Editor’s note: Experts have predicted that the torrid pace of home sales and double-digit price growth would slow this year, and some segments are already experiencing this. In this three-part report we take the housing market’s latest pulse to get a feel for what’s happening across the country and what real estate executives advise brokers and agents can do to stay on top. (See Part 2 and Part 3.)
Large home builders will be tested this year as sales figures are dipping across the country. Some public home-building companies are already feeling the weight of a slowing market as their stock prices have taken a hit in the past couple of months.
Analysts are paying close attention to the builders’ latest earnings announcements, as well as home sales statistics released by the U.S. Census Bureau and National Association of Realtors.
Robert P. Curran, an analyst for the Fitch Ratings agency, said builders’ net new orders for the latest quarter have generally been weaker than a year ago. “The markets are always forward-looking. What they see or fear with sluggish-to-weak orders will translate to sluggish-to-weak revenues and some pressure in earnings,” he said.
Cancellations on new-home orders have spiked in some areas, he said, such as the Greater Washington, D.C., area. “What I see there is more a reflection on short-term investors who committed to buy a home (and then) bailing out and giving up the deposit.” Those cancellations may have been more substantial in areas with a lot of speculator activity or aggressive home-price increases, he said, and condo developments may have been particularly susceptible to cancellations. But the level of cancellations “is not meaningful on a national basis,” he also said.
“We’ve had a very long up-cycle in residential construction. Last year was another exceptional year. The concern in general is that this couldn’t be replicated.” Builders’ margins were very good in the final quarter of 2004, though there are signs of softness in the market and worries about housing affordability, he said.
Toll Brothers, which announced Feb. 23 that its first-quarter net income increased 49 percent over first-quarter 2005, has also seen its stock price in a general slide since August 2005. Toll Brothers’ first quarter ended Jan. 31.
The company’s stock hit an annual low of $28.70 in early February, in fact, after reaching $58.67 per share in July.
“Over the next couple of quarters … we will continue to face tough comparisons with last year,” said company chairman and CEO Robert I. Toll in the earnings announcement.
“In 2005, demand for new homes in many markets was propelled to unsustainable levels by speculative buying. We are now on the other side of that slope,” he said, with speculators placing properties back on the market and leading to a large supply and reduced demand in some markets.
“Although we ended the quarter with a record 258 selling communities, sales remain constrained at the many communities we have with backlogs of 12 months or more,” Toll also stated.
Curran said that many home builders appear to have been conservative with earnings projections for the remaining quarters of the year, and he doesn’t expect to see major adjustments.
In the past 90 days, analysts have revised their earnings per share estimate for Toll Brothers by about 16 percent in the current quarter — from $1.23 per share 90 days ago to a current estimate of about $1.06 per share. And the earnings per share estimate for the third quarter has been lowered by about 17.
KB Home, another large home-building company, also saw its stock price peak in July 2005 and then drop in August. But that company’s stock began to rebound in late October 2005 before hitting a smaller peak in January and falling again in late January and early February. The stock price is currently higher than it was at the same time last year, and KB will announce its latest quarterly earnings in March.
Phillip Neuhart, a Wachovia economic analyst, said the housing market “is headed for a landing — we do expect a soft landing.” The slowing market will likely mean fewer new-home sales, fewer housing starts and slower price appreciation, he said.
While the latest U.S. Census Bureau statistics on new-home sales, released Feb. 27, shows growth of about 3.3 percent in the seasonally adjusted rate of new home sales from January 2005 to January 2006, the rate fell 5 percent from December 2005 to January 2006.
Neuhart said analysts expected to see a stronger showing for January new-home sales.
Also, the months’ supply of new and existing homes for sale has been steadily creeping up. “I’d like to see the inventory numbers notch down a little bit,” he said. The current level “is not comfortable for me,” he said.
The supply of new homes for sale, based on the latest sales rate, was 5.2 months in January 2006, compared to 4.4 months in January 2005, the Census Bureau reported. And the National Association of Realtors reported that the supply of existing homes for sale jumped 43.2 percent — from 3.7 months in January 2005 to 5.3 months in January 2006. Existing-home sales have dropped each month from September 2005 through January 2006, according to NAR.
“The question is now (whether) builders will adjust to the slower sales. My concern is that builders, just like retailers, should adjust their pipelines to what’s going on,” Neuhart said. Hopefully, he added, builders will construct fewer homes for which they have not previously secured buyers.
A National Association of Home Builders’ gauge on builder sentiment about the housing market has reflected some market softening over the past several months, he also noted. It does not appear, though, that the housing market is experiencing any sort of a housing bubble on a national scale, he said.
“Housing is going to slow but how it’s going to slow remains to be seen,” Neuhart said, though a crash appears unlikely. “People have been calling for housing to slow for sometime now.”
There is anecdotal evidence, too, of the changing market for home builders. Some builders have been offering more incentives to buyers to keep sales rolling, and real estate agents in some markets have reported that builders and developers have been more willing to offer co-broke commissions to agents who bring buyers into transactions.
Despite strong earnings among most publicly traded home builders for the past several quarters, stock prices have been subject to significant fluctuations.
Home builder Lennar Corp. has seen its stock hit an annual low of $50.30 per share in early May and an annual high of $68.86 in late July. The stock dipped below $54 in October, topped $65 in January and slumped in late January and early February before climbing again, reaching $60.44 on Feb. 24.
Other home builders have seen similar peaks and valleys. Hovnanian Enterprises Inc.‘s stock experienced an annual high in July and an annual low in October, building up until January and then sliding in late January and early February to nearly its lowest annual level. Centex Corp. saw its stock price reach an annual low in April, an annual peak in July and a near peak in January, and steep declines in October and early February. Builder D.R. Horton Inc.‘s stock hit an annual low in April, with high points in July and January and other low points in October and February.
***
Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.
