Residential Construction Update - Is the Market Rolling Over?
KB Home & Lennar Report 2Q2024 Results
KB Home (KBH) reported earnings for the quarter ending May 31, 2024 this week. Year over year, net orders were up 2%, net order value was up 7% and average selling price was up 1% however total housing revenues declined 3%, deliveries declined 4% and backlog homes declined 14%.
Lennar (LEN) also reported for the 2Q2024 - revenues increased 9% primarily due to a 15% increase in the number of home deliveries offset by a 5% decline in average selling price. Stuart Miller, CEO noted that: “affordability continued to be tested by interest rate movements and simultaneously challenged consumer sentiment, purchasers remained responsive to increased sales incentives, resulting in a 19% increase in our new orders and a 15% increase in our deliveries year over year.” However, new order prices were down 5.5% while backlog average selling price was down 2.3%
So far YTD 2024 LEN stock price is up 3.7%, KBH is up 13.7% and other residential construction players such as insulation supplier/installer TopBuild (BLD) are up 3.7% this year. Lumber prices, however, are down over 20.8% YTD.
Do Home Prices Help Predict Single Family Housing Starts?
And which ‘House Price’ Index can we trust anyways?
Going down a rabbit hole trying to find some reliable macro indicators is usually a bad idea. It turns out, that I learned something about the differences between the variety of home price indexes - and these differences appear to be statistically significant (you can read more here).
While the median home price index of the National Association of Relators (NAR) is fast to report, usually within 3 weeks of month end, the FHFA House Price Index (FHFA) and the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index (CoreLogic) usually post 7 weeks following the month end. In fact, both FHFA and CoreLogic are reporting April 2024 numbers this Tuesday June 25th.
Digging through these indexes using data starting over 30 years ago in order to test for correlation between these home price indexes and single family housing starts yields some interesting results.
The home price index that best fits a simple four month lagged prediction model of single family housing starts is the FHFA. So pay attention to the trajectory of the FHFA this week. Why? The FHFA hasn’t printed a negative year over year price decline since the end of the global financial crisis in February 2012. The FHFA reported a year over year decline for the first time in the summer of 2007 and continued to show monthly price declines until March of 2012 when it reported a year over year price increase. FHFA slowed as the Fed began raising rates in 2022 and hit a low of 3% in May 2023 before rebounding over the past year. The most recent FHFA reading for March 2024 showed 6.75% year over year home price growth.
