Homebuilders' earnings boosted by falling mortgage rates

Falling mortgage rates are giving a lift to homebuilders just in time for the key spring selling season.

Lennar Corp. reported Wednesday a jump in home orders that beat the company's own projections. While KB Home had a slight drop in orders, they were also better than expected. Both companies expressed optimism that demand would strengthen in the coming months.

"The takeaway is things are better than feared," Bloomberg Intelligence analyst Drew Reading said in a phone interview. "As we see the year progressing, we’re going to start to see order growth return."

Lennar rose 3.6% to $51.48 at 9:37 a.m. New York time. KB Home, which reported earnings after the market closed yesterday, climbed 3.5% to $24.92.

Travis Dove/Bloomberg

Homebuilders have struggled since mortgage rates jumped last year, adding to an affordability crunch. Rates have since fallen, giving housing a small boost. The market is also benefiting from strong job growth and slowing price gains, which will open up opportunities for buyers previously waiting on the sidelines.

While the housing market has lost momentum after years of rapid growth, there are signs that it's stabilizing. Mortgage applications for home purchases, for example, jumped 4% last week from a year earlier, according to data released by the Mortgage Bankers Association. And sales of previously owned homes rebounded in February to the fastest pace in almost a year, snapping a three-month streak of declines, the National Association of Realtors said last week.

"We continue to see choppiness," Lennar Executive Chairman Stuart Miller said in the company's earnings statement. "However, during the quarter, mortgage interest rates subsided and ultimately pulled back and home prices moderated, providing a catalyst for the new home market to correct itself."

Lennar said orders jumped 24% from a year earlier to 10,463 homes in the quarter ended Feb. 28. After accounting for last year's purchase of another big builder, CalAtlantic Group Inc., Lennar's orders actually fell 4%. Even so, the growth rate exceeded the high end of Lennar’s guidance by 5 percentage points.

KB Home said orders slipped 4% but that planned openings of at least 35 new communities in its fiscal second quarter would enable it to capture an increase in demand.

The market is unlikely to return to the feverish pace of a year ago, in part because buyers have lost some confidence. Many of them now worry whether they're buying at the top of the market, according to Reading.

"We have a more normalized market," he said. "We'll see a return of growth but our expectations are tempered."