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Homebuilders Fuel Housing Hope

Housing is a significant bellwether when it comes to tracking the real-time performance of the economy, but mixed data reports on this widely covered portion of the economy can sometimes confuse investors, economists and prospective homebuyers alike. As we are in the midst of navigating the highly important spring selling season, some encouraging reports have emerged from a handful of homebuilders which bode well for both the direction of the housing market and the economy at large.  

Housing data released by the government has been choppy over the last several months and credit conditions remain tight for some prospective buyers. Other economic indicators such as jobs and wages are helping to support upside to the housing outlook.

Recent earnings releases from homebuilders Lennar Corp. (the second largest builder in the U.S.), KB Home and Hovnanian Enterprises Inc. provide a glimpse into the housing market at the ground level. Lennar and KB Home (quarters ended February 29th) both handily beat earnings estimates as revenues were better than anticipated, driven in part by deliveries. Earlier in March, Hovnanian (quarter ended on January 31st), reported an operating loss that was in-line with expectations but showed top line strength, given the same drivers as the other homebuilders. Gross margin expansion (a key metric for the industry) was mentioned by all three homebuilders as part of their current year guidance due to lower inventories of speculative homes and more favorable comparisons vs. 2015 that was influenced by labor shortages.

Strong backlog, along with strong pricing, were fundamental components of the quarterly reports, which is a positive sign for the housing market in general. Backlog is the foundation for future revenue and profit growth, so it is crucial to see not only growth but also conversion in this area. For the latest reports, backlog growth has been robust, with all three companies showing better than industry average growth. Overall, industry backlog growth has come down from peak levels, but still remains strong. Like the government housing data, it is still in recovery mode, albeit at a slower rate than previously observed.

All told, we believe the housing market is undeniably in recovery mode, even if the rate of recovery has slowed from the very powerful years of 2012 and 2013. Backlog is still solid and while it will not instantaneously turn into revenue, it is encouraging that the fundamentals remain in place for the trajectory of the housing market to continue its steady, though choppy, move upward.    

Download the full report for additional detail on homebuilder earnings, backlog, and an overall review of housing data/market.

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