D.R. Horton, Inc. (DHI), NVR, Inc. (NVR): Is The Housing Market Actually Improving?

Page 1 of 2

Several reports came out in recent weeks that suggest the housing market is showing signs of recovery. Moreover, shares of leading U.S homebuilders such as D.R. Horton, Inc. (NYSE:DHI) or NVR, Inc. (NYSE:NVR) have also rallied from the beginning of the year. But is the housing market out of woods? Let’s examine this issue.

Home prices have risen in recent months: according to one report, the prices of homes rose for ten consecutive months as they have added nearly 8.3% in December 2012 compared to the same month in 2011.

D.R. Horton, Inc.The median sale price of new houses sold in December reached $248 thousand, according to the U.S Census Bureau and U.S Department of Housing and Urban Development report (opens pdf).

The rise in prices is one indication for the apparent improvement in the housing market. The mortgage rates have also fallen in recent years: the current 30 year Mortgage rate is at 3.53% compared to the 3.98% during the same week last year. This may contributed to the potential rise in demand for homes. Another indication for the improvement in the housing market is the rise in housing starts and building permits.

According to a recent report by the U.S Census Bureau and U.S Department of Housing and Urban Development, the number of housing starts spiked during December 2012 by 12.1% and reached 954k. This number is nearly 37% higher than the same time in 2011.  The building permits were also up in December by almost 29% than in December 2011.

The improvement in the housing market wasn’t gone unnoticed as shares of major home builders have rallied in recent weeks: shares of D.R. Horton spiked by nearly 20% since the beginning of the year, shares of Lennar Corporation (NYSE:LEN) by 6.3% and the stock of NVR by 9.5%. The rally of these stocks is related to the sharp growth in revenues of these leading homebuilders in the recent quarter.

But one should consider that the housing market might not be doing so well:

Despite the sharp rise in housing starts the number of new homes sold has decreased in December 2012 compared to November: The sales of new houses fell by 7.3% but rose by 8.8% compared to December 2011. This means the number of houses sold hasn’t risen during the year at the same pace as the number of housing starts.

Let’s examine how several homebuilders are doing in terms of leverage and profit margins.

Many homebuilders, as part of their business, require a high leverage. One indication for the high leverage of these companies is their debt-to-equity ratio. As of September 2012, the debt-to-equity ratio of PulteGroup, Inc. (NYSE:PHM) was at 1.48; Lennar has a ratio of 1.31. D.R. Horton and NVR have much lower ratios of 0.69 and 0.41, respectively. So D.R. Horton and NVR appear to be much less leveraged than PulteGroup and Lennar. The higher leverage didn’t lead to higher profit margins: the operating profitability of NVR reached 10.15% in the last quarter of 2012 – the highest profit margin of the four above-mentioned companies. PulteGroup’s profitability reached 3.75% in the fourth quarter. Both D.R. Horton and Lennar have a profit margin of around 7.3%-7.7%.

But the main factor that many consider is the sharp growth in revenues during the year. If the housing market will continue to show signs of progress, this is likely to reflect in the growth in these companies’ stocks and revenues. So why should you question the evidence for the improvement in the housing market?

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!