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D.R. Horton, Inc. (DHI), Lennar Corporation (LEN) and One Important Question: Is It Time to Get out of the Housing Market?

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The ongoing recovery of the housing market keeps the stocks of leading home-builders such as D.R. Horton, Inc. (NYSE:DHI) and Lennar Corporation (NYSE:LEN) rising. But is there a sharp rise in demand for housing? Or are we just entering into another housing bubble? Let’s check out the recent developments in the housing market and try to figure out what’s ahead for housing.

Housing Starts continue to rise

Based on the latest report by the U.S Census Bureau and U.S Department of Housing and Urban Development, the number of housing starts sharply rose during March by 7% and reached 1 million. This number is nearly 47% higher than the same time in 2012.

The chart below presents the sharp rise in the housing starts in the past yearThe rise in housing starts is also accompanied by the ongoing rally in the number of new homes sold.

New homes sold rose in March

The number of new homes sold also rose in March compared to February: sales of new homes increased by 1.5% and by 18.5%, respectively, compared to March 2012. Based on the above, we can see that during the year the number of houses sold has risen at a slower pace than the number of housing starts has. Down the line, this could loosen up the housing market and thus pull home prices down.

In the meantime, the rise in home sales is also reflected in the price of homes that grew during the year, climbing 3%. The median price is highly volatile, as indicated in the chart below, but it also suggests the sharp rise in home sales didn’t pressure the home prices up by much. This might suggest that the pressures from the demand aren’t so strong as to push the prices too high.

Let’s examine how several home builders are doing in terms of revenue growth and profit margins.

The sharp rise in housing starts and sales of new homes are also reflected in the stock market: shares of D.R. Horton, Inc. (NYSE:DHI) spiked by nearly 24% (year-to-date). Moreover, the company’s upcoming financial report for the second quarter of 2013 (fiscal year) is likely to reflect steady revenue growth and a rise in profit margin. At least that was the case for Lennar Corporation (NYSE:LEN). The company’s operating profitability rose in the recent quarter to 5.4%, compared with only a 1.2% profit margin in the parallel quarter a year back. The chart below presents the developments in the quarterly operating profitability of these two leading home builders.

Moreover, Lennar Corporation (NYSE:LEN)’s revenue spiked in the second quarter of 2013 by more than 36% compared to the second quarter in 2012. The sharp rise in profit margin and revenue suggest that other home builders such as D.R. Horton, Inc. (NYSE:DHI) are likely to show a good quarter as well.

The Fed’s quantitative easing, which includes the purchase of $40 billion a month of mortgage-backed securities, flooded the markets with cash to help home builders and banks to offer mortgages. This policy, along with the Fed’s ongoing monetary policy to keep rates low and buy long-term securities, has pulled down the mortgage rate to its current low level as indicated in the chart below.

Despite the low mortgage rates, mortgage debt hasn’t grown in recent years and continues to dwindle, as seen in the chart below.

Home builders and banks

Does this mean that home builders and banks don’t see much growth in their mortgage business? This is the case for Wells Fargo & Co (NYSE:WFC), one of the leading U.S banks in terms of mortgages.

Based on its latest quarterly financial reports, the bank’s revenue from community banking, which also includes the mortgage business, fell in the first quarter of 2013 by 6.4% from the previous quarter and by 3.9% from the first quarter in 2012. The bank’s total revenue fell by 1.4% (year-over-year) and reached in the first quarter of 2013 nearly $21.3 billion. Nonetheless, the bank’s net income reached a record high of $5.2 billion – nearly a 22% gain from the parallel quarter in 2012.

In comparison, the bank’s revenue from other business segments, including wholesale banking and wealth, brokerage and retirement rose during the last quarter by 0.9% and 4.4%, respectively. This means the community banking segment was the group that dragged down this bank’s total revenue during the last quarter.

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