Lark Research - Housing Market Update (February 5, 2012)

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The Lark Research Homebuilder Stock Index, a composite of 13 publicly-traded homebuilders, rose 6.0% in the week ended February 3, 2012. This compares with gains of 2.2% in the S&P 500 and 4.0% in the Russell 2000.  Year-to-date, the Index has advanced 25.6%, compared with gains of 6.9% in the S&P 500 and 12.2% in the Russell 2000.

Performance of the Lark Research Homebuilder Stock Index vs. the S&P 500 and Russell 2000
December 28, 2007 = 100

With the recent gains, the Index is now well above its long-term support level of around 82 and roughly in the middle of its four year trading range.  More importantly, it has decisively broken through its one-year downtrend line to the upside, raising the possibility that it might finally break out of its four year trading range.  From the lows of last October, the Index has now rebounded 72%, far outpacing the major market averages.  With such rapid gains in a short time period, I expect that the Index will eventually retrace at least part of the advance, perhaps falling back to the long-term support level.  After that, assuming that the economy and the housing market continue to show improvement, the Index will most likely head higher.

HOUSING NEWS

The Wells Fargo/NAHB Housing Market Index, a measure of homebuilder sentiment, rose four points in January to 25.  This is the four consecutive monthly gain.  The three components of the Index all posted increases.  Current sales conditions rose 3 points to 25; sales expectations for the next six months rose 3 points to 29; and traffic of prospective buyers rose 3 points to 21. The Index has risen 12 points since June and is at its highest level since June 2007.  Even so, with the reading still below 50, current market conditions are considered poor.  (Jan. 18, 2012)

December housing starts fell 4.1% from November to a seasonally-adjusted annual rate (SAAR) of 657,000 units.  Single-family starts rose 4.4% to 470,000 units, the highest pace since April 2010; while multi-family fell 20.7% to 187,000 units.  Year-over-year, the pace of housing starts was estimated to be up 78.1% for multi-family and up 11.6% for single-family.  (Jan. 19, 2012)

December housing permits slipped 0.1% to 679,000 units from November.  Multi-family permits fell 3.7%, while single-family permits were up 1.8% to 444,000 units.  Year-over-year, building permits were estimated to be up 27% for multi-family and down 0.2% for single-family.  (Jan. 19, 2012)

December new home sales declined 2.2% from November to a SAAR of 307,000 units and were down 7.3% from the estimated December 2010 selling pace.  Median sales prices fell 2.5% to $210,300, but average selling prices jumped 6.3% from October’s levels to $266,000.  Preliminary data indicate that median prices rose 1.8% in 2011, but average prices fell 2.3%.  Inventories eased slightly to 157,000 units, representing 6.1 months of supply at the current sales pace.  (Jan. 26, 2012)

December existing home sales (closings) rose 5.0% from November to a SAAR of 4.61 million and 3.6% from the December 2010 level, according to the National Association of Realtors.  NAR Chief Economist Lawrence Yun noted that the trend still points to a sustained housing recovery.

The median home price was down 2.5% in December to $164,500, from the prior year level.  Inventories fell by 9.2% to 2.38 million units, representing a 6.2 month supply, down from 7.2 in November.  Mr. Yun suggested that the lower inventory levels should lead to stabilization or increases in house prices in many markets around the country; but other economists worry that a likely increase in foreclosures may drive house prices down more on average until later this year.  (Jan. 20, 2012)

December pending sales for existing homes declined 3.5% to 96.6 from November's 100.1, according to the National Association of Retailers.  Year-over-year, pending sales were up 5.6%.  The NAR noted that even with the modest decline, recent activity is the highest in the past four years, except for the homebuyer tax credit period.  Contract failures remain high, due primarily to difficulties in obtaining mortgage financing.  (Jan. 25, 2012)

The S&P/Case-Shiller Home Price Indices.  The S&P/Case-Shiller 20-City Composite Index declined 1.3% in November vs. October.  All 20 cities except Phoenix saw house prices decline month-to-month.  On a seasonally-adjusted basis, the October to November decline was 0.7%, with 17 cities showing a decline.  Meanwhile, the year-over-year decline in the 20-city Composite accelerated to 3.7% in November from 3.4% in October.  House prices still appear to be in a bottoming process, with virtually all of the declines being driven by distressed sales.  (Jan. 31, 2012)

Corelogic, another information provider, reported that nationwide house prices in December were down 4.7% against year-ago levels.  Excluding distressed sales, house prices were down 0.9%.  On a month-to-month basis (November to December), house prices fell 1.4%, but they rose 0.2% excluding distressed sales.  (Feb. 2, 2012)

Agreement between large mortgage servicers and state attorneys-general is stalled yet again.  There was renewed hope of a deal between mortgage servicers and state AGs to establish procedures for foreclosure that would eliminate robo-signing and provide relief to homeowners in the form of principal forgiveness and lower interest rates.  California's AG, Kamala Harris, opted out of the deal because it reportedly would have released mortgage servicers from liabilities, including conduct in instances that have not been fully investigated.  Delaware's AG, Beau Biden, also opted out of the deal.  It is not clear at this time whether the servicers will move forward with those states that have agreed to a settlement or whether they will continue to negotiate with California and Delaware until an agreement is reached.  Foreclosures are still being delayed in a number of states pending a resolution of these issues.  (Jan. 25, 2012)

New Obama Mortgage Refinancing Plan.  President Obama sent a new mortgage refinancing plan to Congress.   The plan is aimed at allowing borrowers who are current on their mortgage payments to refinance to a lower rate, even if the value of their home is far below the principal outstanding on their mortgage.  The proposal calls for cutting through the red tape that has prevented many borrowers from lowering their mortgage payments.  It would ease restrictions on the FHA that limit its ability to guarantee underwater mortgages.  Under this plan, Mr. Obama says that an average household could save $3,000 annually.  Critics have charged that the three previous plans have fallen far short of their goals, so a fourth is unlikely to be more effective, unless the complexity of the qualifying formula and refinancing process is reduced, but the chances of Congress passing such a plan in the current contentious atmosphere are low.  (Jan. 31, 2012)

BUILDER NEWS

Beazer Homes USA (BZH)

Beazer reported EPS of $0.01, compared with a loss last year of $0.65 .  Revenue increased 72.9% to $188.5 million, due to a 60.7% jump in closings to 867 units and a 7.6% rise in average selling prices to $213,700.  Gross profit margins, excluding impairments and abandonments, were 13.3%, a 260 basis point improvement from last year.  Impairments and abandonments were higher at $3.5 million in the current quarter, compared with $0.6 million a year ago.  Selling, general and administrative expenses were roughly comparable with the prior year, but declined as a percent of revenue from 34.4% to 19.4%.  Beazer's operating loss was $16.7 million, compared with $28.1 million in 2010.  The company recorded an income tax benefit of $35.7 million or $0.41 per share, compared with $0.6 million or $0.01 per share last year.  Orders were up 35.6% in the quarter and the company begins calendar 2012 with a dollar backlog up 57.3%.  If Beazer can deliver this backlog and maintain its sales momentum, it should move closer to operating profitability within the next few quarters.  (Feb. 2, 2012)

D.R. Horton (DHI)

D.R. Horton reported a fiscal 2012 first quarter profit of $0.09 per share, reversing last year's loss of $0.06.  Revenues increased 15.5% to $885.6 million, with closings up 13.2% to 4,118 units and average selling prices increasing 2.6% to $214.700.  With the increase in sales, adjusted gross margin improved 150 basis points to 16.9%.  Horton's SG&A expense ratio improved by 210 basis points to 13.4%.  Unit orders were up 12.8% for the quarter and the company's ending dollar backlog was up 22.6%, which suggests that the sales momentum should continue.  Management is cautiously optimistic about the upcoming spring selling season.  The company is focused on being profitable for every quarter during this fiscal year.  (Jan. 27, 2012)

KB Home (KBH)

The company has raised $350 million of 8% Senior Notes due 2020 at an offering price of 98.523% to yield an estimated 8.255%.  It will use the proceeds to fund a $340 million tender for its 5 3.4% Senior Notes due 2014 (up to $100 million), its 5 7/8% Senior Notes due 2015 and its 6 1/4% Senior Notes due 2015.  Tendering bondholders will receive 101 for the 2014 notes and 100 for the 2015 Notes, including in both cases an early tender premium of 3 points, provided that they meet the early tender deadline of February 15, 2012.  (Feb. 1, 2012)

Separately, the company said that Les Moonves, the President and CEO of CBS, will not stand for re-election to its Board of Directors.  Mr. Moonves served on KB Homes' Board for eight years and is resigning to pursue other commitments and interests.  (Jan. 27, 2012)

Lennar (LEN)

Lennar reported fiscal 2011 fourth quarter earnings of $0.16 per share, down a penny from last year.  Homebuilding revenues increased 12.5% to $824.2 million.  Deliveries increased 9.3% to 3,375 units, while average selling prices rose 5.2% to $247,200.  Adjusted gross margins improved by 33 basis points to 21.1%.  Inventory impairments declined from $22.3 million to $17.9 million.  Lennar's SG&A expense ratio increased slightly from 13.4% to 13.5%.  So while revenues were higher, the small increase in profit margins combined with a decline in other income and modest rise in interest expense resulted in a drop in homebuilding operating earnings from $27.0 million to $25.2 million.  Operating earnings for Lennar Financial Services and Rialto Investments also declined, but all of this was largely offset by a large tax benefit.  This was Lennar's seventh consecutive quarter of profitability.  The company remains focused on managing its costs and trying to boost sales.  To that end, new orders were up 20.1% in the quarter and the dollar value of Lennar's backlog ended up 37.7%.  CEO Stuart Miller said that the market has started to stabilize, thanks to low home prices and mortgage rates and a heated rental market.  The higher backlog suggests that Lennar's quarterly profit streak will continue and earnings will grow in fiscal 2012.  (Jan. 11, 2012)

MDC Holdings (MDC)

MDC Holdings reported a fourth quarter loss of $0.40 per share, less than last year's $0.65 loss.  Revenues declined 4.7% to $247.4 million.  Home closings fell 8.4% to 792 units, while average selling prices slipped 0.1% to $291,300.  Land sales were $8.4 million, compared with -$735,000 in 2010.  Despite the drop in home sales, adjusted gross margins improved 30 basis points to 16.8%.  MDC's focus on reducing overhead paid off, as evidenced by the decline in SG&A expenses (including corporate expenses) as a percent of home sales revenue from 21.9% to 15.6%.  With the drop in pre-tax impairments from $19.2 million in 2010 to $2.7 million, homebuilding pre-tax income improved from a loss of $12.4 million to a profit of $5.8 million.  However, the company recorded $20.2 million in pre-tax charges related to the extinguishment of debt, as it retired all of the outstanding 5.25% Senior Notes due 2013.  Orders increased 0.8% in the quarter and the year-end backlog was up 22.7%.  January orders were up 30%.  Management is encouraged by the increasingly positive signs of health in the housing market and believes that housing has stabilized and may begin to recover in 2012.   (Feb. 2, 2012)

MDC has named John M. Stephens, formerly CFO at Standard Pacific, as its new Chief Financial Officer.  (Jan. 30, 2012)  It also hired Denver real estate executive Raymond T. Baker to fill the spot on its Board of Directors that opened with the passing of long-time MDC director William B. Kemper.  (Jan. 27, 2012)

M/I Homes (MHO)

M/I Homes reported a fourth quarter net loss of $0.16 per share, compared with last year's loss of $0.60 per share.  Revenues increased 6.3% to $171.7 million, with closings up 2.6% to 667 units and average selling prices up 3.6% to $257,400.  Adjusted gross margins improved by 250 basis points to 19%.  The SG&A expense ratio declined from 16.1% to 16.0%.  Interest expense increased from $3.2 million to $4.1 million.  As a result, M/I's pre-tax loss was $3.1 million, which consisted of a $1.4 million operating profit, offset by $4.5 million of impairments.  This compares with last year's pre-tax loss of $12.3 million, which consisted of a $2.4 million operating loss, $1.5 million of impairments and an $8.4 million debt extinguishment charge.  Orders increased 0.9% in the quarter and the year-end dollar backlog was up 34.1%.  Management was pleased with the quarter's operating profit, which continues an improving trend that is being driven by a strategic shift to new lower cost communities in better locations.  It is hopeful that the market has bottomed, but remains relentlessly focused on returning to profitability.  (Feb. 2, 2012)

Meritage Homes (MTH)

Meritage Homes reported a fourth quarter loss of $0.36 per share, compared with last year's loss of $0.03.  Revenues increased 14.5% to $245.7 million.  Homes closed increased 7.2% to 894 units, while the average selling price was up 7.2% to $274,900.  Adjusted gross margin improved 70 basis points to 18.8%, but impairments $13.9 million, due mostly to the winding down of Meritage's Las Vegas operations.  This compared with $5.1 million of impairments in the 2010 fourth quarter.  Last year's results were also helped by a net tax benefit of $4.5 million.  Orders increased 5.0% in the quarter and the ending dollar backlog was up 23.3%.  Management noted that the company achieved its third consecutive quarter of year-over-year sales increases.  The 5% gain in orders reflects an especially tough prior year comparison, when orders were up 15%.  Meritage is focused on top-line growth, margin improvement and controlling overhead costs to drive greater profitability and shareholder returns.  (Jan. 31, 2012)

NVR, Inc. (NVR)

NVR reported a fourth quarter profit of $6.51 per share, down from last year's $10.41 per share. Revenues fell 8.3% to $728.8 million, as a 9.4% decline in closings to 2,391 units was partially offset by a 1.2% increase in average selling price to $304,600.  Adjusted gross margins declined by 95 basis points to 16.1%.  Land deposit impairments were $4.4 million in 2011 and $4.9 million in 2010.  NVR's SG&A expense ratio increased from 7.4% to 9.8%.  Management said that profit margins were hurt by competitive price pressures in its core Washington DC metro market.  Yet, orders were up 22.3% in the quarter and the company's dollar backlog was up 21.2%.   (Jan. 26, 2012)

PulteGroup (PHM)

PulteGroup reported a fourth quarter profit of $0.04 per share, compared with last year's loss of $0.44.  Revenues increased 6.4% to $1.23 billion.  Closings fell 2.3% to 4,303 units, but the average selling price increased 3.4% to $271,000.  Land sale revenues increased from $2.2 million to $63.8 million.  The company's adjusted gross margin improved by 10 basis points to 18.6%.  Impairments declined from $67.9 million to $7.9 million.  Pulte's SG&A expense ratio declined from 13% to 9.5%, due mostly to a reduction in restructuring costs.  Pulte also booked a $23 million tax benefit in the 2011 fourth quarter from the favorable resolution of federal and state tax matters.  New orders were up 1.3% in the quarter and the dollar backlog ended up 0.3%; however, last year's results included a 200 unit increase in orders due to a change in the company's order recognition policy.  Pulte also operated with 11% fewer communities in the 2011 fourth quarter.  With increasingly favorable data on the economy and housing, management is optimistic about 2012.  Despite ongoing macroeconomic challenges, it believes that the progress that Pulte has made in expanding margins and lowering overhead costs should enable the company to be profitable in 2012.  (Feb. 2, 2012)

Ryland Group (RYL)

Ryland Group reported fourth quarter earnings from continuing operations of $0.03 per share,  compared with a loss of $0.38 per share last year.  Revenues increased 21.9% to $261.8 million.  Closings increased 14.4% to 1,040 units and the average selling price was up 4.5% to $254,000.  Adjusted gross margins increased 170 basis points to 16.3%.  Inventory impairments declined from $12.2 million in 2010 to $0.9 million.  Ryland's SG&A expense ratio declined from 12.7% to 11.2%.  Orders for the quarter increased 17.9% and the dollar backlog ended up 31.0%.   (Jan. 26, 2012)

Toll Brothers (TOL)

The company's financing subsidiary, Toll Brothers Finance Corp., is issuing $300 million of 5 7/8% Senior Notes due February 15, 2022 in a public offering.  Concurrent with this issuance, it is offering existing holders of its 6 7/8% Senior Notes due 2012 and 5.95% Senior Notes due 2013 the opportunity to exchange their notes for the new 5 7/8% Notes.  Including an early exchange premium of 2 points, the total exchange consideration on the 6 7/8% Notes is 101.338  and on the 5.95% Notes is 103.406.  The early tender date is February 16, 2012 and the exchange offer is scheduled to expire on March 2, 2012.  (Feb. 3, 2012)

Fourth Quarter Averages

For the ten builders that have recently reported quarterly earnings, the average year-over-year increase in unit closings is 9.0%, new unit orders is 16.4% and dollar backlog is 32.4%.

February 5, 2012.

Stephen P. Percoco
Lark Research, Inc.
P.O. Box 768
Norwood, MA  02062
(732) 763-0763
webmaster@larkresearch.com

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