Although the housing market has recovered significantly from 2009, it is still below the earlier healthy levels primarily due to strict mortgage underwriting and poor consumer confidence.
An overview of the housing market
Moving ahead into 2015, the general growth prospects of the U.S. market and particularly the housing segment remains positive. However, there’s rising concern for the possible expansion of interest/mortgage rates during 2015 with the Fed having stopped its bond-purchase program.
The improvement in the overall housing market conditions in the U.S. is believed to be partially offset by the forecast increase in interest/mortgage rates for 2015.
The key steps taken by the federal government linked to borrowing limits, taxation and economic stimulus could badly affect consumer confidence and bring down the spending levels which could further poorly affect the overall housing market conditions and the economy in general. Hence, elevated interest/mortgage interest rates could have a restrained effect on pricing and overall housing demand.
Moreover, there’s slow economic recovery and despite reasonable development in economic growth, the consumer spending trend is only modest, mainly due to an expansion in job opportunities for this year is still to fetch considerably improved wages to the employees. In addition, the lending situation is still excessively limited for first-time homebuyers. Strict underwriting standards and elevated down payments are limiting the access to the mortgage markets. Therefore, new home sales are estimated to lag behind the historical levels until there’s a solid economic recovery.
Consumers' anxiety about increase in the mortgage/lending rates by the government coupled with a slower economic recovery and gloomy job environment is believed to further slow down consumer spending and keep investors’ confidence on the lower side.
A lack of accessible capital for minor homebuilders, limited labors in some markets and poor availability of genuine home sites are lowering the supply of both new and existing homes. The homes supply is inadequate in meeting the current demand apart from the prospective expanding demand. If this supply situation does not get better, home prices might increase further and thus making several homebuyers to postpone their buying decisions.
The accelerated improvements in the overall housing market could result in the expanding labor and building materials costs which might lower the homebuilder margins in coming quarters. Actually, several homebuilders are expecting elevated land and construction costs for next year.
The poor availability of capital for smaller homebuilders, lack of labors in the market and smaller number of available home sites is forecast to limit the customer demand for newer homes. And, going forward the expected improvement in the overall housing market scenario might prove to be a loss for the builders with the increasing building materials and labor costs that would eat into the homebuilder margins.
Lennar's fundamentals and prospects
However, Lennar Corporation beat the Zacks Consensus Estimate for both revenues and earnings during the fourth quarter, primarily supported by solid pricing and robust margins.
TheStreet Ratings team rates Lennar Corp. (LEN, Financial) as a Buy with a ratings score of B+, driven by several strengths which are believed to outweigh any of the company weaknesses. The company’s strengths are viewed in several areas, like its impressive revenue growth, robust stock price performance, solid net income growth, outstanding operating cash flows and notable earnings per share growth. The only weakness lies in the company’s overall higher debt management risk being evaluated by most measures.
Overall, investors are advised to invest into Lennar Corp. looking at the robust company valuations with the trailing P/E and forward P/E ratios of 17.55 and 14.10 respectively and better than the industry’s average P/E of 19.53. The PEG ratio of 1.05 signifies healthy company growth and similar to the average industrial growth. The profit margin of 8.21 is satisfactory. However, the company needs to optimize its hugely debt-laden balance sheet with total debt of $6.02 billion compared to total cash of $1.19 billion only to finance its future growth investments.
