The nation’s home builders are leaping back to life. Another day, another earnings report that beats the street’s expectations.
This time it was Miami-based Lennar , boasting a 44 percent jump in new orders and net earningsfour times what they were just a year ago.
“The housing market has stabilized, and the recovery is well underway,” wrote Lennar’s CEO Stuart Miller in the earnings release.
So why are analysts suddenly heading for the coat check to leave this party?
“We’re pricing in recovery in earnings that we’re likely not going to achieve until 2016,” said Buck Horne, an analyst at Raymond James who currently has a neutral on Lennar. “We are in uncharted territory on the valuations. We’re still finding a lot of difficulty in mortgage availability for first-time home buyers, and we are not seeing, despite these calculations of rent-to-own affordability, we’re not seeing an exodus of renters out of apartment REITs yet.” (Read More:Will Fed's Mortgage Buying Juice the Housing Recovery?)
Lennar’s stock is up roughly 175 percent from a year ago, and it’s not even the top performing home builder. Shares of Pulte Group (PHM) are up over 300 percent from a year ago. The stocks beganrising in advance of the gains in housing starts, as more and more analysts began calling a bottom to the housing market. But have they overheated already?
“No one is discounting the amount of time it will take to hit mid-cycle earnings. They’re trading at a 60 percent premium to mid-cycle, and everyone’s chasing these things right now,” says Will Randow, a Citi group analyst who has an underperform on Lennar.
Others, however disagree. “There should be little doubt this builder is driving its homebuilding operations faster than most of its peers,” writes ISI’s Stephen East in a client note. “Lennar sports a premium valuation, these results justify that position, as issues that matter most to us, including order rates, gross margin and SG&A, are all near the top of the group.” (Read More:Home Builders Bullish for Fifth Straight Month)
The builders are racing to meet new demand, but they are still building at less than half the historical averages. Single family housing starts were at a seasonally adjusted annual rate of 535 thousand units in August. Yes, that’s up from 418,000 in 2011, but nowhere near the 1.3 million average rate around the beginning of the last decade.
Another issue is land. Some of the builders, like Toll Bros. (TOL) are well positioned to take advantage of a swift recovery, but others are not. Land prices are rising, especially for finished lots in prime locations. The cost of materials is also high, and in some areas labor is tight, pushing costs up there as well.
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