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US Home Builders Further Darken Housing Outlook

By Dawn Wotapka
Published: July 26, 2007

Home builders set off new alarm bells on the distressed U.S. housing market, with D.R. Horton Inc. (DHI) and Beazer Homes USA Inc. (BZH) posting losses while ailing WCI Communities Inc. (WCI) admitted it can’t find a buyer.

Those weren’t the only signs of stress: Beazer got a new line of credit that’s half the size of its previous one, signaling a greater tightening of money available to the industry. Meanwhile, the Commerce Department said new-home sales took their fifth tumble in six months during June, as sales of single- family homes fell by 6.6%.

All of this indicates the worst housing slump in years—one that has rattled credit markets as inventories and delinquencies mount—will continue to weigh on the economy as projections for relief are being reset until later next year. The downward spiral has even spread to major retailers including AutoNation Inc. (AN) and Home Depot Inc.(HD), and it’s at the root of the concerns slamming the stock market, where the Dow Jones Industrial Average fell more than 400 points at its worst Thursday.

“It’s definitely going into other parts of the economy, I just don’t see how it can’t,” said John Tomlinson, director and senior analyst at Majestic Research.

Industry watchers have moved beyond labeling this a downturn. The housing market is “in a very severe recession, I don’t think there’s any question about that, and it’s a recession that’s going to continue for some time,” said Carl Steidtmann, chief economist for Deloitte Research, who doesn’t expect a glimmer of revival for a year.

Florida-based WCI Communities was the hardest hit, as the ailing Florida condo builder said it has received no offers from potential buyers. The news sent the stock plummeting by more than 20% before closing down 13% at $9.87. In the last three months, about 56% has been shaved from WCI’s shares.

“This is a microcosm of the whole boom-bust cycle in this one company right here,” said Jack McCabe, chief executive of McCabe Research & Consulting in Deerfield Beach, Fla. “This is incredible.”

The company rebuffed a $22 a share bid from billionaire activist Carl Icahn and delayed its June 15 annual meeting until Aug. 30 so it could entertain further offers. But Thursday, executives blamed “deteriorating conditions and uncertainty in the homebuilding and debt markets” for the challenging sales process and lack of interest. Icahn wasn’t immediately available for comment.

Meanwhile, D.R. Horton, the nation’s largest builder, posted a net loss chiefly because it had to write down the value of its land holdings. In a morning conference call, executives said they don’t see “a lot of strength” in any of its markets.

The picture was equally grim for Beazer, the country’s seventh-largest builder, which has recently seen its stock fall because of a Securities and Exchange Commission investigation. The stock fell 8.7% Thursday to $15.56.

Beazer Homes said it cut prices to spur sales and took major charges to write down the value of unsold inventory. The company also announced a new $500 million revolving credit facility that was just half the size of the one it replaced.

Other home builders could see a similar reaction from creditors when they need to refinance existing facilities, said Joe Snider, vice president and senior credit officer for Moody’s Investors Service. Companies may need to secure their credit revolvers or accept tighter restrictions.

“This is likely to have pretty significant consequences,” he said of the industry’s travails.

Finally, shares of Pulte Homes (PHM), the nation’s third-largest builder measured by 2006 closings, fell more than 5% after it reported a loss late Wednesday. The Michigan company wouldn’t provide estimates beyond the third quarter, saying it isn’t sure how it will perform as the market’s difficulties persist.

It will take a long time for the industry to recover, said Peter Dunay, an investment strategist for Leeb Capital Management in Manhattan.

“Declines are slower and last longer just like increases are slower and last longer. They don’t move like technology stocks,” he said. “It took several years of extremely low interest rates to push real estate values way up, and it will take a good period of time for them to correct.”