With Increase in Home Deliveries, Lennar Corp. Exceeds First-Quarter Expectations

Lennar Corp. posted profit and sales numbers that greatly exceeded expectations for the first fiscal quarter, and it appears the homebuilder is currently poised to continue to outperform expectations in the second quarter after trending upward by almost 1 percent according to recent premarket trade analyses. Of course, it is worth noting that although the homebuilder’s quarterly net income fell compared to one year ago, it still exceeded the earning-per-share consensus and experienced an increase in revenue growth from $1.99 billion to $2.34 billion.

According to our own recent analyses, a renewed economy featuring the promise of sustained growth is part of the reason homebuilders like Lennar Corp. have been able to exceed performance expectations during the early part of 2017. Even though the supply of real estate is limited nationwide — in many cases requiring an increased reliance on off-market expertise — Lennar Corp. was still able to exceed expectations in homebuilding revenue and home deliveries.

In the case of homebuilding revenue, Lennar Corp. succeeded in generating $2.02 billion despite expectations indicating just $1.95 billion. As for the total number of home deliveries, Lennar Corp. again outperformed expectations, increasing home deliveries from 4,806 up to 5,433. In addition to the impact created by early indications pointing to a renewal in economic strength as well as sustained economic growth, the fact that Lennar Corp.’s home-buying incentives increased by $1,100 (up to $22,700 from last year’s average of $21,600) might have also factored into the homebuilder’s ability to outperform its first-quarter expectations.

The increase in the average incentives provided to homebuyers also paired with relatively static average home sales prices, with first-quarter analyses showing an average home sales price of $365,000. Even so, Lennar Corp.’s first-quarter performance is clearly the driving force behind the homebuilder’s stock price rising by 27 percent thus far this year. Lennar Corp.’s year-to-date stock spike of 27 percent compares with a 10 percent increase in the SPDR S&P Homebuilder exchange-traded fund and a 6 percent gain in the S&P 500 SPX.

As Lennar Corp. continues to exceed performance expectations while also outpacing both the SPDR S&P Homebuilder ETF and the S&P 500 SPX, it is fair to wonder whether the homebuilder will be able to sustain its impressive first-quarter performance numbers. Should Lennar Corp. succeed in doing so, it will be interesting to conduct an analysis that properly explores the role of all the different factors enabling the homebuilder to outperform expectations while increasing home deliveries and consistently generating greater homebuilding revenue.





Federal Reserve Minutes: Balance Sheet Reduction Linked to Planned Interest Rate Increases

The Federal Reserve’s March policy meeting offered some new insight into the central bank’s plans for the remainder of the year. While the Federal Reserve has long telegraphed its intention to increase interest rates as it closes in on its inflation goal of 2 percent, the minutes from the most recent policy meeting show that the Fed also intends to reduce its balance sheet as a consequence of rising interest rates.

This revelation is certainly of interest for many reasons, but the level of disagreement among committee members is also worthy of deeper exploration. The committee, which is comprised of 17 total members and 10 voting members, appeared somewhat divided with regard to the timing of the planned interest rate increases and the subsequent reduction in the balance sheet.

As the minutes indicate, the voting members preferred a more measured approach — and relied on their status as voting members to assert this preference — while many of the non-voting members expressed at least some level of dissent, preferring more immediate action given the potential for headline inflation to cross the previously outlined threshold of 2 percent. After raising their concerns over the potential of exceeding a 2 percent rate of inflation in relatively short order, the prevailing members cited the limited risk associated with increased inflation, largely due to current expectations among consumers and businesses.

Overall, the Federal Reserve expressed optimism for the long-term prospects of the economy. In doing so, however, officials also noted the possibility that the first-quarter GDP reading will fall short of expectations despite the overall health of the economy and the likelihood of substantial growth over the long term. Officials also engaged in a bit of hedging as well, indicating the possibility that an unexpected or otherwise sudden uptick in economic activity could accelerate their current plans for increasing interest rates and reducing the balance sheet.

Addressing the balance sheet, whatever the timing ends up being, will require a reduction in the $4.5 trillion worth of government- and mortgage-backed bonds. As for the actual timing of the balance sheet reduction, the minutes from the policy meeting indicate that officials are currently eyeing a December announcement, which would follow two separate increases in interest rates. In the meantime, it seems quite likely to expect a slowdown in reinvestment as the year continues to progress.

All of this, of course, is subject to change over the coming months. Despite the plan outlined during the policy meeting minutes, the Federal Reserve will surely allow the performance of the economy to dictate the ideal timing for raising interest rates, reducing the balance sheet, and slowing reinvestment.






Sharp Upward Trend Continues in Toronto Housing Market

The United States is not the only nation experiencing the return of a booming real estate market: Our neighbors to the north are also in the midst of a similarly extended surge in the marketplace, and it is the renewed strength of the Canadian economy that has powered this upward trend in the average price of existing home sales. Our analyses indicate Toronto is perhaps the most salient example highlighting this continued upward trend, particularly since the city’s average home sale price checked in at $1.2 million in the last month, increasing at a rate representing a 28-year high.

After reviewing each category of housing within Toronto’s city limits — including detached homes, condominiums, and townhouses — it is evident that the sharp increase in the average sale price applies more or less equally to the different types of housing. Even with the 33-percent increase in prices across all housing categories encouraging a 15-percent increase in new listings put on the market, the Toronto housing supply still remains limited by any measure.

Although the sudden increase in equity would lead most economists to predict a continued increase in the number of real estate listings — thereby introducing more balance within the market — our research indicates that many homeowners are still somewhat reluctant to cash in on their gains by putting their home on the market. It is somewhat ironic, but here at Tweed Economics we believe this might be the product of the limited housing supply leaving few good options for potential sellers who wish to remain in the city of Toronto.

City officials are looking at the limited supply of real estate as an issue that may need to be addressed through some sort of government intervention. Throughout our many years working in similar markets in which limited supply issues can be overcome with off-market expertise, intervention by government entities — despite wholly good intentions — all too often leads to unintended consequences that only exacerbate an existing issue or create new, more complex issues.

Various city officials have intimated potential steps they might take to intervene, citing the current lack of affordable housing as a deterrent for first-time homebuyers who wish to live and work in Toronto. This is certainly problematic, and city officials are right to be concerned about a continued lack of supply preventing potential buyers from entering the real estate market. Without first identifying the precipitating factors and understanding how each of these factors influences the market, outside intervention will almost certainly lead to a host of newer and more complicated problems for city officials to handle.

As Toronto city officials discuss the possibility of implementing a vacant-home tax or a foreign-buyers levy in the hopes of reducing real estate speculation, it’s worth pointing out that it is typically ideal to simply allow the market to self-correct. With home values continuing to soar in Toronto, it seems likely that potential sellers in the city will ultimately decide to take advantage of a strong marketplace rather than standing on the sidelines as others reap the rewards of the sharp rise in home equity.





Trump’s Win Could Spark US Housing Boom, Says Yale Economist


Yale economist Robert Shiller believes that Donald Trump’s surprise presidential win could prove a “turning point” that catalyzes a housing boom in the US. The Nobel laureate further argued that the real estate billionaire’s landmark election indicated a shift in American attitudes toward wealth and conspicuous consumption and away from modesty and prudence.

“We used to be more into modest living,” Shiller told CNBC, with regard to the post-Recession years. “Now people are thinking, ‘[that] doesn’t work.’ You know? You have to live big-league and you’re on your way.”

While the data aren’t there to support his cultural observations, Shiller noted that such excitement and attitudes could be seen at Trump rallies and in the stock markets, which rallied following the news of Trump’s win. Indeed, there is an emerging belief that Trump’s administration may usher in preoccupation with big living and materialism, and an aspirational culture reminiscent of the 1980s, according to CNBC.com.

Shiller speculated these attitudinal changes could, in turn, stimulate spending in the housing market: “Trump is a real estate man, right? He talks about living big, living large. I can imagine that this will boost housing demand as well, among at least those who are excited by Trump,” he said to CNBC.

Shiller’s statements came on the same day that the S&P CoreLogic Case-Shiller data came out, revealing that the 20-city property values index had risen 5.1% year-over-year in October 2016, with each of the cities seeing year-on-year gains. The Case-Shiller U.S. National Home Price Index soared by 5.6% during the same month, marking the highest margin of growth since 2014. US home prices have risen steadily due to increasing demand, higher employment, and rising incomes.

“I think we’re at a turning point. The numbers that we’re reporting today are October, before the Trump election, and everything looks different now,” the eponymous Shiller told Bloomberg Television. “There might be a Trump boom coming.”

Shiller also hastened to add that he was merely “wondering” about rather than forecasting a boom, given the uncertainty surrounding Trump’s policy positions.

Trump campaigned successfully on an economic platform of lower taxes, deregulation, and massive investment in infrastructure, all of which spurred palpable excitement among investors. The Dow rose 14.4% in 2016 whereas the S&P grew by 10.8%. That being said, Shiller warned that like Coolidge, Trump may preside over a short-lived era of American prosperity which ends badly. 






Chinese Interest in US CRE Grows Following Trump Election

Trump’s election and pro-growth rhetoric are sparking heightened investment interest in US commercial real estate (CRE), especially as expectations of dollar appreciation grow. Much of the increased demand for dollar-denominated assets, particularly in commercial real estate, has come from China where the yuan has depreciated and economic growth has been slowing.

“(Investors) are seeing the U.S.commercial real estate marketplace as really standing out on a global basis,” said Hessam Nadji, CEO of Marcus and Millichap, to CNBC. “It’s not being overbuilt; it’s been very well balanced in this particular cycle in terms of loans that are not going up, the leverage that was very well balanced. They’re at much lower risk at this stage of recovery than we’ve seen in the past.”

The dollar appreciated considerably following Trump’s win, hitting eight-year highs against the yuan, leading to a flurry of speculation regarding US commercial real estate. Much of the foreign investment in US commercial real estate has been directed toward major metropolitan hubs including New York, Los Angeles (where Chinese developer Greenland has over $1 billion invested), San Francisco, and Chicago.

“The expectation is inflation will go up, job growth will improve and therefore commercial real estate becomes a better hedge in that scenario on a longer-term basis,” Nadji added.

In all, Chinese investment in foreign real estate reached $16.1 billion in the first half of 2016, double the figure from the same period in 2015. Investors at the recently-concluded 3rd Real Estate Globalization and Overseas Investment Summit in Beijing discussed growing opportunities in overseas investment. Henry Zou, founder of the Henry Global Consulting Group, encouraged attendees to prepare for stronger Sino-US ties in 2017,  anticipating that the Bilateral Investment Treaty between the world’s two largest economies would be ratified.

However, such overseas investment may be hampered by a Chinese government wary of massive capital outflows. In late November, China’s National Development and Reform Commission, The People’s Bank of China, The Ministry of Commerce and The State Administration of Foreign Exchange issued a statement warning of higher scrutiny of outbound investment. They are expected to pass stricter controls for foreign investments exceeding $10 billion, and for property deals by state-owned firms exceeding $1 billion, according to the Wall Street Journal.

Such regulatory controls may make it more difficult for Chinese firms to make large-scale real estate deals in the US, and may also hurt in-progress development projects that rely on Chinese capital.