Lennar Corporation (NYSE: LEN) Tuesday reported better than expected
fourth-quarter earnings, reflecting the company's strong liquidity
position and continuing growth prospects for the U.S. housing sector,
according to Fitch Ratings. The company is the third largest homebuilder
in the U.S. and has an issuer default rating (IDR) of 'BB+'. Rating
Outlooks for both Lennar and the U.S. housing and homebuilding sectors
Lennar's fourth-quarter revenue jumped 42% to $1.35 billion and gross margins expanded to 23.5% from 19.4%. The company's CEO noted that low mortgage rates, affordable home prices, reduced foreclosures, and an extremely favorable "rent versus own" comparison continued to drive the U.S. housing recovery, as reflected in Lennar's earnings. Fitch sees attractive home prices, persistently low mortgage rates, and a rise in nominal incomes resulting in superior affordability and valuations. Mortgage rates remain near their all-time recorded lows, and housing appears more undervalued versus incomes than at any time in the past 35 years. Rising home prices and the potential for interest rates to increase could create a sense of urgency and encourage fence-sitters to pull the trigger and purchase a home.
Lennar maintains solid liquidity, with unrestricted homebuilding cash of $1.15 billion as of Nov. 30, 2012. The company also has an unsecured revolving credit facility of $500 million that expires in May 2015. Its debt maturities are well-laddered, with roughly 20% of its total homebuilding debt maturing through 2015.
We raised our housing forecast for 2012 a number of times during the course of the year. Nevertheless, the current forecast still reflects a below-trend line cyclical rise off a very low bottom. In a slowly growing economy with somewhat diminished distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, 2013 single-family housing starts should improve about 18%, while new home sales increase approximately 22% and existing home sales grow 7%. However, as we have noted in the past, recovery will likely occur in fits and starts.
We also adjusted expectations for home prices due to overt price increases and mix issues. Average single-family new home prices (as measured by the Census Bureau) improved an estimated 3.5% in 2012 and should rise about 3.8% in 2013.
Although home prices have stabilized and started to improve, we believe that home price appreciation will tend to be relatively narrowly focused and very sensitive to local economic, employment, and supply issues. Demand will likely continue to be affected by widespread negative equity, challenging mortgage qualification standards, and excess supply due to foreclosures. Foreclosure activity could also accelerate somewhat this year as a result of agreements between banks and the federal government.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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