Home Builders Hammered by Housing Slump

April 27, 2007 — -- Thanks to better-than-expected corporate earnings, the Dow broke through the 13,000 mark for the first time Wednesday.

But not everyone is celebrating.

The nation's largest, publicly traded home builders are reporting significant drops in revenue and profits.

Pulte Homes, one of the nation's largest builders, reported Wednesday that it lost nearly $86 million during the first three months of this year. During the same time period a year ago, the company earned a profit of $262 million.

In a statement, Pulte President and CEO Richard Dugas said, "Overall, the home building environment remained challenging during the first quarter of 2007."

The nation's largest builder, D.R. Horton, also struggled during the first months of the year. It saw revenues drop 26 percent to $2.61 billion compared with the same period last year. Profits fell 85 percent from more than $352 million a year ago to nearly $52 million.

Horton chairman Donald Horton said in a statement, "Market conditions in the home building industry continue to be challenging in most of our markets as inventory levels of both new and existing homes remain high, and further increases in the use of sales incentives continue to put pressure on profit margins."

Challenging just begins to describe the housing market.

Sales of new homes, while up slightly in March, were down 23 percent compared with a year ago. And the 8.4 percent precipitous drop in existing home sales in March was the biggest one month decline since 1989 and reversed the four previous months of increasing home sales.

As A.G. Edwards home building analyst Greg Gieber said there is "definitely too much housing out there and demand is not strong."

In previous months, home builders used a mix of financial incentives, such as paying closing costs or buying down interest rates or offering upgrades like granite countertops and high-end flooring.

But according to a survey conducted by the National Association of Home Builders, many builders have actually reduced the level of incentives. In March, 54 percent of home builders offered nonfinancial incentives to sell their homes, down from 60 percent in December.

Now, many builders have simply chosen to lower prices to sell the backlog of homes. The industry trade group survey found that nearly one in five home builders reduced prices in January 2006. Now, nearly 40 percent are doing so.

"The reason to cut prices versus throwing in a lot of free stuff is affordability," said Gieber. "People can only borrow so much, and we've hit that point."

The recent meltdown in subprime lending -- mortgage loans with higher interest rates provided to home buyers with riskier credit -- and the expected tightening of lending standards will result in many people pushed out of the market, because they can't find a loan to buy a home.

"To reduce the inventory glut," said Gieber, who has been pessimistic for the past year about the home builders, "the industry needs to build fewer homes and lower prices."

And lower prices mean less profit for the foreseeable future.

Legal Troubles Grow for One Builder

Investors also learned today that legal problems for one home builder are growing.

Atlanta-based Beazer Homes disclosed that it is the subject of a second homeowner class action, this one filed in South Carolina.

The company had previously disclosed that it was the subject a possible class action in North Carolina for allegations of illegally financing unqualified buyers of its new homes. The U.S. attorney for the Western District of North Carolina has subpoenaed the company for information about the company's mortgage services.

In response to the U.S. attorney's action, the company said it was cooperating and that "there have been no allegations of wrongdoing."

Beazer did not return a call for comment on the new, South Carolina lawsuit.

Peter O'Dowd contributed to this report.