U.S. home builders, stuck with more than 500,000 unsold houses, may report the lowest earnings in five years because a rebound in the real estate market is too little too late to save 2007 sales.
Net income at D.R. Horton Inc., the industry’s largest company, may plunge 60 percent in fiscal 2007 to $498 million, the worst since 2002 when the domestic economy was recovering from the slowest growth in more than a decade.
The average drop in annual profits at America’s four biggest home builders probably will be 55 percent, according to analysts surveyed by Bloomberg.
“The demand side of the market is stabilizing, but it doesn’t mean that all of a sudden construction is going to be off to the races,” said Michael Darda, chief economist of MKM Partners in Greenwich, Conn. He cited a 3.4 percent gain in new-home sales in November from the previous month.
Sales of new houses fell 18 percent in 2006 to 1.05 million, the biggest contraction since 1990, after median prices rose 41 percent in five years, pushing them beyond the budgets of many buyers, said David Berson, chief economist of Fannie Mae, the largest mortgage buyer.
Sales will rise to 946,000 homes at an annualized pace in the third quarter and gain until at least the second half of 2008 after falling to a five-year low of 942,000 in the second quarter, the Chicago-based National Association of Realtors said in a forecast.
Freddie Mac, the second-biggest mortgage buyer, and the Mortgage Bankers Association also are predicting an increase in demand in the second half of this year.
The National Association of Home Builders in Washington projects new-home sales will gain in every quarter of 2007.
Slowdown in construction
Stuart Miller, chief executive officer of Miami-based Lennar Corp., the fourth-biggest U.S. home builder, isn’t as optimistic.
“Market conditions continued to weaken during the fourth quarter and we have not yet seen tangible evidence of a market recovery,” Miller said in a Jan. 2 statement from the company.
Lennar reported its first loss in more than a decade in the fiscal fourth quarter, which ended Nov. 30. Analysts forecast that Lennar’s earnings will fall 51 percent in fiscal 2007.
New-home sales bottomed in the fourth quarter at an annual rate of 970,000, sliding from an all-time high of 1.3 million in 2005’s third quarter, Berson said.
Buyers canceled contracts to purchase homes at a record pace in the second half of 2006, swelling inventories. Measured in terms of how long it would take to sell off the existing stock, inventory stood at 6.3 months in November, down from 7.2 months in July and up from 4.9 months a year ago, according to the Commerce Department.
Super Bowl
It takes five to six months to complete a typical house. Bigger homes such as those sold by Toll Brothers Inc., the largest U.S. builder of luxury properties, can take a year or more. Buyers pay a deposit when they sign a contract, and the property isn’t sold until it’s completed.
Families with children tend to plan household moves to occur before the start of the U.S. school year in September. To guarantee an August move, they have to sign a contract for a built-to-order house by February or March.
That’s why the kickoff to the busiest time for the new-home market traditionally comes the weekend after “Super Bowl Sunday,” when U.S. football teams compete for the National Football League championship.
That’s the first weekend sports-loving spouses will consent to forgo Sunday afternoon television to begin touring model homes and potentially place an order for a new property.
This year’s game will be played Feb. 4 at Dolphin Stadium in Miami.
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`No massive glut’
Analysts estimate that Centex Corp., the third-largest U.S. home builder, will report the biggest decline in fiscal 2007 profit of the four largest home builders, according to Bloomberg’s survey of analysts.
Earnings of Dallas-based Centex probably will decrease 64 percent in the year ending March 31.
Profit at Ft. Worth-based D.R. Horton probably will fall 60 percent in the year ending Sept. 30, analysts estimate.
Orders fell 23 percent from a year earlier to 8,771 homes in the builder’s first quarter, and the average price slid 6.1 percent to $262,000, the company said.
Pulte Homes Inc. of Bloomfield Hills, Mich., the biggest U.S. builder of retirement communities, probably will report a 43 percent decline in net income this year, as sales to aging Baby Boomers help it to outperform its rivals, according to analysts. Pulte is the No. 2 home builder by revenue.
Inventory, the amount of unsold houses, dropped to 545,000 in November from a record 573,000 in July, according to the Commerce Department.
Economists such as Darda, of MKM Partners, expect that number to continue to decline.
“There is no longer a massive glut,” Darda said.
New-home sales probably will rise at an annualized pace of 973,000 in the current quarter from a low of 970,000 in the fourth quarter, Berson said.
That number probably will reach 978,000 by the fourth quarter of this year, he said.