Morning Report: Homebuilder margins explode

Vital Statistics:

S&P futures391314.4
Oil (WTI)60.662.12
10 year government bond yield 1.67%
30 year fixed rate mortgage 3.28%

Stocks are higher this morning as markets rallied overnight. Bonds and MBS are down.

Yesterday’s 7-year auction wasn’t a disaster, but it wasn’t great either, and that pushed 10 year yields up about 6 basis points or so.

Personal Incomes fell 7.1% in February, which was driven by stimulus check comparisons. Personal Consumption expenditures fell by a percent as well. The PCE Price Index rose 1.6% YOY and the core PCE Index rose 1.4% YOY. While we did see an uptick in inflation in the CPI numbers, the Fed prefers PCE, and so far it seems to be where it has been for the past year.

The homebuying market is competitive enough as it is, with homes sitting on the market for an average of only 20 days. Potential homebuyers have their hands full competing with each other, and now we have a new entrant. Homebuilder Lennar has partnered with Centerbridge Partners spend $4 billion on a build-to-rent strategy. Not sure if this also includes existing homes as well, but this have the effect of taking supply off the market, whichever way you look at it. Other SFR rental REITs like American Homes 4 Rent and Invitation Homes are also building up their inventory.

Separately, Lennar announced first quarter earnings of $3.20 per share, compared to $1.27 a year go. Not only were revenues up big, but margins exploded, with gross margins rising to 25% from 20.5% a year ago. Note Lennar is on a November fiscal, so last year’s quarter was entirely pre-COVID. New orders and backlog were up 31% and 32% respectively.

Homebuilder KB Home also announced earnings, however they saw more muted results, with revenues up only 6%. That said, KB’s earnings rose 62% driven by higher margins as well. Orders are up 23%.

The big jump in margins is surprising given that lumber prices have tripled over the past year and skilled labor is supposedly in short supply and expensive. We aren’t seeing the massive jumps in average selling prices though – KB’s ASP was up only 2%, and Lennar’s ASPs actually fell. IMO this is a product mix-driven change as starter homes are in especially short supply.

The rapid increase in home prices has people talking about a potential housing bubble, or at least the possibility of a correction. I think the talk of a bubble can be dismissed out of hand, since housing bubbles generally come around every third or fourth generation and the pieces simply aren’t in place for one.

Can we see a correction? That is certainly a possibility, however IMO the supply and demand dynamics simply aren’t there. Lennar’s new venture with Centerbridge is illustrative of why. Professionally managed money is flooding the sector, drawn to the high potential returns. Think about it: Resi real estate cap rates are in this high single digits, plus the entire sector is appreciating at close to double digits. Where else are you going to get that sort of return? Stonks? Even corporate high-yield debt is only mid single digits. Homes may be overpriced on a multiple-to-income basis, but so what? That won’t change until (a) rates rise and (b) supply increases. It will take years of housing starts above 2 million for that to happen.

There is one potential issue with investment properties and that is the government. Rumor has it that the eviction moratorium will be extended another year. That said, this issue will fade in importance as the economy recovers and leases expire. Note that with Fan and Fred’s changes on investment property loans that cap rates will probably fall a touch, although there will be a bid for these loans, especially on the mREIT side. Investor demand will still be high. Again, compare the potential returns on SFR rentals with the investment universe. The money has to go somewhere.Posted

55 Responses

  1. There’s always a video:


  2. Can someone please explain to me how in the world it is that the CDC has the power to do this? Surely this cannot possibly be Constitutional.


  3. This is pretty good:


  4. Lol!


    • Priorities. Presumably, most native children are already aware that they live in a terrible, oppressive country that should be destroyed and that the worst and really only bad thing in the world is white people, also possibly cis-gendered men.

      These poor migrants have no idea how they were immediately oppressed by stepping into the USA, and how terrible it is to be a straight biological male or caucasian. Inoculating them with anti-racism comes before actual COVID vaccinations, obviously, but also before native citizens who either already are white-supremacists devils or have been adequately instructed on the subject already.


      • What I don’t fundamentally understand is why voters in California put up with that? Serious question, do they believe that COVID is a death sentence? Are they that afraid?


        • Social pressure. Modern leftism is a religion, and it is analogous to wearing a Slayer T-shirt during the Salem Witch Hunt.


        • Critical race theory is basically modern advocacy for the admission of “spectral” evidence in the adjudication of moral virtue. Surprised they haven’t started a kind of “if they float, they are racist, but if they sink they are innocent” test.


        • The ones that care and can afford it send their kids to private school. Easiest solution is to opt out. There’s also the outflow of population from California.


        • Well, clearly some voters aren’t putting up with it. There are folks leaving California, there’s a recall on Newsome, and IMO California was the proving ground for the kind of voter fraud that we’re assured never happens when Democrats win things.

          But for the general public I think there are those who are terrified of COVID, more who are terrified of social ostracizing because they aren’t sufficiently woke on COVID (and most other things), those who just don’t want the hassle or don’t want to risk their job by challenging anything in public. And lots of low information folks who kind of do the minimum to go along to keep on with their lives.

          Then you’ve got the people opposed, who are either fighting it as best they can (in a very David vs. Monster Giant Goliath from Hell situation) or voting with their feet. Which will likely turn California even bluer over time.

          And it’s not clear to me how oppressive things are in rural California. San Francisco and L.A. and so on, sure, but in some rural town 100 miles from a big city?


        • I’m guessing state mandates are just ignored in rural parts of California. But the schools are still closed in Fresno and Modesto and it makes we wonder why the citizen’s tolerate it.


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