Industry’s foundations get shakier
For the housing industry, the bad news just keeps on coming.
Three major home builders reported quarterly losses Wednesday, and a real estate trade group said that nationwide sales of existing homes fell to their lowest level in nearly five years.
The fresh data came one day after the nation’s biggest mortgage lender reported more delinquencies among even its better customers, and a market research firm said California foreclosures were soaring.
The sole inkling of good news came in a report that said inventories of homes for sale in Southern California and the nation had leveled off after steadily rising for months.
But some analysts think that’s a temporary lull and expect inventories to rise again as adjustable loans reset to higher rates and many homeowners find themselves unable to make the payments.
“We expect inventory levels to increase based on the credit issues with the increasing level of mortgage resets in the coming months through spring ’08,” building analyst Daniel Oppenheim of Banc of America Securities wrote in a note to clients.
“We think inventory is the best indicator of future pricing trends -- excess inventory equals lower prices ahead,” he added.
Nationally, sales of existing homes fell to an annualized rate of 5.75 million in June, 3.8% fewer than in May. That was the most sluggish rate since November 2002, the National Assn. of Realtors said. The median price for single-family homes rose a scant 0.1% year over year to $230,300. But that was 3.8% higher than last month’s figure of $221,900, marking the first time in 11 months that the year-over-year price hadn’t declined.
But some analysts attributed the increase to the fact that higher-priced homes are selling at a better pace than entry-level properties. In that stratum, many buyers are likely to be thwarted by tougher lending standards and higher mortgage rates.
Meanwhile, the supply of unsold homes nationwide was at 8.8 months in June, the same as May, but that was up 40% from a year ago, the Realtors said.
“These higher prices did not allow the market to absorb the excessively high inventories, which stand at levels not seen since 1991,” said Carl Reichardt, an analyst with Wachovia Securities who said affordability is one of the most significant roadblocks facing the industry as it struggles to recover.
Southern California has a 12.6-month supply of unsold existing homes, about double the inventory from a year ago, according to a sampling of for-sale listings taken by the California Assn. of Realtors. The month before, the supply was 12.5 months.
“It’s slowly going down because you have discretionary sellers taking their homes off the market,” said Patrick Veling, president of Real Data Strategies, a Brea-based firm that analyzes housing inventory data.
“Another possible phenomenon that we cannot get our hands around is whether these are financially troubled home sellers leaving the [multiple-listing service] environment because they are being foreclosed on,” Veling added. “Some of these homes are not in the MLS now but will come back as bank-owned.”
Veling, who uses a different methodology from the Realtors’ groups for counting homes for sale, said that Los Angeles and Orange counties each have eight months’ supply of unsold homes on the market as of Wednesday, about the same as 30 days before.
Meanwhile, Riverside and San Bernardino counties show about 14 months of supply, flat with the previous period. Veling’s statistics reflect the time it would take to clear all the homes on the market with no additional houses going up for sale
During the worst of the Southland’s last housing downturn in the mid-1990s, inventory maxed out at 19 months of supply, with foreclosures accounting for about a third of the homes, Veling’s statistics show. Today, the proportion of foreclosures or bank-owned properties on the market is less than 10%.
Six months’ supply of unsold homes is considered a balanced market.
The weak housing market is also bedeviling builders.
Pulte Homes of Bloomfield, Mich., reported a second-quarter loss of $507.6 million, or $2.01 a share, compared with profit of $243 million, or 94 cents, last year.
The results, which were in line with expectations, included a charge of $749 million related to lower land values and impairments and $40 million for job cuts. Pulte’s revenue dropped 40% to $2 billion.
“The home-building 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,” Pulte Chief Executive Richard Dugas said.
MDC Holdings Inc., another big California builder, posted a second-quarter loss of $106.1 million, or $2.32 a share, compared with profit of $76.5 million, or $1.66, a year earlier. Revenue at the Denver-based company plunged 40% to $716.7 million.
Calabasas-based Ryland Group Inc. swung to a second-quarter loss of $52.4 million, or $1.25 a share, from profit of $94.8 million, or $2.03, the previous year. Revenue fell 38% to $723 million.
Ryland shares closed at $32.92, up 22 cents, and was little changed after hours. MDC rose 63 cents, to $46.86, but fell to $46 after the bell. Pulte added 21 cents to $20.67 during the trading session and rose to $21.10 after hours.
In Southern California, big builders have reacted swiftly to the slowing market by slashing prices on homes under construction and building fewer.
This strategy cuts profit in the short term, but by cutting back during the downturn, the companies will be in better position when the recovery begins, analysts said.
That was not the case a decade ago, when many builders didn’t scale down soon enough.
“The reasons the builders have responded so quickly this time is because they are stronger companies and can afford to cut prices to stay alive,” said John Burns, a building industry consultant in Irvine.