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By Fred Yancy, Broker | Broker in Woodstock, GA

Housing Comeback Materializing As Lennar's Profit Surges Fourfold

Housing Comeback Materializing As Lennar's Profit Surges Fourfold

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A Lennar project in Florida - Image credit: Getty Images via @daylife

Despite high unemployment and a stubborn economy that refuses to grow at an acceptable rate, the housing sector has managed to become one of the bright points in this fragile recovery. The latest example of strength in residential real estate is Lennar, which posted solid fourth quarter earnings on Tuesday. Lennar’s management highlighted rising deliveries and orders, increased volume in mortgage operations, and higher average sales prices, forecasting continued improvement in what was just recently a major drag on GDP growth.

“During our fourth quarter, the housing industry took further steps toward a sustained recovery,” explained Stuart Miller, Lennar’s chief executive, “low mortgage rates, affordable home prices, reduced foreclosures and an extremely favorable ‘rent vs. own’ comparison continue to drive the recovery,” he added.

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Lennar saw its net earnings jump four-fold to $124.3 million in the fourth quarter, on revenues that surged 42% to $1.35 billion. The company beat Wall Street’s top and bottom-line estimates, seeing gross margins on home sales rise 410 basis points to 23.5% while sitting on a cash pile worth $1.1 billion.

Homebuilders have been on a tear since about October 2011, with the XHB homebuilders ETF rallying 84% in that time. The residential real estate sector had been at the epicenter of the financial crisis, taking a particularly hard hit as the global economy went down the drain. Housing had actually proven to be a drag on GDP, with purchases and construction completely breaking down as consumers went on a deleveraging cycle to fix their balance sheets.

Yet housing has turned a corner, and Lennar is there to show it. The homebuilder has beaten expectations for a seventh consecutive quarter. Average sales prices of homes delivered rose 7.4% to $261,000 by the end of 2012, while sales incentives offered by Lennar stood at $25,800, or 9% of sales revenue, which is down from 12.2% a year ago. And Lennar is not alone: KB Home, Toll Brothers, and PulteGroup have all had impressive runs over the past 12 months.

Even Fed Chairman Ben Bernanke has become bullish on residential real estate. In a speech at the University of Michigan on Monday, the Chairman acknowledged improvements in labor markets and the fact that construction is coming back. “That’s one factor that’s going to help us have a better year, I hope, in 2013,” he said, according to NYTimes’ Economix Blog. The Fed has been engaged in a $40 billion-a-month plan to buy residential mortgage-backed securities (RMBS) that has helped push down mortgage rates and facilitate refinancing.

Home prices are forecast to rise 5% to 7% annually through 2015, according to Barclays. Rising home prices coupled with increased construction has helped housing become a tailwind for GDP, as I previously reported.

This, in turn, should provide opportunities for investors. Hedge fund manager Deepak Narula of Metacapital, for example, made a killing in RMBS last year, returning nearly 40% for his investors. Homebuilders have benefitted too, as the aforementioned performance of the XHB ETF proves. But, as I’ve previously reported, investors should be careful of a possible bubble in homebuilder stocks. Several of the major names, which all count with market capitalizations of less than $8 billion, are trading very close to their all-time highs. Valuations may become difficult to justify, as Barclays’ research team suggested.

For the time being, though, homebuilders are flying high. And beyond the performance of specific stocks, a solid recovery in the housing market should lead to policymakers, starting with Bernanke, breathing a sigh of relief.


Fred Yancy, Broker
Crye-Leike Realtors
(678) 799-4663
http://fredyancy.crye-leike.com

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