Homebuilder Profits Go From Bad to Worse

The slaughterhouse that has been the U.S. housing market for the past few months got bloodier on Thursday as several industry leaders reported worse results, July home sales fell more than expected and stocks throughout the sector hit multiyear lows.

The grim tidings about the industry dragged down both the housing and construction sectors, as well as the broader stock market.

"Overall, the market for new homes stinks ... liquidity is getting sucked out of the system," said Alex Vallecillo, senior portfolio analyst with Allegiant Asset Management, which has $30 billion in total assets under management. "Mortgages are going to be tougher to come by, more expensive. The buyers are basically drying up."

On Thursday, after several publicly traded home builders reported their quarterly financial results, the Dow Jones U.S. Home Construction Index, a yardstick that measures the sector's performance, fell as much as 6 percent, a low unseen since September 2003.

Pulte Homes was off nearly 6 percent, to $19.35, and D.R. Horton fell over 5 percent to $16.46, also lows unseen since September 2003. Beazer Homes USA saw its price drop nearly 7 percent to $15.88, its lowest since November 2001.

While individuals companies' results are clearly suffering, many of the macroeconomic trends look just as dismal.

On Thursday, the U.S. Commerce Department said June single-family homes sales fell 6.6 percent from May, as the median sales price dropped 1.3 percent.

In June, the median sales price of a new home fell 1.3 percent to $237,900 from $241,000 in May.

There were 537,000 new homes for sale in June, holding the same level reported for May. It would take 7.8 months to clear that inventory at the current sales pace, up from the 7.4 months reported for May.

With sales plunging, home builders are now writing down the value of their unsold homes and the land they have bought for future development. The lower value is reflected in each builder's tangible book value -- what a company could get if forced to hold a fire sale.

"The market believes these guys are going to be writing down their book values in the next quarter or two -- or more," Vallecillo said.

About three out four of builders' stocks are trading below the value of tangible book value, Vallecillo said. Hovnanian Enterprises and Beazer trade at about half their book values.

The reduction of book value becomes more drastic as home sales continue to plummet.

On Thursday, D.R. Horton, the No. 1 U.S. home builder, took a whopping $1.28 billion charge, stripping out about 12 percent of its book value. Beazer, the No. 7 U.S. home builder, slashed $188.5 million from its book value.

On Wednesday, No. 3 U.S. home builder Pulte, took down its book value by $749 million.

MONEY WOES

The dour sentiment is also shared by executives in the business of selling or financing new homes.

Industry experts blame the glut of existing homes on the market.

On Wednesday, the National Association of Realtors said that sales of single-family homes fell 3.5 percent while the supply of new single-family homes rose to its highest level since June 1992.

Recently, the chief executive of Countrywide Financial , the largest U.S. mortgage lender, said it could be 2009 before the market recovers and KB Home's CEO said the market could deteriorate well into 2008. Home builders' sentiment in July reached its lowest level in 16 years.

Investors should only buy housing shares now if they have the stomach to hang on for a long, rocky ride, Vallecillo said.

"It's going to take a while -- six months, nine months, a year, maybe two -- for these issues to resolve themselves and the market to clear," Vallecillo warned.

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