Thursday, March 19, 2015

Lawler on Lennar: Orders Up Despite Weather; Margins Down a Bit on Diminished Pricing Power; and Confusion on Houston

by Bill McBride on 3/19/2015 03:18:00 PM

From housing economist Tom Lawler:

Lennar Corporation, the nation’s second largest homebuilder, reported that net home orders in the quarter ended February 28, 2015 totaled 5,287, up 18.4% from the comparable quarter of 2014. The average net order price was $346,000, up 5.8% from a year ago. Home deliveries totaled 4,302, up 19.2% from the comparable quarter of 2015, at an average sales price of $326,000, up 2.5% from a year earlier. The company’s order backlog at the end of February was 6,817, up 20.4% from last February, at an average order price of $352,000, up 2.9% from a year ago.

In Lennar’s press release the company’s CEO was quoted as saying that “(d)espite severe weather conditions which contraction production and sales in parts of the country, the housing market continued its strong and steady recover. Early signals from this year’s spring selling season indicate that the housing market is improving, and disappointing single-family starts and permits numbers should rebound shortly.”

The company said that its homebuilding gross margin last quarter was down slightly from a year earlier but was consistent with the company’s guidance from earlier this year, with the decline coming from a combination of rising labor and material costs and a moderation in pricing power.

A few conference call questions focused on Houston, and company officials seemed moderately “upbeat” but created a bit of confusion. Noting a 7.1% YOY decline in net home orders in Houston in the latest quarter, one analyst asked about what was behind this decline, and how the Houston market was holding up. A company official responded that the Houston market was still seeing “good traffic,” but that some buyers were being a “bit more caution” about “pulling the trigger.” The official also noted that the company, in balancing “price versus pace,” was focused more on margin in Houston, and did not “chase prices down.” Near the end of the call another analyst, noting this statement, asked for some clarification, and a company official said that some “smaller and less-capitalized” builders, some selling in “outlying” areas, had cut prices in response to “headlines,” but that Lennar had not. Lennar’s average order price in Houston last quarter was unchanged from a year ago.

And some other data from Houston:

Flipping to “macro” numbers, single-family permits in the Houston MSA through January showed no signs of slowing. January SF permits were up 11% from the previous January, and permits over the three-month period ending in January were 14.4% from the comparable three-month period of a year earlier.

On the MLS front, the Houston Association of Realtors reported that single-family home sales by realtors in the Houston area totaled 4,521 in February, down 5.8% from last February’s pace. The HAR also reported that total property listings were up 0.7% from a year earlier, the first YOY increase in several years, and that listings in February were up 8.4% in December. While inventory levels remained at historically low levels relative to sales last month, the unusually high jump over the last two months is worth noting.

Right now it appears as if home sales are starting to soften in the Houston market, while based on building permits construction was still increasing through the beginning of this year. Given the likely negative impact of the plunge in oil prices on Houston’s economy (it won’t be as bad as in the 1980’s, but it will be negative), and it would appear that (1) there may be some “excess” building going on; and (2) that suggests coming downward pressure on home prices.