Big homebuilders' profits soar

Lucrative mortgage sales, far more than building, fueling boom

Bloomberg NewsDecember 10, 2012 

CONSTRUCTION SPENDING

Workers lay bricks on a new home under construction in Park Ridge, Illinois, U.S., on Wednesday, Nov. 28, 2012. The U.S. Census Bureau is scheduled to release construction spending data on Dec. 3.

TIM BOYLE — Bloomberg

— Construction is taking a back seat to lending for some U.S. homebuilders, turning the uneven housing recovery into an earnings boom.

At PulteGroup Inc., the second-largest U.S. builder by market value, mortgage revenue jumped 70 percent in the third quarter, almost six times the revenue gain from home sales. At Lennar Corp., the No. 1 builder, mortgage-unit revenue surged 60 percent – double the increase in sales revenue. Aided by lucrative lending units, both companies posted the biggest overall profits since 2006.

“Homebuilders are getting extra help right now from mortgages,” said Jack Micenko, a homebuilding analyst at Susquehanna International Group in New York. “They’re over-earning in those areas because lending margins are so wide, but they can’t depend on that going forward.”

A Federal Reserve program aimed at lowering borrowing costs by purchasing home-loan bonds has widened margins across the lending industry, with JPMorgan Chase Chief Executive Officer Jamie Dimon in October describing his bank’s mortgage production margins as “very high.” The average gain-on-sale – which measures the difference between the rate homeowners pay and the rate paid by investors – has doubled this year on increased demand for the securities, Micenko said.

“The Fed might have preferred that its interventions created less of a windfall for homebuilders and more for their buyers in the form of lower rates, but that’s something it can’t control,” said Stephen Stanley, chief economist of Pierpont Securities in Stamford, Conn.

Despite the housing industry’s lackluster sales in recent months, overall profits probably will at least double in the current quarter at Lennar and PulteGroup, according to the median estimate of homebuilding analysts including Micenko and Stanley.

At No. 3 DR Horton Inc., profits probably will rise about 75 percent, and No. 5 NVR Inc. will probably see a gain of about 70 percent, the analysts projected.

None of the top 10 publicly owned homebuilders break out lending margins in their earnings statements, and only a handful provides mortgage volumes. The ones detailing lending and revenue illustrate how wide the difference can be.

At Bloomfield Hills, Mich.-based PulteGroup, the dollar value of housing originations grew 25 percent, to $685 million, in the third quarter; mortgage-unit revenue jumped 70 percent.

At NVR, based in Reston, Va., loan closings rose 22 percent to $594.9 million, while the firm’s mortgage-banking revenue grew twice as fast.

“The homebuilders are little players in the lending world, but they’re benefitting from the wide margins of the big players,” said Michael Widner, an analyst at Stifel Nicolaus & Co. in Baltimore.

“If you’re Lennar, why charge much less (for mortgages) than the banks that are your customers’ alternatives?”

Fort Worth, Texas-based DR Horton reported last month that fiscal fourth-quarter operating income at its financial services unit more than doubled.

Miami-based Lennar cited lending margins as a driver of profit in its third-quarter earnings statement, without breaking out origination volume.

Lennar spokesman Marshall Ames declined to comment. PulteGroup’s spokesman James Zeumer also declined to comment, as did NVR’s Dan Malzahn.

Fred Cooper of Toll Brothers, the No. 4 builder by market value, said its mortgage revenue is “immaterial” to the company’s profits.

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