Seeking Alpha
Long/short equity, event-driven, homebuilders, currencies
Profile| Send Message|
( followers)

Something special must be happening in Lancaster, California, a small town of 155,000 people about 70 miles north of Los Angeles. After finding a thriving land development project in Lancaster, American Public Media's Marketplace returned to the city (or maybe they never left!?) to do another story on the town's economy. What they found encouraged me to write this quick summary as a follow-up to "California Soon To Experience A New Construction Boom."

Jack Cole is CEO of Lance Camper, a company that has employed him since 1966 (one year after its founding). Lance Camper makes truck campers and travel trailers that can cost as much as $20,000. The recession forced Cole to cut his workforce from 460 to 120, a massive 74% reduction. Now, Cole is back up to 360 employees, buying equipment, and his customers are buying even as interest rates have increased. This tripling in the workforce and increased economic activity can help explain at least in part why the developers in Lancaster can be so optimistic that they will soon sell out of the 44 homes under construction. Cole understandably calls the recovery "real."

With some optimism on the brain, let's take a look at some other related positive signs for California's economy:

Here is what Meritage Homes (NYSE:MTH) had to say about the California market in its July 24th earnings conference call (quotes from Seeking Alpha transcripts). A lot of MTH's California exposure is now in Sacramento, but their commentary generally applies across the state's major inland housing markets:

"California has been turning in the highest growth rates for the last couple of years and it's had by far the highest orders per community again in the second quarter. Because we've been selling out of communities quicker than planned, our average community count there was down 32% year-over-year."

"Some communities will be pushing prices harder, particularly in California…we won't retreat that strategy."

"…prices have gone up just as much inland as they have on the coast. So, the pricing pressure is pretty consistent across the whole state."

Despite reporting generally good results - increasing revenue and earnings guidance for 2013 based on stronger-than-expected demand over the past 6+ months - MTH's stock declined 4.2% on very high trading volume. Interest rates jumped today and homebuilder stocks went along for the ride in the other direction. This happened even after the U.S. Commerce Department reported much stronger than expected gains in new home sales. Sales achieved a new 5-year high. Higher rates are not worrying MTH…at least not in the short-term:

"I didn't see demand really retreating due to interest rates. We have seen a little bit of cooling in July.

Again it's hard to tell whether that's from the summer seasonality or from demand, I mean, our traffic remains significantly stronger than it was than last July. But I've heard anecdotally from some people that, some of our customers that they may sit out for a month or two thinking that rates may actually go back down.

I think people were a bit surprised by the speed of the increasing rates and took a little people, shocked a few people. But I don't think those people are not going to buy home, it's just a function nor they buy this month or next month or the month after that they are going to buy a house. So, we don't have a lot of concern particularly in the short-term from the rising rates."

We should expect the remaining reports for homebuilders to look similar. The next three months should say a lot about the durability of the nascent housing recovery as interest rates are unlikely to fall much further from current levels. In the meantime, I will look forward to the next telling report from little Lancaster.

(click to enlarge)

The post-earnings selling has barely dented MTH's impressive 2013 rally


Be careful out there!

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MTH over 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.

Source: Word From Lancaster, CA: This Recovery Is For Real