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Lennar Corporation (LEN), Hovnanian Enterprises, Inc. (HOV): Could Silicon Valley Cause a Housing Bubble?

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California is one of the hottest spots for real estate now, and prices are rising at some of the highest rates in the country. It’s all about psychology, said economist Robert Shiller in a recent CNBC interview. For all we know, it could be the Silicon Valley effect considering the number of tech companies located in the area. The point is there’s no real explanation for it and that’s what’s scary. Historically, the San Francisco real estate market has been in bubble territory, so who is to say that it’s not heading in that direction?

East Coast malaise

While West Coast housing prices are on fire, things aren’t as hot in the Eastern part of the United States. That’s evident in the performance of one New Jersey-based home builder Hovnanian Enterprises, Inc. (NYSE:HOV). The company recently returned to profitability after two years of financial losses, and expects to be profitable over the balance of this year. One of Hovnanian’s hang-ups has been its struggle with high debt costs.

An interesting thing about Hovnanian Enterprises, Inc. (NYSE:HOV) is its diverse customer base. Last year, the company had a combination of deliveries across first-time home buyers, move-up, and luxury home buyers, which is a good model to offset weakness in economic cycles. As of the second quarter, it has $1 billion in contract backlog, up 34% compared to a year ago.

And total revenue in the second quarter climbed 24% to $423 million versus last year. But back in 2005, before the housing crisis, Hovnanian Enterprises, Inc. (NYSE:HOV)’s gross margins were as high as 26%. Today’s gross margins are more in the range of 19% and the company has a new normal target range of about 20% to 21%.

New competitor

Hovnanian has some growing competition and it goes by the name The Ryland Group, Inc. (NYSE:RYL). In July, this Westlake, Calif.-based home builder and mortgage financier acquired Cornell homes, which gave it a foothold in the Philadelphia market and makes it a competitor in the surrounding Tri-state (New York, New Jersey, and Connecticut) area. After the recent acquisition of the Dallas-based business of LionsGate Homes. Ryland now has an entry point into the Dallas market, where it’s likely to benefit from the rising population in Texas.

While Hovnanian Enterprises, Inc. (NYSE:HOV) is diversified across home-buyer types, The Ryland Group, Inc. (NYSE:RYL) is diversified in its revenue streams. The company’s mortgage financing arm is profitable (it generated pretax earnings of $7.6 million in the second quarter compared to $2.9 million in the year-ago period), and the home developer has a rising loan pipeline. It just declared a dividend of $0.03, and has about $705 million in cash and marketable securities as of the second quarter.

Not so hot

Lennar Corporation (NYSE:LEN)Miami-based Lennar Corporation (NYSE:LEN) is a home builder that focuses on affordable, move-up, and retirement housing. Like Ryland, it’s also active in mortgage financing. But Florida is one of those markets that’s not yet out of the doldrums, with cities like Tampa and Miami trailing the West Coast in terms of home values.

Credit: Lennar Corporation (NYSE:LEN)

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