Thursday, May 24, 2007

New Home Sales Increase 16%

From Bloomberg:

Purchases of new homes in the U.S. unexpectedly jumped in April by the most in 14 years, a sign low lending rates and incentives may be reviving demand.

Purchases rose 16 percent to an annual pace of 981,000 last month from an 844,000 rate the prior month that was lower than previously reported, the Commerce Department said in Washington. The supply of unsold homes at the current sales pace dropped.

Lower prices and incentives offered by builders such as Centex Corp. are stirring demand for new homes after two years of falling sales. Still, a glut of unsold properties suggests homebuilding is likely to remain a drag on growth throughout this year and into 2008.

Let's add a very important piece of information from the AP:

However, the median price of a new home sold last month fell to $229,100, a record 11.1 percent decline from the previous month. The big price decline indicated that builders are slashing prices in an effort to move a huge overhang of unsold homes.

First -- color me really surprised.

However, let's look a bit deeper at some of the housing news.

Toll brothers reports decline (posted yesterday):

Second-quarter revenue fell 19 percent to $1.17 billion.

Net contracts were down 25 percent to $1.17 billion. Net of cancellations, contracts totaled 1,647 units, down 24 percent.

The second-quarter cancellation rate was 18.9 percent, down from the prior quarter's rate of 29.8 percent, but still higher than the company's historical average of about 7 percent, Toll said.

"Given the uncertainty surrounding sales paces, and market direction and, thus, the potential for and size of future impairments, we are not comfortable giving full earnings guidance," Chief Financial Officer Joel Rassman said in a statement.

Pulte and Beazer report lower earnings (May 14, 2007):

It became more of the same this week when two more large builders -- Pulte Homes (NYSE: PHM) and Beazer Homes (NYSE: BZH) -- reported first-quarter losses and refused to issue earnings guidance for the current year.

For the quarter, Pulte recorded a net loss of $85.7 million, or $0.33 per share, compared with earnings of $262.6 million, or $1.01 a share, a year ago. With the nation's depressed housing circumstances worsening steadily, the company's revenues declined 37%. All of Pulte's seven regions experienced declining revenues, and all but the Southwest saw net new orders decline.

For its part, Atlanta-based Beazer reported a loss of $1.12 a share, versus $2.35 a share a year ago. The company's closings fell 36% for the quarter to 2,743 units, while its revenues slid 35% to $826.3 million.

"Overall, the homebuilding environment remained challenging during the first quarter of 2007, as elevated inventory levels, combined with weak consumer confidence for housing, continue to place pressure on results," said Richard J. Dugas Jr., Pulte's president and CEO, when he released his company's results.

"Challenging" -- that's a word that builders have been invoking more frequently than Aaron Burr and Alexander Hamilton ever thought to do before their famous duel. Beazer CEO Ian McCarthy took his turn when he described the climate for his company: "We continued to experience extremely challenging operating conditions during our second quarter of fiscal 2007. Most housing markets across the country continue to experience lower levels of demand, coupled with higher levels of inventory, resulting in increased competition and continued significant discounting."

Hovnanian reports loss (May 7, 2007):

On Friday, Hovnanian Enterprises (NYSE: HOV) joined several of its peers in painting a bleak picture of its markets. The homebuilder expects a total loss for the second quarter in the range of $0.45 to $0.50 per share. Of that amount, about $0.30 is expected to occur before land charges, with the remainder related to land impairments and write-offs of predevelopment costs and land deposits.

The company's net contracts for the quarter dipped about 21% to 3,116, but without the especially hard-hit Fort Myers-Cape Coral market, net contract additions would have declined just 17%.

Hovnanian's prerelease follows recent reports from other major builders, including Beazer (NYSE: BZH), Centex (NYSE: CTX), and Pulte (NYSE: PHM), all of which have declined to provide guidance on the rest of the year's results, given the climate for continued soft housing conditions. On Friday, however, Hovnanian said that when it formally releases second-quarter results, "the company expects to update its 2007 guidance to reflect the charges and operating results for the first half of the year and its expectations for the remaining quarters of the year."

Builders have lower contracts, they call the environment challenging and they refuse to give guidance. There is no mention in any of these reports of a "rebound", or "the worst is over" or similar statements.

In short, today's numbers do not jibe with the latest reports from the industry. In fact, today's report is diametrically opposed to the news we have been hearing from the housing industry

While I am not saying today's report is total bullshit, it does not jibe in any way with the reports the housing companies have consistently reported this earnings season.