Home builders' foundations shift with shaky market

KB Home said its cancellation rate jumped to 58% for its third fiscal quarter, which ended in August. The company said it abandoned plans to build homes in Indiana and Fort Myers, Fla.

"There was a significant deterioration in the housing market, and this accelerated dramatically toward the end of the quarter," said Jeffrey Mezger, CEO of KB Home. The number of buyers touring model homes and signing contracts hit "the lowest levels of the current housing downturn."

KB Home hasn't borrowed against its credit line but has renegotiated the terms to protect its liquidity. Beazer Homes, bzh Standard Pacific, spf TOUSA toa and others have also gone back to their lenders for new terms on their loans or credit lines.

But the struggles of builders, lenders and sellers aren't the only gauge of the housing industry. There are still some positive signs. Interest rates are still historically low. And buyers with good credit enjoy plenty of loan options. There are also pockets across the country where home sales are still healthy and prices are rising.

In the greater metro area of Tulsa, sales rose more than 7% in August to near-record levels. Prices also climbed. The real estate markets are solid, too, in most parts of South Dakota and Texas, for example.

On Monday, Robson Communities raised prices 1% on its active-adult development in Denton, Texas, because development costs are rising and sales are healthy. Still, the Phoenix-based developer projects that it will sell only 800 homes this year, half the number it sold last year. And the company has handed pink slips to 25% of its employees.

"Because we tend to focus on the senior buyer, the problem is not making the decision on the new house; it's selling their old house," says Steven Soriano, executive vice president for Robson.

That's partly because there's a bloated 10-month supply of existing homes on the market and more than eight months' worth of new homes for sale. Even when sellers do receive offers, the deals often collapse because buyers run into trouble qualifying for a mortgage.

Gordon Milne, CFO of Ryland Group, ryl says that 10% of its buyers last year purchased homes with "Alt-A" loans; those are for borrowers with reasonably good credit but no down payment and little or no proof of income or assets. Now that such loans have virtually disappeared, Milne says, "We're scrambling a bit to find mortgages for buyers who were in that 10%, and we can't find them for all of them."

Half of Ryland's buyers backed out of their contracts in the most recent quarter, Milne says, and the company had to lay off 30% of its staff. With its business shrinking, Ryland Homes has combined its Fort Myers and Tampa offices. In California, it's consolidated four of its offices into two.

"There is definitely a lot of discounting going on in some cities," Milne says, adding that many builders are offering 5% to 20% in incentives and price cuts, depending on the community.

This month, Ryland is promoting a "40th Sales Finale." Its home prices in Fort Myers, for example, have been slashed by up to 30% on completed homes that are sitting vacant. Buyers there also get $10,000 toward closing costs.

"It's hand-to-hand combat out in the field," Milne says. "We look at the competition down the street, what they're doing, and we've got to match it."

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