Is It Too Late To Get Into The Housing Rebound? Part Two

Includes: ITB, XHB
by: John M. Mason

Well, it looks like the big financial institutions are not the only ones getting in on the largess of the Federal Reserve. Now we are getting information that some homebuilders are benefiting too. Construction firms are turning a healthy profit even though actual construction remains lethargic.

Note from Bloomberg: "At PulteGroup Inc. (NYSE:PHM), the second-largest builder by market value, mortgage revenue jumped 70 percent in the third quarter, almost six time the revenue gain from home sales. At Lennar Corp. (NYSE:LEN), the No. 1 builder, mortgage-unit revenue surged 60 percent, double the increase in sales revenue. Aided by lucrative lending units, both companies posted the biggest overall profits since 2006."

We're not building homes, but we are making money!

This was one of the big lessons of the credit inflation over the past fifty years. Led by manufacturers like General Electric (NYSE:GE) and General Motors (NYSE:GM), executives learned that when credit is being inflated, it pays to have a financial unit. Hence, for example, we saw in the last decade or so that for quite a few years General Electric achieved more than 50 percent of its profit from its financial subsidiary not its manufacturing units.

Its just good to see that other, smaller fish, learned to play the game that the major manufacturing firms did. And, these homebuilders have the Federal Reserve to thank.

Thanks to the Federal Reserve's program to buy mortgage-backed securities, which, have lowered borrowing costs, the margins being earned by the lending industry are very high. "The average gain-on-sale, which measures the difference between the rate homeowners pay and the rate paid by investors, has doubled this year on increased demand for the securities."

In terms of activity, "At Bloomfield Hills, Michigan-based PulteGroup (PHM), the dollar-value of originations grew 25 percent in the third quarter, while mortgage-unit revenue jumped 70 percent. At NVR Inc. (NYSE:NVR) based in Reston, Virginia, loan closing rose 22 percent, while mortgage-baking revenue grew twice as fast."

"Fort Worth, Texas-based DR Horton (NYSE:DHI) reported last month that fiscal fourth-quarter operating income at its financial services unit more than doubled."

"Increased profitability in Lennar's (LEN) mortgage unit 'was primarily due to increased volume margins in the segment's operations,' its Sept. 24 earnings statement said. Denver-based MDC Holdings Inc. (NYSE:MDC), the No. 7 homebuilder by market value, cited mortgage margins as boosting third-quarter profit in a regulatory filing last month."

The question for the future is, whether or not these profits will hold up? As I mentioned in my earlier post, if one gets in too late on such an opportunity the margins have usually been competed away. Just how far has this bubble progressed?

Still, we have the Federal Reserve promising to do more and more monetary easing until it gets the economy growing more rapidly and unemployment dropping further. Is there time enough for others to get into the game?

One of the problems the Fed faces in creating such a policy is that the credit inflation might just go into financial rewards to those that can play the game and not into production that will increase output and provide jobs. But, this is not something the Federal Reserve can control.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.