Frankly, builder sees slump in ‘07

From Times Staff Reports and Bloomberg News

Using very un-CEO-like verbiage, the chief of home builder D.R. Horton Inc. on Wednesday made clear his belief that the housing market will remain in a slump and the company will close on fewer homes this year than last.

“I don’t want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year,” Chief Executive Donald Tomnitz said at a Citigroup Inc. conference in New York. “Our future is not as bright as what we would like it to be.”

Tomnitz’s comments pushed home builder stocks lower and provided more bad news to a market shaken by a rise in sub-prime mortgage defaults and fears of recession or waning economic growth. A yearlong U.S. housing decline has left builders with a glut of unsold homes as customers abandon deals or hold off making purchases. Sales fell 17% in 2006, the most since 1990.

Fort Worth-based D.R. Horton, the second-largest U.S. home builder by revenue, said closings would probably drop below last year’s 53,000.

At a separate presentation, Toll Bros. Inc., the biggest U.S. builder of luxury homes, said that customer cancellations were falling and that it was offering fewer sales incentives.


Cancellations dropped to 16% in the last five weeks from a high of 36%, CEO Robert Toll said at the conference. The company was also selling off its backlog of homes, he said.

“We’re now running at half the pace of inventory that we had three or four months ago,” Toll said. “So I would guess, and that’s all it is, it’ll be another four or five months before you finally burn off inventory in most of the markets.”

The divergent views from D.R. Horton and Toll Bros. may reflect their different customers. Forty percent of Horton’s buyers are first-time purchasers moving out of apartments, Tomnitz said. The company’s home prices start at $90,000. Toll Bros. houses cost an average of $676,000.

Westwood-based KB Home, the fifth-largest builder, said housing was being hurt by waning consumer confidence.

“The decline in consumer confidence in housing has led to increased cancellations,” CEO Jeffrey Mezger said at the conference. “Over the last several months, new home supply seems to be subsiding. Hopefully this is a precursor to the balancing of supply and demand.”

Shares of Toll Bros. rose 44 cents to $29.24, D.R. Horton fell 1 cent to $24.55 and KB Home lost 11 cents to $48.60. A Standard & Poor’s index of home builder stocks is down 22% in the year through Wednesday, with all 16 members declining.

The Federal Reserve on Wednesday said, “Almost all districts reported that housing markets remained weak,” according to the regional survey known as the beige book.

The only exceptions were New York and New Jersey, which reported “some stabilization in the market for new homes.” New York City’s apartment market saw strong demand.