Homebuilders Boom as Lending Masks Uneven Recovery

Construction is taking a back seat to lending for some U.S. homebuilders, turning the uneven housing recovery into an earnings boom.

At PulteGroup Inc., the second-largest builder by market value, mortgage revenue jumped 70% in the third quarter, almost six times the revenue gain from home sales. At Lennar Corp., the No. 1 builder, mortgage-unit revenue surged 60%, double the increase in sales revenue. Aided by lucrative lending units, both companies posted the biggest overall profits since 2006.

“Homebuilders are getting extra help right now from mortgages,” said Jack Micenko, a homebuilding analyst at Susquehanna International Group in New York. “They’re over-earning in those areas because lending margins are so wide, but they can’t depend on that going forward.”

A Federal Reserve program aimed at lowering borrowing costs by purchasing home-loan bonds has widened margins across the lending industry, with JPMorgan Chase & Co. CEO Jamie Dimon in October describing his bank’s mortgage production margins as “very high.” The average gain-on-sale, which measures the difference between the rate homeowners pay and the rate paid by investors, has doubled this year on increased demand for the securities, Micenko said.

“The Fed might have preferred that its interventions created less of a windfall for homebuilders and more for their buyers in the form of lower rates, but that’s something it can’t control,” said Stephen Stanley, chief economist of Pierpont Securities in Stamford, Connecticut.

Investors are already beginning to lose confidence after a rally boosted the 11-member S&P Supercomposite Homebuilding index 83% this year through October as housing rebounded from a six-year low. The gauge has tumbled 7.2% in the past month after a Commerce Department report showed fewer new homes were sold in October than forecast and purchases were revised downward for the prior month.

The top 11 U.S. builders have a price-to-earnings ratio of 39. The measure shows how much investors are willing to pay per dollar of earnings. For the Standard & Poor’s 500 Index, the ratio is 14.5

Goldman Sachs Group Inc. said last month that homebuilder stocks already price in the recovery and investors should consider alternatives such as indexes linked to subprime bonds.

Despite the industry’s lackluster sales in recent months, overall profits probably will at least double in the current quarter at Lennar and PulteGroup, according to the median estimate of homebuilding analysts including Micenko and Stanley. At No. 3 DR Horton Inc., profits probably will gain about 75%, and No. 5 NVR Inc. will probably see a gain of about 70%, the analysts projected.

None of the top 10 public homebuilders break out lending margins in their earnings statements, and only a handful provides mortgage volumes. The ones detailing lending and revenue illustrate how wide the difference can be.

At Bloomfield Hills, Mich,-based PulteGroup, the dollar-value of originations grew 25% to $685 million in the third quarter, while mortgage-unit revenue jumped 70%. At NVR, based in Reston, Va., loan closings rose 22% to $594.9 million, while mortgage-banking revenue grew twice as fast.