closings ahead is that mortgage rates went up nearly 100 basis points (1%) from September 2012 to September 2013. By the middle of last month, the average 30-year fixed mortgage was hovering around 4.5%.

That makes a difference for many people in Pulte's target market. Assume a homebuyer puts 20% down on $310,000 Pulte home and got a mortgage for the remaining $248,000. The additional 100 basis points in interest mean the monthly mortgage payment go from $1,114 per month to $1,257. That extra $143 per month could translate to about $4,765 more in income required to qualify for a mortgage of that amount, assuming a 36% debt-to-income ratio.

(Read: Hamptons real estate has strongest summer since 2005)

Mortgage rates are tied to the yields on such things as government bonds. For the last several weeks, bond yields have gone down as the Federal Reserve Bank made it clear they won't taper their $85 billion monthly bond-buying stimulus program any time soon. Since mid-September, mortgage rates have inched down from 4.5% to 4.13%.

But, will that be enough to help housing in general and Pulte in particular?

Looking at the fundamentals of PulteGroup's business and the housing market is Andrew Busch, editor and publisher of The Busch Report. On the Pulte's charts is Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson.

What's next for Pulte? Watch the video above to see what the fundamentals and technicals each have to say about the stock.

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