Realty Check

Home Builder CEOs: Truth In The Telling And It's Not Good

How are some home builder CEOs reacting to the current housing market?

Donald R. Horton, CEO D.R. Horton: “Market conditions in the homebuilding industry continue to be challenging as inventory levels of both new and existing homes remain at historically high levels. Increased use of sales incentives continues to put pressure on profit margins. In addition, home price appreciation over the past few years, higher interest rates and tightened credit standards in the mortgage industry are all negatively impacting affordability.” 

Richard Dugas, CEO Pulte Homes: “The homebuilding industry continues to face an extremely difficult environment that includes record existing and new home inventory levels, intense price competition and weak consumer sentiment for housing.”

Ian J. McCarthy, CEO Beazer Homes: “Most housing markets across the country continue to be characterized by an oversupply of both new and resale home inventory, reduced levels of consumer demand for new homes and aggressive price competition among home builders. These factors, together with a pronounced credit tightening in the mortgage markets, particularly for credit- challenged home buyers, are likely to lead to continued difficult market conditions.”

I just wanted you to hear it from them, instead of from me, because these same guys who are saying all this doom and gloom stuff are also saying that the media are blowing it all out of proportion. But the numbers don’t lie.

Here are a few: the street projected that Beazer Homes would report a net loss of about 32 cents a share. The real loss: $3.20 a share. I’m not great at math, but isn't that ten times projections??

Pulte reported a 40% drop in closings of its homes in addition to a 4% price drop. You think they might need to drop those prices a bit more? The company also reported losing $750 million or so in land write-offs. One analyst noted that’s about 8% of the company’s entire book value. And then there’s D.R. Horton, which reports that its backlog of homes under contract is now almost half of what it was a year ago. The backlog is the future. Need I say more? Shares of D.R. Horton were selling for about $30 a share six months ago. Make that closer to $17 today.

The trouble with new homes, as opposed to existing homes, is that there are just so many of them out there in these big developments where buyers just see more and more empty houses. Existing homes for sale tend to dot a neighborhood, offering unique appeals. The first-time home buyers, a big chunk of business for the big builders, are dropping out of the market. That's either because they can’t get a mortgage or because they want to wait until the market bottoms. Who wouldn’t? The Realtors noted yesterday that rental rates are rising at a fast clip. There are all your homebuyers.

The builders will tell you they’ve weathered downturns before, and they will certainly weather this one. But what’s troubling is that there’s this strange tone among so many of the analysts that I talk to: this feeling that this downturn is unlike any other because of the credit factor. Most housing corrections are based on fundamental broader economic issues, like a nationwide recession or massive job losses. We don’t have that now. It’s all about fear and credit. And until both of those settle, housing won’t either.

Questions?  Comments?