Homebuilders Continue to Suffer

Homebuilder D.R. Horton, Inc.’s (NYSE: DHI) second quarter results sent ripples throughout the sector Tuesday, driving major competitors Pulte Homes, Inc (NYSE: PHM), Lennar Corporation (NYSE: LEN), and The Ryland Group, Inc. (NYSE: RYL) down in midday trading.

Texas-based D.R. Horton, famous for its slogan “America’s Builder,” reported a second quarter Tuesday with almost no good news in it:

-lost a staggering $1.31 billion, or $4.14 per share, compared to a profit of $51.7 million, or 16 cents per share, a year earlier.
-closed on only 6,719 homes in the period, more than a 30% drop from a year earlier.
-new orders fell 25% to 7,528
-cancellation rate of orders increase to 33% from 32% a year earlier
-backlog sales of homes under contract is 8,947, worth about $2.1 billion, compared to 16,885 homes, worth about $4.8 billion, a year earlier.
-average selling price of homes fell 9% to $245,000 from a year earlier.

D.R. Horton’s loss was nearly seven times larger than analysts’ expected loss of about 60 cents per share. The company was also forced to cut its dividend in half to 7.5 cents per share from 15 cents. Interestingly, D.R. Horton’s shares are practically flat Tuesday, though the company has lost about one-third of its value in the last 12 months.

Homebuilders as a group, including other major players like Pulte, Lennar and Ryland, have lost significant value over the last 12 months but have counterintuitively made back some of that ground since January 1 of this year.

Pulte trades today at about $14 per share, compared to as much as $27.50 last summer and as little as $8.50 this January. Lennar trades today at about $19 per share, compared to as much as $46.50 last summer and as little as $13 this January. Ryland trades today at about $33.20 per share, compared to as much as $47 last summer and as little as $21 this January.

Despite poor developments in the housing sector, these companies’ shares surged this year on hopes that falling home prices combined with lower mortgage interest rates would increase overall demand. Also, government intervention into the foreclosure crisis was taken as relatively good news for the homebuilders.

Unfortunately, these hopes have not come to fruition – according to The National Association of Realtors most recent reports on the U.S. housing market:

-the annualized sales pace is only 4.93 million homes compared to previous estimates of 4.95 million
-existing home sales plunged 19.3% in March compared to a year earlier
-new single-family home sales were down 36.6% in March compared to a year earlier
-median home price was down 7.7% in March compared to a year earlier
-home inventory rose 1% in March
-housing starts dropped 36.5% in March compared to a year earlier
-mortgage applications, as measured by an index, were down 20.4% in March compared to a year earlier

Though median home prices have fallen 7.7% in the last year and the average 30-year fixed mortgage rate is down to 6.03% from 6.16% a year ago – there has been no uptick in demand as the above data universally show.

Most troubling for Pulte, Lennar, and Ryland is the staggering 36.6% decline in new single-family home sales, their specialty, combined with increasing home inventory – which has the potential to force the companies to take massive write-downs on their housing inventory that they cannot sell.

The National Association of Realtors releases updated numbers across these measures over the next three weeks – and they probably won’t be good news, making the stocks of these homebuilders very risky bets in the short term. Taking a longer view, it is impossible to predict when the housing market will “bottom-out,” but renowned investors like Warren Buffett think it will be awhile, which means homebuilders have more painful months, if not years, ahead of them.

Michigan-based Pulte Homes just released first quarter results in late April that mirrored D.R. Holton’s results Tuesday – a much wider than expected loss due to hefty write-downs. Don’t expect anything different when the company releases second quarter results in July.

Florida-based Lennar Corporation released its disappointing first quarter results in late March with similar themes, as did Ryland Group in late April. Pulte and Ryland have the added pressure of Standard & Poor’s Rating Services having lowered their corporate credit and unsecured debt ratings to “BB” from “BB+” and to “BB+” from “BBB-” respectively on special concerns about the companies’ liquidity, making them the riskiest stocks of the group.

The take home message is with little hope for improvements in the macroeconomic picture for these homebuilders, buyer beware.

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