The initial wave of fourth quarter and year-end results for the nation's top home builders is providing a striking dimension to how remarkable 2003 proved to be for home building and big builders in particular.

Nationally, the home building industry was on track to sell a record-smashing 1,093,000 new homes in 2003, based on latest estimates, eclipsing last year's record by 12 percent. Boosting top lines even higher: The average sales price for those homes increased 8 percent in 2003, according to latest estimates, to within a few dollars of the $200,000 mark. For most big builders, unit sales and revenues grew two to three times that fast. (A summary of public builder results appears in BIG BUILDER's Quarterly Financial Scoreboard.)

While 2004 promises to be another strong year for housing, builders will be hard pressed to repeat that kind of fast-lane growth again this year. The deceleration can already be seen in fourth quarter new orders reports. Though orders are still up substantially over 2003, the increase in orders is well below what most of the public builders were reporting last year at this time--with some notable exceptions (see chart below).

That shouldn't come as a surprise. Advanced orders in the fourth quarter of 2001 were hard hit by the trauma of September 11. The Federal Reserve's steady lowering of interest rates in the months that followed, along with underlying demand, set the stage for a resurgence in orders four quarters later in 2002. So while year-end 2003 order files remain remarkably strong, it was inevitable that 2002 growth rates would be tough to beat.

But the fourth quarter order rates by themselves don't tell the whole story. Significantly, the pace of new orders in the fourth quarter was actually higher than what most public builders reported for the third quarter. More than likely, the run up in interest rates in the third quarter motivated buyers to sign on the dotted line by the fourth quarter. Still, the order files remain historically strong given underlying concerns for job growth, reflecting builders' concerted efforts to expand their community counts throughout calendar 2003.

In addition, the value of orders for a number of public builders increased at a faster rate than unit counts. While Wall Street continues to worry that even a modest increase in interest rates will weaken the pricing leverage builders enjoyed in 2003, the latest quarter results indicate that many builders--particularly in supply constrained markets--are succeeding not only in moving their products but trading buyers up.

True, the picture isn't without trouble spots. Builders operating in Texas reported declines in fourth quarter orders; and those building in Denver and a number of Midwest markets continue to face weak building conditions where job growth is expected to remain stagnant well into 2005. And even in booming markets, mid-size builders are encountering intensifying competitive dust storms.

But overall, it's evident from the latest financial results that their new and ongoing programs to improve operating and purchasing efficiencies continue to pay off. As a result, so long as interest rates remain on their current trajectory, it's not unreasonable to expect margins to continue improving through the balance of the decade even if sales growth eases up--reaffirming that big builders have become one of the hottest profit machines on the Amercan industrial highway.

Wyatt Kash

Company Reports, JMP Securities; Credit Suisse First Boston *4Q 2003 Margins: Actual and CSFB estimates; Hovnanian, Toll--qtr. ending Oct.; KB, Lennar --qtr. ending Nov.; Centex--fiscal 3Q.