Realty Check

Meritage & Other Home Builders: You Didn't See This Coming?

The July earnings forecasts are starting to roll in, and I don’t care what the temps are hitting this month, home builders have to be in a cold sweat. Today Meritage Homes reported preliminary sales, closings and backlog for the second quarter, and honey, it ain’t pretty. Sales down 37%, closings down 28% and backlog down 39% from a year ago. And if that weren’t bad enough, cancellations rose to 37% compared to 32% a year ago and 27% in the first quarter of this year (that was pre-subprime fury when everyone thought the market would take a quick bounce back).

“As reported by other homebuilders, the housing market in general continues to be very challenging,” said Steven J. Hilton, chairman and CEO of Meritage . Come on Mr. Hilton, you have to do better than that. If I hear one more sound bite that ends with “challenging,” I’m going to send each and every CEO of a public home builder a thesaurus.

“Weak demand and high inventory levels have increased competition among homebuilders, pressuring margins despite reductions in new home starts, lot supplies and operating costs,” he continues.

The trouble for Meritage in particular is their exposure to Florida, which Hilton admits will “continue to be depressed for the foreseeable future.” It’s Florida, it’s Arizona, it’s Nevada, it’s California; frankly it’s wherever the homebuilders went nuts with their nuts and bolts.

As I continue to report these earnings and stats and forecasts, you readers have been sending me anecdotal reports of what you’re seeing out on the real estate battlefield (thank you!). Stephen in Indiana writes that KB Home recently walked away from a project just outside Indianapolis after Pulte   passed it over to them. Daryl in Tucson writes that a friend of his purchased a home from a builder there, and the builder lowered the price after the contract was signed. And Jeff writes from Central Valley, CA: “KB Homes has been building the same 8 houses for months now to make them look active and they also put “sold” signs in a few homes, problem is nobody ever moves in!”

I know I’m not the fave of the big public home builders (we’ve been over that), but instead of telling me off-the-record that it’s the media tanking the market, I’d like just one of them to sit down for an on-the-record interview with me (like they used to in the good ol’ boom days), and explain to me and everyone else how they all didn’t see this coming? Did the mortgage issues really bring it all tumbling down?

I remember the clamor of demand, demand, demand, and how all these new immigrants and first time home buyers were in desperate need of all these new homes. I reported on the new trend to the “ex-urbs”, those brand new developments just beyond the suburbs that were supposedly the wave of the future. And I drove out to all the “adult active communities” under construction, where all those baby boomers, desperate not to end up in the nursing home, would “age-in-place.” I drank the "Kool-Aid;" I’ll give you that. But how could the builders--who’ve seen far more housing cycles in their company histories than I have in my reporting history-- how did they not see this coming?

Questions?  Comments?