) -- It's been a busy week of data on the U.S. housing market, with existing home sales coming in below expectations and new home sales data setting a 47-year low. The housing story gets more company-specific in the next two days, with two of the biggest homebuilders set to report second-quarter earnings on Thursday and Friday:


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>>New Home Sales Plunge 32.7%

The second quarter numbers from Lennar and KB Home shouldn't be nearly as bad as the ugly existing home and new home sales data just reported for May. Even so, this doesn't mean it's time to trade Lennar or KB Home on improving earnings reports.

The homebuilders have already been beaten down extensively over the past month. The pummeling in the homebuilder sector is one of the reasons that the 47-year low reported in new home sales on Wednesday didn't sink the sector. In fact, KB Home was up by close to 5% on Wednesday afternoon. Lennar was up more than 3%, and the general trend among homebuilders was positive in Wednesday trading.

The trading on Wednesday might seem to defy the recent brutal numbers in terms of home sales, but analysts say it reflects the fact that investors in the sector were already prepared for the worst. Additionally, many of these homebuilding stocks are trading at or near book value. When including deferred assets value, both Lennar and KB Home are trading at 0.7 times book.

Since the beginning of May, Lennar has shed 28% of its share value. KB Home has lost even more since the beginning of May, shedding 37% of its value.

Therefore, a relief rally on Wednesday even after the woeful new home sales numbers was not the biggest surprise in the world to homebuilder analysts. Yet, the earnings reports from Lennar and KB Home shouldn't be trigger for a better outlook on the homebuilders, either.

The expiration of the federal homebuyer tax credit that was primarily responsible for the drop in existing home and new home sales is also an important caveat in the upcoming homebuilder earnings. Even though the second quarter for these homebuilders will include May, their results will have the benefit of including two of the best months of the short-term housing surge, March and April. The combination of the typical spring upturn in home buying and the looming expiration of the homebuyer tax credit led to a surge in two of the three months that Lennar and KB will report on.

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In fact, analysts say that in the same way that most investors familiar with the sector already had baked into the numbers the worst-case scenario in terms of new home sales, analysts have already baked into assumptions about Lennar and KB Home's outlook the fact that their second quarter numbers will be given a boost by the March to April activity in the sector. As an example, analysts say that it wasn't the 300,000 unit level for new home sales in May that was the surprise, but that in April the new home sales number was as high as 500,000 and 446, 000.

Joel Locker, analyst at FBN Securities, said he doesn't expect to gleam much new information from the Lennar and KB Home earnings reports, unless the homebuilders provide an outlook on how June is shaping up, something they have not been in the historical practice of doing. "If they say something about June, it might move the markets," Locker said, though otherwise, the data for the last three months is largely anticipated, the analyst added.

Lennar has been the more recent improver, increasing its orders and operating margin more notably than KB over the past few quarters. KB Home, on the other hand, was among the first homebuilders to capitalize on the low- end market last year, but that first-mover advantage was ultimately eaten away at by competition coming into the low-end market.

FBN estimates earnings of 8 cents from Lennar - 13 cents excluding one-time charges - versus consensus estimates of a breakeven quarter to earnings of 3 cents. FBN is above the consensus because it believes that Lennar will hit a gross margin peak - not to be repeated until late 2011 -- in the second quarter numbers.

Even though FBN is predicting a Lennar beat of the consensus earnings estimate, its view is mixed on the homebuilder, predicting 3,264 new orders, well below the Street consensus of 4,080 orders. When FBN recently upgraded Lennar from underperform to market perform, it was because the homebuilder had lost 28% of its value since May 3.

The consensus view of KB Home is that it will report a loss of 30 cents in the second quarter, which would be an improvement on the previous quarter's loss of 42 cents.

Keefe, Bruyette & Woods expects KB Home earnings to reach near breakeven by the third quarter and to turn positive in the fourth quarter of the year. KBW analyst Jade Rahmani is slightly below the consensus for the second quarter, estimating a loss of 32 cents for KB Home shares.

Yet the overall view is of a modest recovery, and given the fact that second quarter numbers will include the anomaly of the March-April tax credit surge, investors need to look at the larger picture. KBW predicts a modest profit in the fourth quarter for KB Home, and beyond 2010, "a modest recovery in earnings per share, suggesting return on equity at or below the company's cost of capital".

"We think the market will be looking for a read on current selling conditions including June, as well as progress both companies have been making on profitability. There could be positive or negative surprises relative to expectations on both fronts," KBW's Rahmani said in an email.

The one thing that won't be a surprise in the Lennar and KB Home earnings, though, will be any short-term boost provided by the March to April tax credit-triggered home buying.

-- Reported by Eric Rosenbaum in New York.


>>Homebuilder Stock Losers: KB, Pulte

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