High-End or Starter Homes, Builders Remain in a Slump
By EDUARDO PORTER
Published: November 8, 2006
Two of the nation’s major home builders reported dismal results in their most recent quarters yesterday, confirming that the slump in the once-hot housing market is far from over.
Toll Brothers, the country’s largest builder of luxury homes, said revenue from home building fell 10 percent, to $1.81 billion in its fourth quarter, ended Oct. 31, compared with $2.01 billion in the period a year earlier. The results are preliminary; the company will report earnings on Dec. 5.
Toll Brothers’ backlog of projects declined 25 percent and its signed contracts plunged 55 percent as the company suffered from a rash of cancellations concentrated in the formerly hot markets of Florida and Northern California.
“I don’t think we can call where the floor is,” said Joel Rassman, chief financial officer of Toll Brothers. “We have not seen a turnaround yet.”
The decline was not limited to the luxury segment of the housing market. The Atlanta-based Beazer Homes USA, a smaller rival that builds many homes for first-time buyers, reported that net income fell 44 percent, to $91.9 million, or $2.19 a share, in the quarter ended Sept. 30, from $164.4 million, or $3.61 a share, in the period in 2005.
Revenue increased 4 percent, to $1.88 billion. But new orders plummeted 58 percent, and the company forecast a substantial decline in earnings for 2007.
More than a year into a housing market bust, the home builders’ deteriorating fortunes are hardly a surprise. In September, sales of both new and existing homes were running around 14 percent below their level a year earlier.
Home prices have not fallen uniformly across the nation; in some areas, they have, however, declined steeply. By September, the average price of a newly built home was about 2 percent below the price of a year earlier, according to government figures.
Stuck with unsold inventory that is the equivalent of more than six months of sales, builders have slammed on the brakes. New-housing starts in September were running about 18 percent below their level in September 2005.
Toll Brothers, which is based in Horsham, Pa., cut its forecast for home deliveries in 2007 by 9 percent to 10 percent, compared with its previous forecast. And it trimmed its portfolio of land to 74,000 lots, 19 percent below its high in the fiscal second quarter, which ran from February through April.
James O’Leary, chief financial officer at Beazer Homes, said the company reduced its number of lots by 15 percent in the quarter. It also cut about 1,000 jobs in September and October, about 25 percent of the company head count.
The slump in construction has hurt the broader economy. Residential investment, which accounts for about 5 percent of the nation’s total economic production, plummeted 17.4 percent in the third quarter of the year, according to government data. It was the biggest quarterly decline in more than 15 years, single-handedly reducing the growth in gross domestic product by roughly 1.1 percentage points.
Mr. Rassman at Toll Brothers argued that the housing market’s chill is a question of confidence, “led by the consumer being afraid” that prices might fall. But he argued that still-low interest rates combined with continued employment growth should eventually feed through into growing demand for homes.
Economists, however, point out that it will take some time for builders to clear out their bloated inventory of unsold houses — a requisite for them to break their fall. With home prices still high by historical standards compared with potential buyers’ incomes, this may be a protracted process, requiring more income gains or price declines.
Richard DeKaser, chief economist at the National City Corporation, predicted that it would take about 9 to 12 months for the supply and demand of homes to come back into balance. “We are probably two-thirds of the way down the slope,” Mr. DeKaser said. “The bulk of the decline is behind us, but we are not yet out of the woods.”
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