Two home builders,
will report third-quarter earnings after the stock market closes on Wednesday. The dual earnings will give investors an early look at how higher mortgage rates are hitting builders—and what to expect through the end of the year.
The frenzied pandemic housing market reversed course earlier this year as mortgage rates rose. Higher rates, home prices, and a still-low inventory of existing homes combined to squeeze some would-be buyers out of the market. Some housing economists have called recent market conditions a housing recession, with metrics such as home sales and single-family starts anticipated to end the year below 2021’s levels.
Third-quarter earnings reports from
(Ticker: LEN) and
(KBH), both expected Wednesday after the market closes, will shed more light on how the challenging housing market environment this summer has impacted builders.
Consensus estimates by
expect the larger
to report earnings per share of $4.81 on sales of about $8.9 billion, and the Los Angeles-based
to report earnings per share of $2.67 on sales of about $1.88 billion. Both would represent an improvement on the same quarter last year, when
reported earnings of $4.52 per share on revenue of $6.9 billion and
earned $1.60 per share on $1.47 billion in revenue, according to FactSet.
Perhaps more prescient than third-quarter earnings will be any updated outlook amid higher rates. Mortgage rates gained with 10-year Treasury yields following last Tuesday’s hotter-than-expected consumer price index data.
weekly measure of the average rate on a 30-year fixed mortgage last week rose above 6% for the first time since 2008.
While mortgage rates’ most recent rise in September won’t be reflected in earnings, both of which cover the quarter ended Aug. 31, the companies will likely offer a look at September demand in their statements or conference calls. And how the companies fared after rates rose in June could be telling of what’s to come.
The macro picture for single-family builders remains gloomy. Builder confidence in September fell for the ninth consecutive month to its lowest level since the early days of the pandemic, the National Association of Home Builders said Monday. While housing starts rose in August, permits, a forward-looking gauge of future construction, were at their lowest seasonally-adjusted annual rate since June 2020, according to data released earlier this week.
“Builder sentiment has declined 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 elevated construction costs. More than half of builders who responded to the trade group’s survey said they used incentives, such as rate buy-downs, free amenities, and price reductions, to boost sales, Dietz said.
The impact of incentives on buyer demand is one factor that BTIG analyst Carl Reichardt says is worth watching during builder earnings this week. The analyst says he is interested whether such incentives stimulated demand or further spooked prospective buyers, who may hold off amid fear of price drops or in hopes of a better deal in the future. “We’re hoping to hear about some stabilization in demand because builders have found a price that clears the market for their product,” Reichardt says.
As of Tuesday, analysts expect Lennar to report earnings per share of $16.39 on about $33.7 billion in revenue in 2022, according to FactSet consensus estimates. Last year, Lennar reported annual earnings per share of $14.27 on $27.1 billion in sales.
KB Home is expected to report 2022 earnings of $10.11 per share on $7.3 billion in revenue, according to FactSet. The company earned $6.01 per share on about $5.73 billion in revenue in 2021.
The broader view of the housing market may be downbeat, but the same cannot necessarily be said for analysts’ view of builder stocks, which are largely down about 30% year-to-date. A KeyBanc Capital Markets analyst covering home builders on Monday updated his outlook for the industry to Overweight from Underweight. “On balance, we see fundamental and rate pressures persisting, but positive relative performance,” KeyBanc analyst Kenneth Zener wrote.
From a price-to-earnings standpoint, home builder stocks are relatively inexpensive, with their shares trading at a lower multiple of future earnings than the S&P 500. The four largest home builders,
(PHM), as of Tuesday were trading between about 4 and 10-times 12-month forward earnings estimates, according to FactSet, compared with the S&P 500’s multiple of about 16.5 times.
Broad economic factors will likely impact home builders through the rest of the year, wrote J.P. Morgan analyst Michael Rehaut in a Sept. 14 preview of Lennar and KB Home earnings.
“Overall, we do not have a distinct preference for one name over the other as it relates to our outlook for short-term relative performance around earnings, given our view that both names and the broader group overall are more likely to continue to be led by macro drivers such as interest rates and economic concerns through year-end as opposed to current fundamentals,” wrote Rehaut.
Write to Shaina Mishkin at [email protected]