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Housing Market Gains Cause Homebuilder Losses

Wednesday - 7/10/2013, 3:15am  ET

The housing market suffered during the recession, with the median size of a new single-family home dropping by an estimated 6%, according to NPR. Home values dropped significantly; today, the average home price is still 30% below the peak in most markets.

But in recent months, consumers have been bombarded with positive news about the economy. That might entice investors, who assume the housing market is the next big industry, since many homeowners have remained in houses they've outgrown since before the housing bust. But with news of rising home prices came the inevitable mortgage-rate increases, with interest rates on 30-year mortgages hitting 4.58% during the week ending June 28.

Will high rates scare off homebuyers?

The lift in rates caused investors to worry. With consumers still pinching pennies, many are worried that substantial mortgage-rate increases may scare off potential homebuyers, slowing the housing market further. The largest homebuilder in the U.S., D.R. Horton , has experienced a nearly 9% decrease in its stock value so far this year.

The company, expected to release its latest earnings report later this month, is considered a leader in the housing industry, with analysts watching its performance closely. In April, D.R. Horton reported that in the first half of 2013 were projected to be more profitable than all of 2012. For the first quarter of the year, D.R. Horton enjoyed $111 million in profit, compared to only $40.6 million for the same quarter in 2012. As home sales continue to climb throughout the summer, it might be logical to conclude D.R. Horton is only going to continue to thrive.

But the company's glowing projections for 2013 have been based partly on low interest rates. As interest rates climb into the 4% range, many lenders are speculating we may be kissing 3% rates goodbye. If interest rates continue to climb through the second half of 2013, homeowners may delay buying, unaware that rates could go even higher in 2014.

Still, D.R. Horton's land and lot position is the strongest in the company's history; having increased investments in land, lots, and construction, the firm is bracing itself for the onslaught of homebuyers. If this is any indication, the company could be set to have an even stronger second half of 2013, regardless of rate hikes.

Second place

Shares of the country's second-largest homebuilder, Lennar , rose recently following its recent earnings call. While numbers were down from the previous quarter, the company emphasized that home sales were up, with numbers hitting a high not seen since 2008.

The news that Lennar was up 53.3 % since the same quarter last year caused analysts to downgrade the stock. With $1.4 billion in revenue for its most-recent quarter, analysts now believe Lennar will post $1.67 in earnings per share this fiscal year, with analysts at Ativo Research downgrading the company to an "unfavorable" rating, with other analysts rating it as outperform and neutral.

Lennar was impacted not only by the housing market crash, but also by a 2011 stock fraud scam that caused the company's stock to drop 26%. The perpetrator of this scam, Barry Minkow, is now in jail. Nonetheless, Lennar has recovered just in time to enjoy the upswing in the housing market.

Ryland Group backed by Goldman Sachs

With expected 189% earnings growth in 2013 and a 59% increase in orders this past April, Ryland Group is definitely a stock to watch. The homebuilder recently received a boost from Goldman Sachs, which assumed coverage of the stock and gave the company a Buy rating, citing its heavy presence in multiple markets and its appeal to high-end buyers.

Ryland Group has a 50-day moving average of $45.35 per share, with revenue of $374.70 million in its most recent quarter. This was up 73.6% on a year-over-year basis. But like D.R. Horton, Ryland stock has been negatively impacted by rising mortgage rates. Shares dipped slightly as investors grew concerned about the company's future.

Homebuilders look promising

Both D.R. Horton and Ryland quickly rebounded, however, returning to earlier highs. Nonetheless, analysts will continue to watch all three stocks in the coming months, especially if mortgage rates increase.

As the economy continues to improve, however, consumer interest in homebuying is certain to increase, as well. D.R. Horton, Ryland, and Lennar are all very likely to benefit from increased interest in new home ownership in the next couple of years as current homeowners and renters start shopping for homes.

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