Home Builders Face Steep Decline
The nation’s home-building industry, already in the throes of a slowdown, appears to be heading for a severe decline in the coming months.
Some builders have started to delay or stretch out projects amid rising cancellations from buyers. Stocks in home-building companies have been hit particularly hard since markets reopened Monday, reflecting growing uncertainty about a sector that had been shoring up the nation’s shaky economy.
The federal government said Thursday that new-home construction in August fell to its lowest level in 10 months, and analysts expect continued declines as terrorist strikes further erode consumers’ appetite for new homes. That will hurt construction employment and trickle down to other sectors in the economy such as lumber and home furnishings.
Christopher Winham, an analyst at Goldman, Sachs & Co. in New York, said new-home sales nationally could decline by as much as 25% in coming months.
The Southern California housing market is expected to hold up better than in many other parts of the country. Sales and prices of both new and existing homes have been outpacing the nation, in part because construction has not kept up with the strong demand.
Still, analysts and economists are concerned that consumers throughout the country will make fewer big purchases amid fears of a worsening economy.
“We were already cautious toward the new-housing market,” Winham wrote in a new report, “and believe the recent events will almost certainly cause a substantial retrenchment of activity.”
Reflecting such concerns, the Standard & Poor’s index of the nation’s major home builders has plunged more than 18% this week, wiping out gains that created a 52-week high two months ago. Shares of home builders such as Champion Enterprises, Centex Corp., Fleetwood Enterprises and Clayton Homes absorbed double-digit percentage losses.
Even Los Angeles-based KB Homes, the nation’s second-largest home builder, and Lennar Corp., the third-largest--both of which reported strong fiscal third-quarter results Thursday--saw their shares fall further.
“When there’s this much uncertainty in the economy, consumers are not going to move into something like a house,” said Robert Van Order, chief economist at Freddie Mac, a major investor in the mortgage market. “Sales will drop and housing production will be down a while.” Some builders have reported sharp drops in deposits for new homes, and analysts are concerned the industry will be unable to sustain the robust sales pace from earlier this year. That weakness could make financing for projects, both new and ongoing, harder to obtain.
“I don’t think it’s going to halt housing in its tracks right away, but the outlook over the next several quarters is distinctly more negative than it appeared to be a week and a half ago,” said Michael Carliner, an economist at the National Assn. of Home Builders. “I’d be surprised if we could shrug this off.”
The market for existing homes also may feel the pinch, despite historically low mortgage rates. Sales of previously owned homes, once on a record pace, may be off 10% the second half of the year, said David Lereah, chief economist for the National Assn. of Realtors.
“Mortgage rates may not play a major role when consumer confidence is shaken to the extent it is,” he said. In another reflection of the housing slowdown, the number of loan applications last week dipped by more than 11% on an annual basis from the previous week, the largest decline in nearly four months, according to the Mortgage Bankers Assn. of America, a trade group in Washington.
Still, two major home builders remained optimistic about their business this year, while posting strong results for the recent quarter.
KB Homes said earnings for the three months ended Aug. 31 climbed a better-than-expected 35% on a 26% gain in sales, and expects business to remain strong in the fourth quarter.
KB Homes, which changed its name from Kaufman & Broad Corp. in January, expects to benefit from strong demand for entry-level homes, the company’s main market, in light of falling interest rates, said Chief Operating Officer Jeff Mezger.
For the third quarter, net income rose to $60.4 million, or $1.58 a share, from $44.6 million, or $1.14 a share, a year earlier. Revenue totaled $1.24 billion, up from $981 million.
Despite the bullish report, the stock fell $1.02 to $26.40 on the New York Stock Exchange.
Miami-based Lennar, meanwhile, said its fiscal third-quarter earnings rose 75% on strong home sales and higher prices. The shares fell $3.15 to $33.15 on the NYSE.
