NVR profits from gain on sale margins, scarce home inventory

Homebuilder and mortgage bank NVR, Inc. reported profits rising on both a quarterly and annual basis, as scarce inventory of existing properties continued to push buyers to new constructions.  

The Reston, Virginia-based enterprise with operations across the Eastern U.S. reported net income of $433.2 million for the three months ending Sept. 30. Third-quarter numbers increased 7.2% from $404 million three months earlier and were also 5.3% higher from a profit of $411.4 million one year ago. 

Both units of the company landed in the black. The construction business, which operates under the Ryan Homes, NVHomes and Heartland Homes brands, recorded third-quarter income of $500.1 million. Profits jumped 15.2% from $434.7 million in Q2, but represented a 3.9% decline from $520.9 million over the same period in 2022.  

Meanwhile, NVR's mortgage banking operations, which provides loans to the homebuilders' clients, posted $38.5 million worth of profit in the recent quarter, up 5.7% from a $36.5 million gain at the end of June. Mortgage income came in 119% higher from $17.6 million a year ago, attributable mostly to more favorable gain-on-sale margins for loans sold on the secondary market. 

While purchase originations for existing homes continue to come in well below levels of a year ago — off 21% according to the Mortgage Bankers Association in its most recent survey — builders have managed to provide a few bright spots for a beleaguered industry. Investors have also taken note, propping up values of the industry's stocks in the first half of this year. 

With accelerating interest rates creating a lock-in effect for current homeowners and thereby constraining existing-home supply, prospective buyers have increasingly looked for options offered by homebuilders. Loan applications for new homes increased 14.9% on an annual basis in September, higher for the eighth straight month, according to the Mortgage Bankers Association's monthly survey of homebuilder lending subsidiaries.

"Demand for newly constructed homes remains relatively strong due to the persistent shortage of resale inventory, but increasing mortgage rates are impacting would-be buyers," said Joel Kan, MBA vice president and deputy chief economist, in a press release. 

Another sign of how interest rates are now impacting the market appeared in the National Association of Home Builder measure of industry sentiment, which dropped last month to early 2023 lows. 

Although higher compared to a year ago, new-home application volumes fell 12% from August, the MBA reported. The trade group also estimated new single-family home sales slowing to a seasonally adjusted rate of 634,000 units compared to 702,000 in August. But Federal Housing Administration-backed applications nabbed approximately 25% of total volume, the highest share since 2013, "an indication that demand from first-time homebuyers is still somewhat strong," Kan said. 

NVR reported $1.62 billion of mortgage originations in the third quarter, a 17.4% lift from $1.38 billion in the second, but lower by 2% from one year prior.

Last month, NVR's national building peers Lennar and KB Homes similarly reported third-quarter profits.The income homebuilders and their lending units are logging this year stands in contrast to the struggles of several nonbank mortgage originators. Companies reliant on loan production have faced ongoing financial pressure in 2023, although some saw profits return in the second quarter after instituting cost-cutting measures. The largest publicly traded nonbank lenders and servicers begin reporting third-quarter earnings this week.