Lennar Corporation, the nation’s second largest homebuilder, reported its second quarter earnings on Tuesday, resulting in good news for the housing market and its road to recovery.
The homebuilder reported a net earnings of $218.5 million in the second quarter of 2016, a 19 percent jump compared to the same quarter of 2015. Lennar’s delivery of homes was up 12 percent from the previous quarter, with a total of 6,724 homes in Q2.
“We are very pleased with our second quarter results as we achieved pre-tax earnings of $327.8 million, our second highest second quarter pre-tax earnings since 2006,” said Stuart Miller, chief executive officer of Lennar Corporations.
The numbers show positive signs for continued growth in the housing market. The company reported a 10 percent increase in new orders to 7,962 homes during the second quarter, with a dollar value of $2.9 billion. The company’s backlog also reached a milestone, increasing 12 percent from the previous quarter to 9,014 homes, and a dollar value of $3.3 billion.
The Miami-based company, which has operated with relatively large profit margins by loading up on land at distressed prices after the real estate crash, also increased operating earnings in the first quarter of 2016 to $220.6 million from the previous year.
“As the recovery has continued to mature, we have remained focused on our strategy of moderating our growth rate in community count and home sales, as well as on our soft-pivot land strategy, targeting land acquisitions with a shorter average life,” said Miller.
As of late, the housing market has been fueled by low mortgage rates, modest wage growth, positive consumer confidence and low unemployment levels. The problem for potential homebuyers, however, has been tighter levels of inventory — or lack thereof.
Miller acknowledged in a conference call on Tuesday that high demand for homes coupled with low supply is plaguing homebuyers.
“As we’ve noted consistently over the past years, the overall housing market has been generally defined by a rather large production deficit that has continued to grow over the past year,” said Miller.
“While questions have been raised as to the real normalized levels of production that are required to serve the U.S. current population, we believe production levels in the one million to 1.2 million starts per year range are still too low for the needs of American household growth that is now normalizing.”
With mortgage rates continuing to fall, the spring selling season has seen an explosion in homeownership. The rate of mortgage applications is nearly 35 percent higher than one year ago, as home prices continue to rise at an annual rate of five percent.
“We expect that these conditions will continue to result in a slow and steady positive homebuilding market and will enable slow, steady though sometimes erratic growth throughout the industry,” Miller added.
Looming Brexit Could Have Positive Effects On U.S. Housing Market
On June 23, UK citizens will vote on whether they should remain a member of the European Union (EU) or end its economic and political partnership with the 28 member nation. Known as Brexit, the vote is expected to have significant impact on the global economy, as well as possibly shifting the global housing markets.
“The U.S. will be considered competition or a safe haven,” said Lawrence Yun, chief economist at the National Association of Realtors (NAR).
“That could lead to interest rates falling. The mortgage rate here in the U.S. could begin to decline because of lower GDP [gross domestic product] expansion. That always benefits the housing market.”
According to the latest Freddie Mac report, U.S. mortgage rates fell for the second consecutive week, dropping to 3.54 percent, down from 3.56 percent the previous week. This marks a three-year low for mortgage rates, which continue to decline as a potential Brexit looms.
“Wednesday’s Fed decision to once again stand pat on rates, as well as growing anticipation of the U.K.’s upcoming European Union referendum will make it difficult for Treasury yields–and more importantly–mortgage rates to substantially rise in the upcoming weeks,” said Sean Becketti, chief economist for Freddie Mac.
“The 10-year Treasury yield continued its freefall this week as global risks and expectations for the Fed’s June meeting drove investors to the safety of government bonds.”
The controversial vote is expected to take a big toll on Britain. As the world’s fifth biggest economy, the United Kingdom set a record of $93.11 billion for real estate investment volumes last year, with London accounting for nearly half the total. If Briton votes to leave the EU, many believe real estate prices in the country will drop significantly, with estimates showing prices could fall up to 18 percent, according to U.K. Treasury chief George Osborne.