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The Power of the Wave Principle

Sign of Another U.S. Housing Market Bubble?

Housing-Market / US Housing May 13, 2013 - 10:52 AM GMT

By: Money_Morning

Housing-Market

All you have to do is look at a price chart of Lennar Corp (NYSE: LEN) to see the proof that the U.S. housing market is on the mend.

Since January 2012, shares of the Miami, Fl.-based new homebuilder have more than doubled.


In fact, since the industry nearly collapsed six years ago, new-home construction for builders like Lennar is now clearly on an upswing.

According to the March 2013 report from the U.S. Commerce Department, new home construction was on pace for more than one million units for the first time since the gaudy days of June 2008.

Much of this home-buying fervor can be attributed to a few important points:

1. A pent-up demand that has built up over the last six years,

2. Low inventories,

3. And an outrageously low interest rate environment thanks to the Federal Reserve.

The question now is whether or not the "Housing Bubble 2.0" still has legs, making Lennar Corp. a smart new buy with plenty of room to run.

Is Lennar Still a Buy?

Of course, evaluating Lennar on its own merits is a fine exercise in due-diligence.

The numbers alone tell us that the third largest U.S. homebuilder has righted its ship from its downward spiral back in 2007-08 and is now posting strong--and getting even stronger-- financials.

In the most recently reported quarter, Lennar's revenue increased 36% t0 $990 million, up from last year's quarter of $725 million. Also during the quarter the company was able to increase earnings to $57.5 million, or 26 cents per share, compared $15 million, or 8 cents from the previous year.

However, there is a caveat to the increased earnings. Lennar's results included the reversal of a $25 million deferred-tax asset, without which analysts believe the earnings per share amount would have still been a very impressive 15 cents for the quarter.

Another big positive for Lennar, is that it has 34% (4,055) more homes on back order than it had last year.

The average selling price of a home also jumped from $246,000 to $269,000 in the same period a year ago. This translates to gross margins increasing to 22.1% from 20.9%.

Lennar is also continuing to increase its market share by purchasing additional lots. These lots are getting harder and harder to come by, but the company did spend over $500 million on land purchases in the first quarter and is focusing on buying further lots on which to build future homes.

So Lennar's financials look extraordinary and the company seems to be doing all the appropriate things in preparation for the continued housing demand.

However, does the ball keep on rolling? Or is housing about due for another tumble since the foundation it is built upon is made of FED-created dollars?

That's why there's more to this story since so much of it rides on what is in store for the U.S. economy.

Ask yourself, who is buying these new homes - especially if the banks aren't lending? With household wages stagnant and unemployment at highs, - where are the new buyers coming from?

For that matter, where are the first-time buyers or the trade-up buyers?

Yes, prices are moving higher but a lot of the new homes are being bought by foreign buyers or those with enough cash to bypass the mortgage market.

This type of buyer falls under the classification of "fast money" and history suggests "fast money" will be gone as fast as it came.

But whether it's fast money, first time buyers or trade-up buyers who are driving Lennar's increasing top and bottom line, the company's continued success ultimately depends on continued increases in home prices, coupled with the FED's easy money policy, in order to maintain momentum.

As long as home prices continue to rise, the company will benefit from higher collateral and ever-increasing borrowing power. But if home prices stagnate, the company's increasing build out will be hampered.

Also, if interest rates rise the company will face significantly higher cost of capital, which will pinch margins. Worse yet, if home prices stagnate and interest rates rise, together, the company could be facing some serious headwinds.

Lennar's Shaky Foundation

With "Housing Bubble 2.0" assuredly on the horizon, I wouldn't want to be a holder when the inevitable day arrives.

But how far off into the horizon before that day comes is anybody's guess.

As mentioned above, Lennar's share price has more than doubled in the last 18 months. With freshly printed money being thrust into the economy there is still room for upside in Lennar's share price.

In fact, I could even envision a scenario where even after the Fed decides to begin raising interest rates home prices could still go higher as a new mini-wave of buyers chooses to lock-in the lower rate before even further increases make home purchasing undesirable.

All the above-listed scenarios and possible eventualities make it impossible for me to properly time and offer a semi-accurate recommendation on the direction of Lennar's share price.

Even brilliant economists and mathematicians are struggling to piece this together - and I don't want any part of it. So I'd be a SELLER of Lennar and look for opportunities in other sectors where I don't have to be directly subjugated to the whims of the Fed.

[Editor's Note: If you have a stock you would like to see us analyze in a future issue, leave us a note in the comments below and we'll add it to our list.]

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.

Source :http://moneymorning.com/2013/05/13/buy-sell-or-hold-is-l...

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