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Home Builder Earnings: Won't Be A Pretty Picture

Friday, 20 Jul 2007 | 1:02 PM ET
U.S. Department of Commerce
AP
U.S. Department of Commerce

Next week, no fewer than six major public home builders will report their quarterly earnings, all right around the same day that the U.S. Dept. of Commerce reports its New Home Sales data for the month of June. I doubt either will be very heartening for investors.

The CEO of KB Home , which reported a loss of $149 million, (with $308 million in pretax charges a few weeks ago), said then that he could not predict when the market would improve. But this week, Jeff Mezger said the market would bottom out in late 2008, perhaps not showing an uptick until well into 2009.

The CEO of Toll Brothers , Robert Toll, told Fortune Magazine that he predicts a recovery in the spring of next year.This after several of the big public home builder CEO’s told me at a UBS conference last fall that everything would turn around this spring. Of course that was before the subprime meltdown, so who could blame them for that prediction?

Next week the likes of Pulte ,Beazer , Centex and others will get on their conference calls, announce their earnings, and do their best to put a band-aid on the amputations of their profits. We already know Pulte’s won’t be pretty. The company forecast its earnings this week, reporting an unprecedented $740 million impairment charge, 8% of the company’s book value on an after tax basis. Analysts at the big banks called that everything from “ouch,” to “staggering.”

“The difficult conditions that plagued the home-building industry in the first quarter of 2007 worsened in the second quarter, with increased competitive pricing pressures, elevated levels of new and resale home inventory, and weak consumer sentiment for housing affecting the entire industry, said Pulte CEO Richard Dugas in a statement.

The home builders are doing everything they can to unload inventory: lowering prices, offering incentives like help in financing and delayed payments. One private builder I’m reporting on today is giving you the home free for a year. The ad says: “Really.” The builder may think buyers won’t believe it, but these days, it’s just not that unbelievable.

Desperate Homebuilders
The housing slump is causing some homebuilders to take desperate steps to help boost sales. CNBC's Diana Olick takes a closer look in today's Realty Check segment.

I know the builders think we in the media are constantly talking gloom and doom for the housing industry, as if no one will ever buy a new home again. Of course, that’s not true. The industry is just going through a deeper-than-expected correction because it went through an unprecedented boom. What goes up high, must come down hard.

So as we listen to all these earnings calls next week, and as each CEO does his best to predict a bottom to the market and an improvement in the bottom line, keep this in mind: According to the Brookings Institution, the U.S. population is expected to increase 33% by 2030, that’s 94 million more people than there were in 2000. About half of the homes needed by 2030 don’t exist today. Now stop calling me a pessimist!

Questions? Comments? RealtyCheck@cnbc.com

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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