Toll Brothers Inc (TOL), PulteGroup, Inc. (PHM): Higher Rates Can’t Hinder Housing’s Recovery

If the recent rise in home sales is yet another indication of the real estate market returning to normal, now may be the time to consider investing in homebuilders.

In July, home sales rose to their highest level since November 2009, when a federal tax credit spurred a surge of homebuying. This July’s seasonally adjusted sales rate was up 17% from July 2012, and the 5.39 million homes sold beat economists’ estimates of 5.15 million. In a sign that demand for homes is picking up, median home prices have risen to $213,500, up 14% from July 2012. That’s the biggest year-over-year gain since 2005.

Will rising rates scare buyers away?
Market experts are predicting that sales could slow due to rising rates on mortgages, but prices should remain high if the inventory of homes remains tight . USA TODAY reports that interest rates have risen a full percentage point since May, meaning that a median-price homebuyer with a 20% down payment can expect to pay about $100 more a month.

The participants in the housing market are also changing. According to ABC News, investors now make up 16% of home purchasers, down from February’s 22%. The data also noted that first-time homebuyers haven’t joined in, making up only 29% of July sales. A healthy real estate market usually has about a 40% participation rate from first-time buyers .

While stock prices for homebuilders have fallen in recent months due to rising mortgage rates, the sector may provide buying opportunities for patient investors who believe that housing demand should return to normal levels in the next few quarters. After all, even those higher rates remain historically low. Let’s examine how some of the top names in U.S. homebuilding are benefiting from stronger housing demand despite rising mortgage rates.

Lennar reports demand in its markets outpacing supply
Lennar‘s second-quarter net earnings for the period ended May 31 were $137.4 million, or $0.61 per diluted share. Earnings were hurt by the partial reversal of a deferred tax asset worth $41.3 million, or $0.18 per diluted share. Note that a deferred tax asset is used to decrease the company’s tax expense in future periods. Earnings for the second quarter dropped about 70% from $452.7 million, or $2.06 per diluted shares in the previous year.

CEO Stuart Miller remains confident in a solid housing recovery. Demand in all of Lennar’s markets is outpacing supply as it is being squeezed by a limited availability of land and fewer competitors. Despite the rate increases, Miller believes homes are still affordable and has noted little impact on unit sales or pricing.