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A number of the large home construction companies reported March quarter results last week.
Beazer Homes (BZH - Free Report) beat earnings estimates by 34.5% on revenue that beat by 4.1%.
D.R. Horton (DHI - Free Report) posted a sales surprise of 21.6% and its earnings surprise was doubly as strong at 43.7%.
PulteGroup’s (PHM - Free Report) earnings surprise was also a spectacular 32.0%, especially since it came on top of a revenue surprise of over 9%.
Not to be outdone, M/I Homes (MHO - Free Report) posted a revenue surprise of 27.0% that generated an earnings surprise of 54.2%.
NVR’s (NVR - Free Report) revenue missed by 9.7% although its earnings still surprised by 3.6%.
Obviously, something is going on here. And it isn’t just that estimates have come down a lot. Most of these companies have posted solid results in a market where the interest rate is still pretty high (although stabilizing) and affordability remains low.
It turns out that the existing home market is where the current market dynamics are playing out. Several home owners, locked in by their low mortgage rates, are disinclined to sell and move to the current higher rate. So, they are not listing their properties.
Those who are listing are often not getting their asking price. At the same time, the limited choice is pushing more buyers, especially in the affordable category, to newly built homes. This is leading to robust demand for home builders, especially at the entry-level. [Realtor.com, week ending Apr 22]
While completed new homes are double the 2021-2022 lows, most (84%) of the current inventory is not completed. Beazer Homes CEO said, “Supply chain issues are greatly improved, allowing us to decrease cycle times and pursue direct cost savings.” That means the under-construction homes will have a smoother finish and possibly a lower time to market. They are also likely to be more profitable. This makes for an attractive outlook for the segment.
Additionally, the gap between demand and supply of homes runs into millions today, driven by a number of factors including increased caution among home builders since the last downturn, when they were severely impacted; the non-availability of lots; demographic considerations (Gen X building families even as home availability remains tight); the pandemic and resultant supply chain issues that delayed builds and the work from home trend (that increased demand for different kinds of homes and in different kinds of locations).
Finally, the spring selling season (March through June) is on, which generally leads to a demand spike. More sellers also enter the market with offers and promos, which makes for better pricing. The biggest problem today (for buyers) is the limited inventory, which although up substantially from last year, remains low compared to the level of demand. For sellers, it’s the biggest limitation on sales. However, lower inventories also support stronger pricing and therefore, improved profitability (provided sales aren’t too low).
Management attributed last quarter’s performance to “improving homebuyer confidence and stabilizing interest rates,” as well as “careful management of overheads.” Wage growth and moderating home prices, despite still-challenging affordability, are helping. The experienced operating team, ample supply of lots and more efficient and less leveraged balance sheets, are expected to support operations for years to come.
Analysts expect revenue and earnings to decline in the year ending September 2023, but growth is expected to return in 2024. Estimates for the June and September quarters are up 11.4% and 3.5%, respectively, in the last seven days. The 2023 and 2024 estimates have climbed a respective 11.0% and 4.2% in the past week.
In the last quarter, D.R Horton became the first homebuilder to sell a million homes. The quarter’s performance benefited from seasonal factors (start of the spring selling season) and the company’s own incentives and pricing actions, which more than offset the impact of higher mortgage rates and inflationary pressures. As a result, orders increased 73%.
Like Beazer Homes, company management said that affordability remains low both in the new and existing home categories. The building blocks of its future success were said to be its experienced operators, diverse product offerings and flexible lot supply.
The company’s estimates have jumped since the last earnings report. The June and September quarter estimates are up 11.8% and 10.0%, respectively. Estimates for the year ending September 2023 increased 8.7% and 7.5%, respectively. Revenue for both years are expected to be down, however, while earnings are expected to increase next year.
The company’s strategy of maintaining a steady level of starts and focusing on an inventory of “quick move-in homes” is paying off. “By achieving an effective balance of price and pace, we realized strong orders, closings and margins in the first quarter,” CEO Marshall said. He is also seeing “a strong desire for homeownership” across all buyer segments and price points.
Like the others, PulteGroup is also expected to see revenue and earnings decline this year, with a return to growth in the next. After the March quarter’s strong showing, however, analysts have raised estimates for the June and September quarters as well as fiscal years 2023 and 2024. Accordingly, estimates for the four periods are up a respective 28.9%, 14.7%, 18.0% and 21.8%.
One-Month Price Performance
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Why the Homebuilding Industry Is Hot Now
A number of the large home construction companies reported March quarter results last week.
Beazer Homes (BZH - Free Report) beat earnings estimates by 34.5% on revenue that beat by 4.1%.
D.R. Horton (DHI - Free Report) posted a sales surprise of 21.6% and its earnings surprise was doubly as strong at 43.7%.
PulteGroup’s (PHM - Free Report) earnings surprise was also a spectacular 32.0%, especially since it came on top of a revenue surprise of over 9%.
Not to be outdone, M/I Homes (MHO - Free Report) posted a revenue surprise of 27.0% that generated an earnings surprise of 54.2%.
NVR’s (NVR - Free Report) revenue missed by 9.7% although its earnings still surprised by 3.6%.
Obviously, something is going on here. And it isn’t just that estimates have come down a lot. Most of these companies have posted solid results in a market where the interest rate is still pretty high (although stabilizing) and affordability remains low.
It turns out that the existing home market is where the current market dynamics are playing out. Several home owners, locked in by their low mortgage rates, are disinclined to sell and move to the current higher rate. So, they are not listing their properties.
Those who are listing are often not getting their asking price. At the same time, the limited choice is pushing more buyers, especially in the affordable category, to newly built homes. This is leading to robust demand for home builders, especially at the entry-level. [Realtor.com, week ending Apr 22]
While completed new homes are double the 2021-2022 lows, most (84%) of the current inventory is not completed. Beazer Homes CEO said, “Supply chain issues are greatly improved, allowing us to decrease cycle times and pursue direct cost savings.” That means the under-construction homes will have a smoother finish and possibly a lower time to market. They are also likely to be more profitable. This makes for an attractive outlook for the segment.
Additionally, the gap between demand and supply of homes runs into millions today, driven by a number of factors including increased caution among home builders since the last downturn, when they were severely impacted; the non-availability of lots; demographic considerations (Gen X building families even as home availability remains tight); the pandemic and resultant supply chain issues that delayed builds and the work from home trend (that increased demand for different kinds of homes and in different kinds of locations).
Finally, the spring selling season (March through June) is on, which generally leads to a demand spike. More sellers also enter the market with offers and promos, which makes for better pricing. The biggest problem today (for buyers) is the limited inventory, which although up substantially from last year, remains low compared to the level of demand. For sellers, it’s the biggest limitation on sales. However, lower inventories also support stronger pricing and therefore, improved profitability (provided sales aren’t too low).
Let’s take a quick look at some details.
Beazer Homes USA, Inc. (BZH - Free Report)
Management attributed last quarter’s performance to “improving homebuyer confidence and stabilizing interest rates,” as well as “careful management of overheads.” Wage growth and moderating home prices, despite still-challenging affordability, are helping. The experienced operating team, ample supply of lots and more efficient and less leveraged balance sheets, are expected to support operations for years to come.
Analysts expect revenue and earnings to decline in the year ending September 2023, but growth is expected to return in 2024. Estimates for the June and September quarters are up 11.4% and 3.5%, respectively, in the last seven days. The 2023 and 2024 estimates have climbed a respective 11.0% and 4.2% in the past week.
D.R. Horton, Inc. (DHI - Free Report)
In the last quarter, D.R Horton became the first homebuilder to sell a million homes. The quarter’s performance benefited from seasonal factors (start of the spring selling season) and the company’s own incentives and pricing actions, which more than offset the impact of higher mortgage rates and inflationary pressures. As a result, orders increased 73%.
Like Beazer Homes, company management said that affordability remains low both in the new and existing home categories. The building blocks of its future success were said to be its experienced operators, diverse product offerings and flexible lot supply.
The company’s estimates have jumped since the last earnings report. The June and September quarter estimates are up 11.8% and 10.0%, respectively. Estimates for the year ending September 2023 increased 8.7% and 7.5%, respectively. Revenue for both years are expected to be down, however, while earnings are expected to increase next year.
PulteGroup, Inc. (PHM - Free Report)
The company’s strategy of maintaining a steady level of starts and focusing on an inventory of “quick move-in homes” is paying off. “By achieving an effective balance of price and pace, we realized strong orders, closings and margins in the first quarter,” CEO Marshall said. He is also seeing “a strong desire for homeownership” across all buyer segments and price points.
Like the others, PulteGroup is also expected to see revenue and earnings decline this year, with a return to growth in the next. After the March quarter’s strong showing, however, analysts have raised estimates for the June and September quarters as well as fiscal years 2023 and 2024. Accordingly, estimates for the four periods are up a respective 28.9%, 14.7%, 18.0% and 21.8%.
One-Month Price Performance
Image Source: Zacks Investment Research