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NVR earnings internals show improvement, activity picking up on the East Coast?

Brent Nyitray, Sr Real Estate Analyst

NVR reported sales that topped expectations for Q213

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 South East.

(Read more: Mortgage rates fall slightly)

NVR stock fell about 1.3% today on the back of its second quarter earnings report. Sales came in at $1.010B, which was slightly above of the consensus $1.001B expectation. While sales did increase 31% year-over-year, that rise was well below what competitors like KB Homes (KBH) reported. KB has a November fiscal year and reported sales up 59%. The earnings per share number was $10.11, which doesn’t compare with the consensus estimate of $11.96. The company didn’t hold a conference call.

(Read more: What exactly is quantitative easing? Part 3)

Other indicators

Orders received were up 25%, while backlog was up 42% on a dollar basis and 31% on a per-unit basis. All three indicators were an improvement over Q1. Cancellation rates increased to 13.8% year-over year—a slight rise from last quarter. Average selling prices were up 13%, and margins fell due to a special charge for a water remediation reserve. NVR has a mortgage origination business, which closed production of $646 million for the quarter, up 18% 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.

(Read more: Mortgage Rates Keep Increasing)

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 Homes. 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 the 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. Last week’s housing starts number of 836,000 was a disappointment, but it appears that multi-family was the reason for the drop. Single-family fell slightly, but it’s been on a more consistent, steady uptrend. The National Association of Homebulders Sentiment Index is at post-boom records. Later this week, we’ll hear from heavyweights D.R. Horton (DHI), Standard Pacific (SPF), and PulteGroup (PHM).

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