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Zacks Industry Outlook Highlights: Lennar, KB Home and D.R. Horton, Pulte Group and Toll Brothers

For Immediate Release

Chicago, IL – April 05, 2016 – Today, Zacks Equity Research discusses the Homebuilders, (Part 3), including Lennar Corporation (LEN), KB Home (KBH) and D.R. Horton, Inc. (DHI), Pulte Group, Inc. (PHM) and Toll Brothers, Inc. (TOL).

Industry: Homebuilders, Part 3

Link: http://www.zacks.com/commentary/76851/3-factors-that-can-hol...

Housing began the year on a shaky note as the U.S. stock market turned volatile and global worries continued to nag. Though the sector has since then picked up momentum on the back of strong jobs growth and a recovering economy, there are factors that can pull it back. Land and labor shortage has become a valid concern and so are tedious underwriting standards. And you can’t wish away competition that can at times get fierce and ignore cost inflation.

It would be prudent for investors to take a closer look at these dampeners before investing in this space. Below, we discuss the impact that these can have on the sector in the coming months and years.

Labor/Land Shortages

Several years of production deficits during the housing downturn resulted in a limited supply of both rental and new homes in the country. At present, a shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing.

The labor market has tightened with limited availability arresting the rapid growth in housing production. Also, capital constraints for land and land development have left entitled lands in short supply while increasing demand drove land prices higher. Moreover, the regulatory environment for mortgages remains challenging.

New home inventory for sale was 240,000 units at the end of February, a 5.6-month supply at the current sales pace, similar to January levels. Total housing inventory of existing homes was 1.1% lower at the end of February than a year ago, per data released by the National Association of Realtors in March.

Rising Labor, Land and Material Costs

Rising land and labor costs are threatening margins as they limit homebuilders’ pricing power. Labor shortages are resulting in higher wages while land prices are inflating due to limited availability. There could be more inflation, going ahead. This is eating into homebuilders’ margins considering that home price increases are moderating.

Rising construction, labor and material costs have hurt gross margins of the likes of Lennar Corporation (LEN), KB Home (KBH) and D.R. Horton, Inc. ( DHI) in the past few quarters.

Slowing Sales Trends in Texas/Houston

Texas’ economy is dependent on the oil complex and the volatility in the energy sector is hurting the region’s overall economic growth and, in turn, home sales. Sales trends have particularly slowed down in Houston, particularly at higher price points in the wake of the oil slide.

Pulte Group, Inc. (PHM) witnessed declining order trends in Texas in 2015 which accounts for around 15% of its homebuilding revenues. Pulte’s orders declined 9% in this market in 2015. Pulte management plans to invest cautiously in the region, going forward, while monitoring demand trends across the state.

Lennar is also seeing declining order trends in the Houston region, mainly across higher price points. Houston accounts for around 9% of Lennar’s homebuilding revenues. The company’s orders declined 12% in the Houston segment in fiscal 2015 and 3% in first quarter of 2016 due to lower demand.

Toll Brothers, Inc. (TOL) also witnessed a challenging first quarter in Houston, especially at higher price points.

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LENNAR CORP -A (LEN): Free Stock Analysis Report
 
KB HOME (KBH): Free Stock Analysis Report
 
D R HORTON INC (DHI): Free Stock Analysis Report
 
PULTE GROUP ONC (PHM): Free Stock Analysis Report
 
TOLL BROTHERS (TOL): Free Stock Analysis Report
 
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