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Lennar Corporation (LEN), D.R. Horton, Inc. (DHI): Could Rising Rates Deflate the Housing Rebound?

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Home sales have been improving of late. The momentum of the recovery has increased notably in recent months. Now, with mortgage rates inching higher, buyers are acting to lock in low rates. That’s a good thing now, but could turn ugly quickly.

Home bubble

Leading into the 2007 to 2009 recession, home prices were rocketing skyward. The quick escalation in home prices led to the belief that buying a house at virtually any price would be rewarded because the value would just keep growing to the sky.

However, time proved that trees, and home prices, don’t grow to the sky. The bursting of the housing bubble took the economy and the stock market along with it as it crashed to the earth. The housing market is finally starting to shift back to growth mode. Only this time, cheap prices and low interest rates are the allure.

Indeed, as prices cratered, institutional buyers started to step in to create an institutional single family home market. The big player is The Blackstone Group L.P. (NYSE:BX), but a few real estate investment trusts have also come along with a single family home focus. That’s helped to dry up the availability of cheap existing homes and push sales of newly built houses.

New homes

Lennar Corporation (NYSE:LEN)

Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI) build starter homes and step up homes. They have benefited from being at the lower end of the price spectrum. D.R. Horton, Inc. (NYSE:DHI)’s earnings went from around a quarter a share in 2011 to well over $2 last year. Lennar Corporation (NYSE:LEN)’s earnings improved from around $0.50 a share in 2010 and 2011 to over $3 in 2012. While those growth rates are clearly unsustainable, there is no reason right now to expect the growth story to stall.

For example, the number of homes that Lennar Corporation (NYSE:LEN) built and delivered was up 28% year over year in the first quarter. New orders were up an even more impressive 34%, and the company’s backlog is up 82% based on the number of homes, and 105% based on the dollar value of those homes. Horton’s numbers are similarly impressive.

Toll Brothers Inc (NYSE:TOL), which sells higher-end fare, has benefited lately from a shift toward more expensive homes. Keying in on the high end led to a sales decline of 75% between 2006 and 2011. But a corporate streamlining effort allowed Toll Brothers Inc (NYSE:TOL) to earn nearly a quarter a share in 2011 despite the massive top line fall. Earnings jumped to over $2.80 a share last year.

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