two house builders,
will report third quarter results after the market close on Wednesday. The doubled earnings will give investors an early glimpse of how higher mortgage rates are hitting homebuilders — and what to expect by the end of the year.
The hectic pandemic housing market reversed course earlier this year as mortgage rates rose. Higher interest rates, home prices and a still-low inventory of existing homes combined to drive some potential buyers out of the market. Some property economists have described recent market conditions as a housing recession, with metrics such as home sales and single-family homes expected to end the year below 2021 levels.
Third quarter earnings reports from
(ticker: LEN) and
(KBH), both of which are expected after the market close on Wednesday, will provide more insight into how the challenging housing market environment has affected home builders this summer.
consensus estimates of
expect the bigger ones
to report earnings per share of $4.81 on sales of approximately $8.9 billion and the Los Angeles-based company
reported earnings per share of $2.67 on sales of approximately $1.88 billion. Both would represent an improvement over the same quarter last year
reported earnings of $4.52 per share on sales of $6.9 billion and
earned $1.60 per share on sales of $1.47 billion, according to FactSet.
Perhaps more prescient than third quarter earnings will be any updated outlook amid higher interest rates. Mortgage rates rose along with 10-year government bond yields after last Tuesday’s hotter-than-expected CPI data.
The weekly measurement of the average interest rate on a 30-year fixed-rate mortgage rose above 6% last week for the first time since 2008.
While the recent rise in mortgage rates in September will not be reflected in earnings, both of which cover the quarter ended Aug. 31, companies are likely to have a look at September demand in their statements or conference calls. And how companies fared after June’s rate hike could shed light on what’s to come.
The macro picture for single-family homes remains bleak. Home builder confidence fell in September for the ninth straight month to its lowest level since the pandemic began, the National Association of Home Builders said Monday. While housing starts picked up in August, building permits, a forward-looking indicator of future construction activity, were at their lowest seasonally adjusted annual level since June 2020, according to data released earlier this week.
“Builder sentiment has fallen every month in 2022 and the housing recession shows no signs of abating,” Robert Dietz, the trade group’s chief economist, said in a statement, citing higher mortgage rates and increased construction costs. More than half of homebuilders who responded to the trade group’s survey said they used incentives such as discounts, free amenities and discounts to boost sales, Dietz said.
The impact of stimulus on buyer demand is a factor BTIG analyst Carl Reichardt will watch during this week’s construction gains. The analyst says he’s interested in whether such stimulus has stimulated demand or further scared potential buyers who may be holding off for fear of price declines or hopes of a better deal in the future. “We hope that demand will stabilize to a certain extent because builders have found a price that frees up the market for their product,” says Reichardt.
According to FactSet consensus estimates, analysts expect Lennar to report earnings per share of $16.39 on Tuesday on 2022 sales of about $33.7 billion. Last year, Lennar reported annual earnings per share of $14.27 on sales of $27.1 billion.
According to FactSet, KB Home is expected to report earnings of $10.11 per share on sales of $7.3 billion in 2022. The company made $6.01 per share in 2021 on revenue of about $5.73 billion.
The broader view on the housing market may be bearish, but the same cannot necessarily be said for analysts’ views on home builders, most of which are down about 30% year-to-date. A KeyBanc Capital Markets analyst, which covers home builders, on Monday updated its outlook for the industry from underweight to overweight. “All things considered, we see continued fundamental and interest rate pressures, but positive relative performance,” wrote Kenneth Zener, an analyst at KeyBanc.
From a price-to-earnings perspective, homebuilder stocks are relatively cheap, as their shares trade at a lower multiple of future earnings than the S&P 500. The four largest homebuilders,
(PHM) traded between about 4 and 10 times forward 12-month earnings estimates on Tuesday, according to FactSet, compared to the S&P 500’s multiple of about 16.5 times.
Broader economic factors are likely to impact homebuilders through the end of the year, JP Morgan analyst Michael Rehaut wrote in a Sept. 14 preview of Lennar and KB Home’s earnings.
“Overall, we don’t have a clear preference for one name over the other in terms of our prospects for near-term relative performance in terms of earnings, as we believe both names and the broader group as a whole are more likely to continue to be led by macro drivers such as Interest rates and economic concerns through year-end versus current fundamentals,” Rehaut wrote.
Write to Shaina Mishkin at firstname.lastname@example.org