For Immediate Release
Chicago, IL – September 12, 2012 – Today, Zacks Equity Research discusses the U.S. Homebuilding, including Lennar Corporation (LEN), PulteGroup, Inc. (PHM), KB Home (KBH) and Meritage Homes Corporation (MTH).
A synopsis of today’s Industry Outlook is presented below. The full article can be read at
The last few years have seen a very fragile housing market. The downturn in housing -- aggravated by an overall weak economy, high unemployment rates, low consumer confidence, rising interest rates and tightened mortgage-lending standards -- weighed on homebuilders.
Declining demand for new homes and an excess of supply in the market in 2011 drove homebuilders to make large concessions in prices, largely hurting profitability. Homebuilders' sales and profit margins had dropped dramatically from peak levels in 2006.
As discussed above, there have been signs of a gradual strengthening in the housing market in the first half of 2012. However, homebuilders have cautioned that the process of stabilization is erratic and not adequately broad-based.
The housing market improvement has been uneven across the country. Most of the gains have, by and large, been observed in high-end communities. In addition, homebuilders are still facing impediments in raising prices in some markets. The overall demand remains constrained due to tight credit standards, which make it difficult to obtain home loans. A speedy housing recovery is unlikely and it will take some time before the markets fully recover.
Progress in High-End Communities
The average selling prices (ASPs) are improving for most large-cap homebuilders due to changes in the community/product mix. ASPs have gained from increased sales in high-end communities of California, Arizona, Colorado and Florida, where home prices are generally higher.
Given the scenario, large builders are eating into the share of other undercapitalized small/medium-sized private builders on the back of overall housing demand, stronger capital and better land positions.
Lennar Corporation (LEN) strategically focuses on acquiring new home sites that would boost margins and percolate down to the bottom line. The company focuses on high-margin, well-positioned communities and avoids fringe or tertiary markets where price is the only driver. The company's focus on quality instead of quantity is benefiting margins and boosting new sales orders.
PulteGroup, Inc. (PHM) is also shifting its focus towards high-priced Pulte-branded move-up homes, which improve the overall ASP. A better mix of sales, particularly Pulte-branded move-up homes, as well as addition of new higher margin communities, is consistently boosting the company's margins.
Small homebuilders like KB Home (KBH) has started rolling out communities in highly desirable submarkets primarily in the Central and West Coast regions, which allows it to sell larger, higher-priced homes, driving up the ASP. KB Home is also targeting higher income, first-time and move-up buyers -- all of whom are more inclined toward buying a new home rather than buying a foreclosure.
Another small homebuilder, Meritage Homes Corporation (MTH) is investing in well-positioned and high-priced land and new communities in the most desirable submarkets, which should ensure profits as the market gets stronger.
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