Homebuilding Stock Outlook - April 2015 - Industry Outlook

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Will Housing Pick Up in the Spring Selling Season?

The U.S. housing market saw a rough first quarter as softening consumer confidence and a measure of economic uncertainty led to a lull in housing activity. Severe winter conditions, which seasonally slow down construction activity at the beginning of the year, were also responsible for the sloth.

The recently released housing data was rather mixed, creating some uncertainty around housing recovery.

Housing starts tumbled to their lowest levels in almost a year in February, declining 17% due to severe winter conditions.

Sale of existing homes rose 1.2% in the month, which though a rebound from January's decline, was below market expectations due to "insufficient" supply and a severe winter.

Homebuilders' confidence in new single-family homes, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI), dipped two points to 53 in March from the prior month. NAHB Chief Economist, David Crowe, blamed land and labor shortages, as well as tight underwriting standards, for the decline.

However, on a positive note, sales of new single-family homes increased almost 8% in February, reaching the highest level in almost seven years.

Pending home sales in February reached its highest level since Jun 2013. The Pending Home Sales Index rose 3.1% in February from January and 12% year over year, marking its sixth straight increase.

The number of building permits -- a gauge of future constructions -- also increased 3% in February from the prior month.

Analysts in general are not too worried about the housing setback. They rather see it as a passing phase and expect sales to expedite in the spring selling season. The season warms up in March and sees maximum business until the back-to-school season in September.

The spring selling season generally brings in improving sales trends. Higher job numbers, a reassuring economy, moderating home price gains, affordable interest/mortgage rates, rising rentals, recent federal initiatives to increase mortgage availability and a limited supply of inventory point to an inevitable pickup in housing.

As demand stabilized, housing price gains slowed in 2014. This is expected to continue in 2015.

Apartment rental rates have continued to move up, making home buying more attractive than renting.

Moreover, since mortgage rates are still below historical levels, housing should remain an affordable option in 2015. Even if mortgage rates rise in the latter half of the year -- as is widely anticipated -- housing will likely remain reasonable.

To add to the positives, plans from the White House to cut premiums on mortgage insurance should increase mortgage availability and thereby encourage home buying among first-time homebuyers.

With oil prices continuing its downward journey and the economy largely on the mend, the desire to own new homes should get a shot in the arm.

How Major Players Fared Last Earnings Season

All three homebuilders -- Lennar Corp. ( LEN ), KB Home ( KBH ) and Toll Brothers, Inc. ( TOL ) -- that have reported first-quarter fiscal 2015 results so far, beat the Zacks Consensus Estimate for both earnings and revenues. Strong order trends and pricing gains pulled up the top lines of these homebuilders.

Both Lennar and KB Home reported lower gross margins due to rising construction, labor and material costs. However, luxury homebuilder Toll Brothers saw its gross margins go up on a larger number of higher margin City Living home deliveries.

A look at the table below shows that four out of the five largest homebuilders carry a favorable Zacks Rank -- Zacks Rank #1, 2 or 3 -- which clearly highlights the positive outlook of the investment community for the housing industry in the upcoming spring selling season.

A look at the Earnings ESP in the table shows that Toll Brothers is likely to beat expectations in the upcoming quarter.

Zacks Industry Rank

Within the Zacks Industry classification, we rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank .

As a guideline, the outlook for industries in the top 1/3rd of all Industry Ranks or a Zacks Industry Rank of #88 and lower is 'Positive,' the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is 'Neutral' and the bottom 1/3rd or Zacks Industry Rank of #177 and higher is 'Negative.'

The Zacks Industry Rank for the construction industry is currently at #48. This is in the upper 1/3rd of all industries ranked, highlighting the group's positive outlook in the spring selling season. The better-than-expected results of the homebuilders who have reported so far could have also played a role in instigating a positive outlook for the housing industry.

Earnings Trends

If we look at the overall results of the Construction sector, earnings shot up 18.6% in the December quarter, up from a 17.2% rise in the September quarter. Total revenues increased 5.5% in the quarter, better than the 4.5% rise in the sequentially preceding quarter. The sector racked up an earnings beat ratio (the percentage of companies coming out with positive surprises) of 69.2% and a revenue beat ratio of 61.5% in the December quarter.

In the first quarter, earnings and revenues are expected to grow 13.5% and 8.7%, respectively.

For 2015, earnings are expected to show an increase of 18.5% while revenues are forecast to grow 8.7%.

For more details about earnings for this sector and others, please read our latest ' Earnings Trends .'

Bottom Line

While the housing market has slowed down lately, homebuilders are increasingly optimistic of a pickup in sales in the spring selling season. However, increasing competitive pressure and rising land and construction cost amid moderating home price increases will be the headwinds for the housing market.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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