If anything is certain, it’s that the 2022 Q1 earnings season was one for the books. We witnessed nasty sell-offs following many companies’ quarterly results, undoubtedly not the typical reactions we generally see during earnings season.  

Margin compression was widespread as companies struggled to keep pace with rising costs associated with energy, freight, labor, and geopolitical issues. Simply put, we’ve found ourselves in a highly unique economic situation coming out of a once-in-a-lifetime pandemic.

Now that the Fed has been cranking borrowing rates in an attempt to bring inflation down, it has landed homebuilders in a unique situation. Earlier this week, we received quarterly results from one of these companies, Lennar (LEN Quick QuoteLEN - Free Report) .

Of course, homebuilder stocks are in the spotlight whenever the Fed becomes more hawkish, raising interest rates as they have done. As borrowing rates increase, so do mortgage rates, affecting mortgage demand.

Interestingly, mortgage applications increased just last week, witnessing a spike in demand.

Considering that the fixed 30-year mortgage rate has risen from 3.11% at the end of December 2021 to 5.78% in the week ending Thursday, June 16^th, the demand spike seems somewhat mysterious on a surface level.  

However, one explanation that may be a root cause for the spike in demand is potential homebuyers are forecasting even higher rates in the upcoming months and attempting to lock in rates as soon as possible. After all, mortgage rates have skyrocketed recently and climbed to the highest levels we’ve seen in a decade and a half.  

Nonetheless, it’s a fascinating development with extreme, widespread effects on the economy.

On deck to release quarterly results after the bell rings today is another homebuilder, KB Home (KBH Quick QuoteKBH - Free Report) . Let’s closely examine Lennar’s quarterly results to get a feel for what to expect from KBH.

Lennar Quarterly Results

To a slight surprise, Lennar reported strong quarterly results, beating on the top and bottom lines. The company posted quarterly EPS of $4.69, enough to beat the Zacks Consensus Estimate of $3.95 per share by a substantial 19%.

Regarding quarterly revenue, quarterly sales of $8.4 billion was enough to beat estimates of $8.1 billion by a notable 3% and pencil in a 30% increase from the year-ago quarter.  

Homebuilding operating earnings increased to $1.9 billion, compared to operating earnings of $1.1 billion. Gross margin on home sales improved 340 basis points to 29.5%.

The company’s total deliveries increased 14% to 16,500 homes, and new orders increased 4% to 17,800 homes – both compared to the year-ago quarter.

All in all, on a surface level, it was a strong quarter for the company.

However, Stuart Miller, Executive Chairman, said, “While our second-quarter results demonstrate strength and excellent performance throughout the quarter, the weight of a rapid doubling of interest rates over six months, together with accelerated price appreciation, began to drive buyers in many markets to pause and reconsider. We began to see these effects after quarter-end.”

Lennar has yet to notice a frightening pullback in demand, potentially because the unemployment rate has fallen significantly, providing consumers the ability to spend. Moving forward, the company gave broad guidance for Q3, citing that the Fed’s actions are still quite “fluid” and “responsive” to inflation data. If anything, it seems that the next few quarters will be where these homebuilders feel the most pain.

Let’s move on to projections for KBH.

KB Home

Year-to-date, KBH shares have been tossed aroud, declining 42% in value and vastly underperforming the general market.

Image Source: Zacks Investment Research

For the quarter, the Zacks Consensus EPS Estimate sits at $1.97, marking a substantial 32% growth in earnings from the year-ago quarter. Over the last 60 days, one analyst has lowered their quarterly earnings outlook and has been the only analyst to revise their estimate.

Quarterly revenue estimates reside at $1.6 billion, an 11.5% increase in the top-line from year-ago quarterly sales of $1.4 billion.

The company missed on the bottom-line by 3.3% in its latest quarterly report but has beat quarterly EPS estimates by 5.6%, on average, over the last four quarters.

If Lennar’s quarterly results indicate what’s to come for KBH, it seems that things are shaping up to be a strong quarter. However, pain may be felt in the upcoming quarters.

KBH is currently a Zacks Rank #4 (Sell).

Bottom Line

The housing market is in a very unique situation as of right now, and it looks as if the pain will start to hit homebuilders later in the year, in Q3 and Q4. Lennar posted strong quarterly results but gave very concerning and vague guidance for the rest of the year.

Additionally, Lennar noted that increasing interest rates and rising house costs started to steer away buyers near the end of the quarter, another concerning development.

Currently, I believe investors should heed caution in the homebuilding industry – aspects of this industry are starting to show signs of softening. Additionally, homebuilder stocks underwent adverse price action after a few real estate firms announced job cuts last week.  

KBH carrying a Zacks Rank #4 (Sell) is another reason investors should heed caution with this stock.