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Why Meritage Homes Was Soaring Last Week

What happened

Shares of Meritage Homes (NYSE: MTH) surged nearly 13% last week, far outpacing the Dow Jones Industrial Average, which actually ended the week slightly down, after the homebuilder reported exceptionally strong second-quarter results.

So what

Inflation is hitting all markets because of higher government spending, and housing is no exception. Yet coupled with Federal Reserve policies that are keeping interest rates artificially depressed, the housing market is in the midst of a boom.

Image source: Getty Images.

The impact is evident in Meritage Homes' performance, which saw the number of home orders decline 2% year over year, but prices were 18% higher. With lumber prices at unprecedented levels until only recently, the cost of building a home is rising, but leading to a shortage of housing despite rising demand.

Home prices are soaring as a result, with Zillow estimating that the average price nationally has risen 15% year to date.

It bolstered Meritage Homes' bottom line, which saw earnings per share rocket 84% higher from the year ago period to $4.41 per share.

Now what

Meritage reported it had over 5,500 homes in its backlog, a 25% increase from last year, but with the dollar value of the homes sitting 41% higher. That bodes well for the builder's outlook, and it continues to target having 300 communities open by the middle of next year.

Yet it's a game of musical chairs that can't go on forever, as we saw back in 2008 when the housing market crashed, precipitating the Great Recession and breaking the notion prices would always go up. It took the industry around a decade to recover from that collapse, and JPMorgan Chase says prices are 4% above the peak they hit in 2006 before it all fell apart.

Because of the spending policies of the federal government, it's likely pushed out the likelihood from another crushing blow for some time, so Meritage Homes is not in imminent danger. JPMorgan doesn't believe there are the same structural problems in place as existed in the mid-2000s, though there are pockets of the country where the market is overheating.

Whether that will trigger a reckoning elsewhere is unknown, but for now, Meritage Homes is riding the wave higher.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool recommends Meritage Homes. The Motley Fool has a disclosure policy.


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