Will Housing Stabilize in the New Year? - Zacks Analyst Interviews - Beazer Homes USA (NYSE:BZH), D.R. Horton (NYSE:DHI)

A string of housing data released last month portrays a mixed to slightly positive picture of the housing market.

Sale of existing homes rose 1.5% in October for the second month in a row. Interestingly, sale of existing homes rose 2.5% from the same month last year — the first year-over-year increase since Oct 2013.

Building permits — a gauge of future constructions — improved for the second consecutive month in October. After improving 1.5% in September, building permits grew 4.8% in October.

Though housing starts declined 2.8% sequentially in October, it improved 7.8% year over year suggesting that the broader housing trends are very much in place. Moreover, single-family housing starts rose 4.2% in October, clearly indicating that the drop in housing starts in the month was driven by a slide in multi-family construction — a rather volatile sector.

Home builders are also turning more optimistic as demand for new homes rises with an improving job market and growing consumer confidence. Homebuilders' confidence, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index, rose 4 points to 58 in November — a relief after a drop by the same magnitude last month.

Having said that, new home sales in October fell short of analyst expectations. It grew a meager 0.7% in October from a revised-down September number.

And yet, the above mentioned data clearly indicates that the housing market is recovering at a steady and gradual pace after a slump at the beginning of the year. Thanks largely goes to stabilizing mortgage rates, overall economic growth, improving job numbers, moderating home prices and a low level of housing inventory.

With the economy looking better in 2014 than last year, the housing outlook for 2015 is stable to slightly better.

However, what keep us concerned are the chances of a rise in short-term interest rates in 2015 as the Fed has already ended its six-year long quantitative easing program in October.

Though the Fed had earlier promised to keep the key interest rate at record low for a ‘considerable time,' investors have started speculating about the timing of the planned rate hike. The robust job numbers might draw the Federal Reserve closer to raising interest rates. Higher interest/mortgage interest rates may have a moderating effect on demand and pricing.

How Did the Major Players Fare Last Earnings Season?

The September quarter was rather mixed for the homebuilders due to softer housing demand and an overall weak operating environment.

PulteGroup, Inc.'s (PHM) third quarter results were mixed, though it improved upon its second quarter performance. The Atlanta-based homebuilder beat the Zacks Consensus Estimate for earnings while delivering in line revenues. Earnings declined year over year due to softer orders and gross margins while homebuilding revenues rose as home price increases made up for the order shortfall and a lower number of homes delivered.

Higher closings and pricing gains helped D.R. Horton, Inc. (DHI) beat the Zacks Consensus Estimate for revenues. However, earnings missed the consensus. Management has increased incentives in 2014 to quicken the sales pace. Though the strategy worked well for order trends, it took a toll on gross margins.

Lennar Corporation (LEN) beat the Zacks Consensus Estimate for both earnings and revenues in the third quarter, helped mainly by strong pricing and solid margins. KB Home (KBH) reported disappointing third quarter 2014 results as the company missed the Zacks Consensus Estimate for both revenues and earnings. Soft orders and a lower number of homes delivered hurt sales and profits.

Among the smaller homebuilders, Meritage Homes Corp. (MTH) and NVR, Inc. (NVR) missed the Zacks Consensus Estimate for both earnings and revenues. While poor business in Arizona and California and lower gross margins dragged down Meritage Homes, NVR suffered due to higher cost of sales. California-based Ryland Group, Inc. (RYL) beat the Zacks Consensus Estimate for earnings but missed the same for revenues.

In contrast, Beazer Homes USA Inc. (BZH) beat the Zacks Consensus Estimate for both earnings and revenues for the second quarter in a row. Higher sales prices, improved gross margins and better overhead leverage helped Beazer Homes outperform expectations in two back-to-back quarters.

Toll Brothers, Inc. (TOL) and New Jersey-based Hovnanian Enterprises, Inc. (HOV) are due to report their fourth quarter and fiscal 2014 results on Dec 10.

A look at the Earnings ESP in the table below does not clearly show any company that is likely to beat expectations in the December 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 #193. This is in the lower 1/3rd of all industries ranked, highlighting the group's near-term negative outlook – the negative stance reflects a slump in the first half of the year and slow growth in the second half. Moreover, chances of a rise in short-term interest rates in 2015 have cast a bearish shadow on the housing picture.

Earnings Trends

If we look at the overall results of the Construction sector, earnings shot up 17.2% in the September quarter, up from a 16.7% rise in the June quarter. Total revenues increased 4.5% in the quarter, better than the 0.5% rise in the sequentially preceding quarter. The sector racked up an earnings beat ratio (the percentage of companies coming out with positive surprises) of 76.9% and a revenue beat ratio of 61.5% in the September quarter.

In the fourth quarter, earnings and revenues are expected to grow 6.2% and 5.4%, respectively.

For 2014 and 2015, earnings are expected to show a 16.4% and 21.8% increases, respectively. Revenues are forecast to expand 2.4% and 10.6% in 2014 and 2015, respectively.

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

Bottom Line

While the housing market has improved dramatically from where it was a couple of years back, the recent recovery has been a little choppier. However homebuilders are increasingly optimistic of a pick up in sales in 2015.

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Will Housing Stabilize in the New Year? - Zacks Analyst Interviews

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