Zacks Industry Outlook Highlights: Lennar, PulteGroup, KB Home and Meritage Homes

Jan 09, 2013, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, Jan. 9, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Homebuilding, including Lennar Corporation (NYSE: LEN), PulteGroup, Inc. (NYSE: PHM), KB Home (NYSE: KBH) and Meritage Homes Corporation (NYSE: MTH).


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


After the tough years 2006-2007, the housing market is now recovering steadily. The stability in the home buying market, combined with low interest rates and increased rentals, have increased the affordability of homes. Improvement in employment and consumer confidence is also contributing to a rise in demand for new homes.

Inventory of foreclosed homes and short sale homes is declining, thus stabilizing prices of new homes. Additionally, buyers are selecting larger and upscale homes with energy-efficient features, which are increasing average sale prices.

Thus, homebuilders are 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. Home prices have started moving up lately with market demand gaining momentum.

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 and an oversupply situation are gradually being rolled back.

Overall, the U.S. housing market has seen significant upside in new home sales volume for the first nine months of 2012 with industry-wide sales increasing roughly 25% from prior-year levels. The improving housing outlook thus has been a solitary bright spot on the economic horizon.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI), known as the homebuilder sentiment index, rose for the eight consecutive month in December, improving by 2 points to 47. This is a significant improvement from the depths of the housing downturn and is the index's highest level since April 2006. The improvement in this index suggests an increased demand for housing and better sales prospects for the next few months.

Focus on High-End Communities

Most homebuilders are focusing on the high end communities. The average selling prices (ASPs) are improving for most large-cap homebuilders due to changes in the community/product mix. ASPs have gained from increased sales in high-end communities of California, Arizona, Colorado and Florida, where home prices are generally higher.

Given the scenario, large builders are eating into the shares of other undercapitalized small/medium-sized private builders on the back of overall housing demand, stronger capital and better land positions.

Lennar Corporation (NYSE: LEN) strategically focuses on acquiring new home sites that would boost margins and benefit the bottom line. The company focuses on high-margin, well-positioned communities and avoids fringe or tertiary markets where price is the only driver. The company's focus on quality instead of quantity is benefiting margins and boosting new sales orders.

PulteGroup, Inc. (NYSE: PHM) is also shifting its focus toward high-priced Pulte-branded move-up homes, which improve the overall ASP. A better mix of sales, particularly Pulte-branded move-up homes, as well as addition of new higher margin communities, is consistently boosting the company's margins.

Small homebuilders like KB Home (NYSE: KBH) has started rolling out communities in highly desirable submarkets, primarily in the Central and West Coast regions, which allows it to sell larger, higher-priced homes, driving up the ASP. The company is also reallocating resources to focus on core preferred markets with strong growth prospects like those of California and Texas. KB Home is also targeting higher income, first-time and move-up buyers -- all of whom are more inclined toward buying a new home rather than buying a foreclosure.

Another small homebuilder, Meritage Homes Corporation (NYSE: MTH) is investing in well-positioned and high-priced land and new communities in the most desirable submarkets, which should ensure profits as the market gets stronger.

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