Lennar, KB Home Beat Profit Views Even As Rates Rise

Investor's Business Daily

Positive homebuilder results suggested homebuyers are starting to adapt to the new environment of higher mortgage rates and slower growth in prices, offering hope the housing rebound will stay on track.

Fiscal Q3 reports from Lennar (LEN) and KB Home (KBH) announced Tuesday marked the first time results from major builders reflected a full quarter of rising mortgage rates, which began to spike in late May.

The average rate for a fixed 30-year mortgage is about 4.5%, up from 3.3% as recently as early May, according to Freddie Mac.

"The initial shock of higher rates is having an impact," said David Williams, a Williams Financial Group analyst. "You get buyers that hesitate, but then they come back into market when the 4.5% rate becomes normal.

Lennar's earnings climbed 35% to 54 cents a share, well above the 45 cents expected by analysts. Revenue gained 46% to $1.60 billion, topping views for $1.56 billion.

But JPMorgan analyst Michael Rehaut pointed out in a note that Lennar's Q3 orders grew 15% year-over-year, excluding joint ventures — below his estimate as well as Q2's 28% growth, likely a result of higher rates, he said.

Earnings at KB jumped more than sevenfold to 30 cents a share. Analysts expected EPS of 21 cents. However, sales fell short of expectations, rising 29% to $549 million vs. views for $567 million. The average selling price climbed 22%, but orders declined 9%.

Shares of both firms rose 4.3%.

On a conference call with analysts, Lennar CEO Stuart Miller acknowledged the rate hike had slowed sales and traffic, but said the impact of rising rates "is mild and temporary" and consumers have adjusted to the change.

"In our view, the primary driver of our business strategy is that the housing recovery is still very much intact and that the fundamentals of that recovery remained solid," Miller said.

KB Home CEO Jeffrey Mezger, also speaking on a conference call, said that when interest rates moved sharply higher a few months ago, some buyers were taken by surprise and a few "backed out" of their purchases. In addition, some potential buyers are taking a little longer to make buying decisions.

"But we believe both of these events are short term in nature and are fairly typical of the twists and turns housing markets experienced in a recovery," Mezger said.

Those twists and turns can be seen in the mixed housing data out recently.

On Tuesday, the S&P/Case-Shiller composite index of 20 metropolitan areas showed that home prices in July rose 12.4% year over year, the biggest gain since February 2006.

But monthly growth slowed for the fourth consecutive time. Prices increased 0.6% from June, when they saw a 0.9% uptick. Analysts expected a more mild deceleration to 0.8% growth.

Last week, the Commerce Department reported that August housing starts rose less than expected, while the National Association of Realtors said existing-home sales rose 1.7% to the highest level in more than six years vs. estimates for a 2% decline.

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