BIG BUILDERS BROKE THEIR OWN FINANCIAL records yet again in the second quarter as the housing market remained strong in the face of rising but still historically low interest rates.

Many builders, including Lennar, MDC, Meritage, Pulte, and Standard Pacific, reported year-over-year record revenues; and/or reported earnings per (diluted) share, including Beazer, Lennar, Meritage, M/I Homes, and Standard Pacific. Many builders' earnings results exceeded the expectations of equity analysts.

Still, others experienced record-breaking demand through June. New home orders for D.R. Horton, Lennar, William Lyon, MDC, Meritage, Pulte, and Standard Pacific all exceeded previous highs for the comparable quarter.

More than half of the publicly traded home builders reported record backlogs, providing evidence that the companies are likely to continue their strong operating performance (see chart).

Many public builders raised their earnings outlook on the basis of their large backlogs and what their management teams consider a generally favorable economy. Centex, for example, raised its earning guidance for its fiscal year by $.50 a share to $7.25.

“We are encouraged by the direction of the economy as it appears we are entering a period of job growth and rising consumer confidence,” said Tim Eller, chairman and CEO of Centex Corp. “This type of economic environment historically has been a positive for housing's fundamentals and our business.”

Despite strong results and elevated earnings outlooks, some equity analysts were less sanguine. As the quarter closed, JMP Securities downgraded Centex, D.R. Horton, and Lennar from “market outperform” to “market perform.” Analyst Jim Wilson said these builders are most likely to be affected by a higher interest rate environment. Companies focused on the high end and retirement segments are less so, he added.

Hovnanian Enterprises' results tended to bear this out. “While interest rates increased 50 basis points during the quarter, our net contracts increased 45 percent,” said Ara Hovnanian, president and CEO. “We can't recall a time when the national economy was strengthening, as it is now, and housing didn't continue to perform well despite a rising rate environment.”

Notes: (1) Results for quarter ending 6/30/04, except for TOL (ending 7/31), KBH, LEN (ending 5/31), and HOV (ending 4/30). Unconsolidated joint venture results included when provided. (2) Net income vs. loss in prior year; change not meaningful. (3) Closings, orders, backlog, and average sales price for traditional home building segment only. (4) Division report: income unaudited; EPS not applicable.