Good News on Housing: We Needed It


Good news on housing: Homebuilder Lennar reported excellent numbers this morning. Housing analysts and economists are breathing a sigh of relief, because KB Home had terrible numbers Friday. It now looks like KBH was an outlier.

Lennar reported its sharpest rise in orders in three quarters. First-quarter earnings per share was $0.08, compared to analysts’ $0.04 expectation.

Here's why the Street is breathing a sigh of relief:

a) Orders jumped 33 percent to more than 3,000 homes in the December to February period;

b) the cancellation rate was only 18 percent, well below recent average numbers for the industry which have been in the 20 percent to 30 percent range;

c) average sales price was UP 1 percent sequentially; and

d) incentives were FLAT (12.2 percent of sales) — it is not spending more to get more buyers to sign.

So look what we have: Higher prices, lower sales incentives, tighter cost controls. It all translates into higher gross margins, which were UP (to 20.9 percent).

CEO Stuart Miller said, "New sales orders in the first quarter were encouraging."

You're not kidding.

I am greatly relieved. Housing data have been weaker than expected in the past week, though they continue to show slow improvement. If Lennar came in weak, the entire housing recovery- — modest as it has been — would be called into question.


1) Portugal: Ireland-in-the-making. Portugal matters. Portugal is the back door to Spain: Spanish banks are the biggest lenders to Portuguese businesses, outside of Portuguese banks.

I noted a couple months ago that if you wanted to see what the face of the Coming European Austerity looked like, you should look at Ireland: 15 percent unemployment rate, half of male youth unemployed, bars closing, rising suicide rate.

Like Ireland, Portugal accepted a bailout from the European Union/International Monetary Fund and was forced into similar austerity cuts. Reuters noted today that the local paper in Coimbra, a town about 80 miles north of Lisbon, had run an article about the rise in suicide rates, speculating that it might be linked to the deepening economic downturn.

Ya think? The same paper noted the curious rise of gold and silver shops in the town, which have sprung from nowhere recently. The shops specialize in exchanging the locals' gold and silver...for cash. Think there might be a link between the sudden rise of those shops and the economic crisis? Ya think?

Portugal, like the rest of Europe (and the U.S.), has to learn to live within its means. It also has to figure out how to be competitive, which — in the absence of currency devaluation — means wage cuts. It also has to figure out how to grow. Portugal has recently implemented labor reforms that will make it easier to fire workers, something Italy's Mario Monti is struggling to accomplish right now.

Even with reforms, however, Portugal faces several years of tough economic times. Will it need a second bailout? Will they be able to return to the bond market in late 2013 (good luck with that — 10-year rates are over 12 percent)? And, most importantly, will they avoid forcing a Greek-style restructuring of their bonds?

The good news: There's no rioting in Lisbon. A strike called for last week seems to have had little impact. For now, the Portuguese are toughing it out.

Regardless: Portugal anxiety is one of the main reasons Spanish 10-year yields have been rising. And when Germany's Angela Merkel is fighting tooth and nail to expand Europe's bailout funds, it suggests to investors that there is no backstop to Portugal, or to Spain.

2) Walgreen increases 2.4 percent after the drugstore beat second-quarter earnings per share estimates even though it filled fewer prescriptions due to the loss of a contract with Express Scripts. Parting from the Express Scripts network cut $0.07 per share from Walgreen's second-quarter earnings, while a mild cold and flu season hurt earnings by another $0.03 per share. General merchandise same-store sales rose 2.1 percent, buoying the company from a decline of 3.9 percent in prescription same-store sales. Overall same-store sales dropped 1.5 percent.

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