The housing market is in an interesting place right now.
After ostensibly triggering the worst financial crisis in history, it has healed to become one of the fastest growing components of the US economy.
But housing supply has not kept up with demand, especially in the end of the market that’s within the affordable reach of many first-time homebuyers. This has triggered a surge in home prices that has worsened affordability.
This is not great news for many homebuyers, but it is for builders like PulteGroup, America’s fourth-largest homebuilder by market cap.
During the company’s first-quarter earnings call on Thursday, CEO Richard Dugas emphasised that the company’s pre-tax income improved by $1.1 billion, on only a 12% increase in closings.
He went on to explain how the company achieved this and what it could mean for shareholders. And his comments perfectly captured the biggest themes in the housing market right now.
We have communicated that 2016 would be an inflection year with increasing volume being delivered through a much more efficient homebuilding operation. The combination of rising unit volumes, increasing average sales prices and a more efficient homebuilding machine can translate into significant earnings growth. Add in the benefit of consistently returning funds to shareholders and you have a business that can return high returns for its investors over time.
As Bob will detail in a moment the business is beginning to turn in that direction with sign-ups increasing by 10% to almost 5,700 homes, closing volumes gaining 17% to almost 4,000 closings, average selling prices expanding by 9% to $353,000 and our backlog value climbing 31% to $3.4 billion. These metrics obviously resulted in strong the quarterly performance in the first quarter but equally important they position the company to deliver continued growth over the balance of 2016.
The big annotation is that PulteGroup is counting on rising home prices and more efficient homebuilding to drive its earnings growth higher. And its results show that it is already seeing some of that, with a 52% jump in profits year-on-year that topped estimates.
When Lennar reported its results late-March, we noted that CEO Stuart Miller said the company believes that the trifecta of tight inventory, low interest rates and low unemployment would continue. This would be the perfect scenario to keep supply low and demand high, prices high, and homebuilders very profitable.
National Association of Realtors chief economist Robert Dietz shared his frustration about low inventories with Business Insider. Specifically, Dietz spoke about how the realtor community thinks the solution to the inventory shortage is simply lies with homebuilders constructing more. Realtors, of course, stand to gain when there are lots of homes they can help to sell.
But a number of constraints, from regulations to lot costs and financing, are part of what’s constraining homebuilding.
And so PulteGroup would do well to, like it says, be a more efficient homebuilding machine.