Zacks Industry Outlook Highlights: Lennar, KB Home, D.R. Horton and PulteGroup

CHICAGO, May 3, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Homebuilding, including Lennar Corporation (NYSE: LEN), KB Home (NYSE: KBH), D.R. Horton, Inc. (NYSE: DHI) and PulteGroup, Inc. (NYSE: PHM).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at  

Link: http://www.zacks.com/commentary/27088/homebuilding-stock-outlook-may-2013

The housing market has steadily made a comeback from the lows witnessed in mid-2006 from the severe and widespread downturn. The stability in the home buying market, combined with low interest rates and increased rentals, has increased the affordability of homes.

Moderate job growth and slowly increasing consumer confidence are also contributing to a rise in demand for new homes. Inventory of foreclosed homes and short-sale homes are declining, thus stabilizing prices of new homes. Home prices have started moving up with market demand gathering momentum.

As the housing market returns to its pre-downturn level, it will drive employment upward and build consumer confidence, thus providing stimulus to the overall economy. In fact, the health of the housing market is often an indicator of the health of an economy at large.

Homebuilders are thus witnessing increasing traffic levels due to heightened consumer demand. Most homebuilding companies are witnessing significant growth in both volumes and average selling prices (ASP). New home orders, backlogs (number of homes under sales contracts at the end of the year) and homes delivered are climbing year over year.

Moreover, improving homebuilding revenues combined with tight cost control and better overhead leverage (as volumes improve) are boosting margins for most homebuilders. The large discounts and incentives offered in response to declining demand during the housing downturn have mostly been called back.

Overall, the U.S. housing market has seen significant upside in new home sales volume for 2012 with industry-wide sales increasing roughly 25% from prior-year levels. New home construction activity improved 25% in 2012. Faced with the fiscal cliff at 2012 end, and the threat of sequestration and a mounting national debt, the recovery of the housing market was one bright spot on the U.S. economic horizon.

Increased Investments in Land Positions With sales and profitability improving, most housing companies have strategically focused on acquiring new home sites in high demand areas, which will further improve revenues and profits. In addition to purchasing finished home sites, companies like Lennar Corporation (NYSE: LEN), KB Home (NYSE: KBH) and D.R. Horton, Inc. (NYSE: DHI) also acquire early stage raw lands in A-plus locations, on which finished home sites can be built faster at a relatively lower cost.

D.R. Horton has indeed stepped up investments in homes under construction, land development and finished lots on the strength of its improved liquidity position from solid sales growth in 2012. The company's land and lot position is now the strongest in its 35-year history.

PulteGroup, Inc. (NYSE: PHM) spent $925 million on land and land development in 2012 and plans to spend another $1.2 billion on land and related development in fiscal 2013 and 2014. While the company is disciplined in adding land positions, it is also divesting lower-margin projects and exiting underperforming communities and lower-margin land lots which no longer fit into their operating strategy. This would free up cash to invest in other potential opportunities, generating higher returns.

KB Home has also exited underperforming markets like South Carolina, downsized operations in Arizona and Charlotte, disposed of unnecessary land and reduced exposure to risky joint ventures.

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