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NVR’s cancellation rate increases to 19% as its stock falls

Brent Nyitray, CFA, MBA

NVR reported sales that topped expectations for Q313

NVR is a homebuilder and mortgage originator based in Reston, Virginia. It builds homes under the Ryan Homes, NVHomes, Fox Ridge Homes, and Heartland Homes trade names. It’s primarily East Coast–based, with divisions in the Mid-Atlantic, Northeast, Mid-East, and Southeast.

NVR stock fell about 4.3% yesterday on the back of its third quarter earnings report. Sales came in at $1.17 billion, which was slightly above the consensus $1.12 billion expectation. NVR’s 34% increase in sales was similar to KB Home’s (KBH) 29% increase. The earnings per share number was $17.67, which compared favorably with the consensus estimate of $15.32. The company didn’t hold a conference call.

Other indicators

Orders received fell 7%, while backlog was up 24% on a dollar basis and 14% on a per-unit basis. All three indicators were lower than Q2. Cancellation rates increased to 19%, which was the highest level since 2008. Gross margins fell slightly, to 17.4% from 17.8% a year earlier. NVR has a mortgage origination business, which closed production of $696 million for the quarter, up 8% over last year. Operating income in the mortgage segment increased as well. Overall, it was a much more positive earnings report than its first quarter. Could this mean that things are starting to look up for the East Coast?

Unfortunately, NVR doesn’t conduct earnings conference calls and didn’t provide any color on how traffic was affected by increasing interest rates. We’ll have to wait for the other homebuilders to report in order to get a read on traffic and buyer psychology.

Location matters

While NVR is headquartered in the red-hot Washington, DC, market, the rest of its markets are concentrated on the more tepid East Coast markets. This explains some of the divergence between NVR and KB Home. KB is a West Coast–centric builder and has more exposure to the hot markets in California, Phoenix, and Las Vegas. The difference between the locations is primarily driven by foreclosure laws. The East Coast (particularly in the Northeast) requires a judge to approve a foreclosure. This has elongated foreclosure timelines and kept the shadow inventory of homes higher than the non-judicial states. The Northeast markets are lagging behind the West Coast markets in their recovery. NVR’s geographical exposure is probably hurting it somewhat.

Implications for other homebuilders

NVR is the third homebuilder this year to report Q1 earnings. KB Home (KBH) and Lennar (LEN) reported last month, and both firms beat expectations, although they noted traffic was starting to fall off at the lower price points, as the increase in interest rates is putting off the first-time homebuyer. The National Association of Homebuilders Sentiment Index is starting to fall from its post-boom highs. Later, we’ll hear from heavyweights D.R. Horton (DHI), Standard Pacific (SPF), and PulteGroup (PHM).

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