Higher interest rates to weigh on U.S. homebuilder earnings

By Sagarika Jaisinghani

(Reuters) - After seven consecutive quarters of strong demand, homebuilders in the United States are adjusting to a slowdown in new orders as rising interest rates and economic uncertainty deter buyers.

A shortage of land on which to build, as well as overexposure to a volatile Californian housing market, will also weigh on the next round of quarterly earnings for some of the big U.S. homebuilders.

"There are a lot of headwinds this time, and we're going to see that come through in new orders," said David Williams, president of Dallas-based brokerage Williams Financial Group.

Cracks in the U.S. housing recovery appeared in May, when interest rates began their march to a two-year peak.

The Dow Jones Home Construction <.djushb> index has lost a fifth of its value since. The index had almost doubled in the 12 months to May.

Builders' confidence in the housing market has also slipped in the past few months. Sentiment for September was unchanged after four straight months of gains, according to the National Association of Home Builders. For October, sentiment fell.

In the last quarter, Americans were put off buying new homes by the looming threat of a U.S. debt default, a crisis avoided at the eleventh hour after a 16-day partial government shutdown.

Analysts said this would be reflected in results for the quarter ended September, with the effects also likely to extend into the current three months.

NVR Inc , the fourth-largest U.S. homebuilder, kicking off the latest round of earnings on Monday, reported a 7 percent decline in third-quarter orders.

PulteGroup Inc will be next to report, on Thursday. Analysts on average expect the No. 2 U.S. homebuilder's revenue growth to slow to 12 percent for the third quarter from 20 percent in the preceding three months.

Other homebuilders will report over the next several weeks.

LAND SHORTAGE

Builders such as PulteGroup and larger rival D.R. Horton Inc , which is scheduled to report on November 12, have been raising prices to compensate for a land shortage that has limited their ability to construct new homes.

While homebuilders' margins could find some support from higher average selling prices in the latest quarter, analysts said this would not be sustainable and that weakening demand would begin to eat into prices before the end of the year.

Because the last housing crisis drove many land developers out of business, there have been fewer housing lots available for homebuilders in the current cycle. Those developers that remain are also finding it more difficult to secure financing.

"The typical source of financing are community banks, and they have been unwilling to lend, particularly for residential (development)," said David Crowe, chief economist at the National Association of Home Builders (NAHB).

Fifty-nine percent of homebuilders that participated in an NAHB survey in August reported a shortage of developed land, up from 43 percent a year earlier, said Crowe.

Some builders are better insulated than others against the shortage. Lennar Corp and Toll Brothers Inc , for example, bought land throughout the downturn, giving them access to cheap land that many of their peers lack today.

Toll's presence in downtown Manhattan also means it can raise prices without having to spend on picking up more land.

But for D.R. Horton, the largest U.S. homebuilder, analysts expect revenue growth to slow to 38 percent in the latest quarter from 46 percent in the preceding three months.

Despite its limited land bank, D.R. Horton offers investors one of the cheapest housing market stocks on the market.

The stock trades at 11.9 times 12-months forward earnings, while its five biggest peers trade at an average 15.8 times, according to Thomson Reuters StarMine data.

CALIFORNIA HEAT

For some builders, particularly KB Home and Standard Pacific Corp , earnings are likely to hinge on California - the only U.S. state where sales of new homes have declined in the last year, according to Williams.

KB Homes derives more than half of its revenue from California. The most populous U.S. state is also home to about 40 percent of the houses built by Standard Pacific.

California witnessed one of the highest rises in home prices during the previous housing boom, which in turn led to an abnormally high number of foreclosures during the downturn.

The state was also at the vanguard of the most recent recovery - KB Homes is selling houses there at almost double their price in the fourth quarter of 2011 - leading some analysts to conclude it might be most vulnerable to a slowdown.

"Even though it's very good in the beginning stage of the cycle, we're really concerned with people that have too much exposure there," Williams said.

KB Home shares trade at about $17, exactly the value that analysts believe they are worth, according to Thomson Reuters StarMine's intrinsic valuation model.

(Editing by Robin Paxton)

Source: http://news.yahoo.com/higher-interest-rates-weigh-u-homebuilder-earnings-165714834--sector.html
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