Homebuilders and private mortgage insurers are partying thanks to incoming FHFA chief Mel Watts' weekend move to postpone an increase in fees which would have raised significantly raised mortgage costs for those with good, but not stellar credit and less than 20% to put down.
"This is a victory for the housing finance industry," says FBR's Edward Mills. "We believe that this is the first of a series of decisions by incoming Director Watt to preserve/expand mortgage credit availability ... We view this announcement as positive for housing generally, but specifically for private mortgage insurers, originators, and homebuilders."
Mortgage insurers: Radian (RDN +4.1%), MGIC (MTG +1.1%), Genworth (GNW +1.6%), Old Republic (ORI +0.7%), NMI Holdings (NMIH +1.1%). Essent Group (ESNT -0.6%) is off a hair, but up 29% since its late-October IPO.
Not showing much reaction today, but potentially set up to disappoint if the GSEs do not allow any private oxygen in mortgage finance are Redwood Trust (RWT -0.2%) and PennyMac Financial (PFSI +1.2%).
Lennar (LEN) Net profit +32% to $164.1M, including a $94M tax provision.
Deliveries of homes +27% to 5,650.
New orders +13% to 4,498; in dollar terms, +34% to $1.4B.
However, "the political and interest rate environment, and our previously initiated price increases tempered new sales orders," says Lennar CEO Stuart Miller.
Backlog +19% to 4,806 homes, or +40% to $1.6B.
Gross margin on home sales 26.8%, up 330 bps.
Operating margin on home sales 16.9%, +470 bps.
"We begin 2014 with a strong balance sheet and a clearly defined strategy," says Miller. "We are extremely well positioned across all of our platforms to continue to grow profitably our operations and capitalize on the opportunities of a recovering housing market and economy."
The two worst-performing sectors on a down day are industrials (XLI -1.4%) and homebuilders (XHB -1.5%), (ITB -1.9%).
Industrials are taking a hit after Joy Global (JOY -6.3%) missed earnings estimates and provided disappointing guidance. "With a limited number of projects that can book in time to help 2014, we continue to see both the need and opportunity to lower the cost base in our business," says the company. Caterpillar (CAT -1.2%).
Homebuilders continue to digest Toll Brothers' (TOL -1.8%) "leveling in demand" comments from yesterday's earnings results - in the 19 weeks since August 1, business has been flat vs. last year, and in the first 5 weeks of FQ1 (beginning Nov. 1) business has also been flat from 2012 (though Hurricane Sandy makes a tricky comparison).
CEO Doug Yearley on the earnings call (transcript): "There's just not a lot of action [this time of year]. We still feel like pent-up demand is building, demographics are on our side, affordability is in place, and we are cautiously optimistic about the spring season, which begins the end of January."
Lennar (LEN -2.3%), D. R. Horton (DHI -3%), KB Home (KBH -3.1%), Hovnanian (HOV -3.3%)
"While collecting the award is doubtful, the true value of the verdict is the validation of our integrity, credibility and transparency, which have always been cornerstones of our foundation," says Lennar's (LEN, LEN.B) CEO, Stuart Miller.
Lennar had sued California developer Nicolas Marsch and his company Briarwood for conspiring with Barry Minkow to extort money from the homebuilder. A convicted felon, Minkow returned to prison in 2011 over his role in the scheme.
Homebuilders have their tails in the air following this morning's housing starts report which beat expectations and also included a big building permits print - up 6.2% from September and 13.9% from a year ago.
The homebuilders (ITB -1.1%), (XHB -0.8%) are outliers to the downside as the NAR's October Pending Home Sales Index slips to its lowest since December 2012. At 102.1, the index is also 1.6% below its level of a year ago. A bright spot in the data is its age. October, shutdowns, and debt defaults were a long time ago.
The report has sent interest rates lower: At 2.77% just before the release, the 10-year yield is now 2.73%. TLT +0.4%, TBT -1%
It's become a buyer's market again as rising interest rates (now compounded by the D.C. budget stalemate) hit new home sales. "I think there is a weakness in the market right now," says homebuilder Mark Ward. "Everybody's giving more incentives today than they were in the summer."
It's a big turnaround from this spring, when builders were scaling back incentives and instead raising prices by double-digit amounts. A Wells Fargo survey has 29% of respondents saying they're increasing use of incentives, double the amount of year ago.
Lennar (LEN) cautiously admitted to boosting incentives on a "select" basis during its earnings call (transcript) last month, suggesting lower margins for the entire industry.
The Dow Jones U.S. Home Construction ETF (ITB +2.6%) gains following earnings reports from Lennar (LEN +5%) and KB Home (KBH +4.5%) - both of which showed interest rate hikes taking at least some bite out of results. Also, Case-Shiller data pointed to a slight slowing in home price increases. Homebuilders have been knocked for a loop since rates started going up in May - perhaps some sell the rumor, buy the news action is warranted today.
In other homebuilder news, RBC Capital initiates coverage on Brookfield Residential Properties (BRP +4.1%) with a Buy and $27 price target.
Rising interest rates look like they're hitting at least a little bit, with new orders of 4,785 homes up 14% Y/Y vs. a 27% gain in Q2; dollar value of new orders up 32%. Backlog of 5,958 homes up 32%; dollar value up 53%. Cancellation rate of 18% vs. 14% in Q2.
Gross margin of 24.9% up 170 basis points. Operating margin of 14.7% up 350 basis points as SG&A expense improved 180 bps to 10.2%.
Naturally seeing a bright future for the industry, management mentions "bumps along the road" in the near-term picture.
Lennar Corp is a homebuilder and a provider of financial services. Its homebuilding operations include the construction and sale of single-family attached and detached homes, and to a lesser extent multi-level residential buildings.