“Aggressively Responding To New Market Realities”: CEO
Some housing bubble news from Wall Street. “Dallas-based homebuilder Centex Corp. reported Tuesday that its profit for the latest quarter plunged 60 percent with the slowing of the U.S. housing market. Centex said it was forced to write off more than $130 million in costs in the quarter ended Sept. 30 related to canceled land purchases and revaluations.”
“‘We have been aggressively responding to deteriorating market conditions by reducing our controlled lots and aligning our workforce to the new market realities,’ Centex CEO Tim Eller said.”
“Concerns about a housing price bubble in many markets, higher interest rates and a slowdown in economic growth have put potential homebuyers on the sidelines. New home orders were down in every section of the country for a total of 29 percent, Centex said. Sales orders in the Southwest were off 14 percent from a year earlier.”
“Eller said inventories of existing homes for sale have doubled or tripled in many markets and in some areas are still rising. ‘Buyers are either waiting on the sidelines for conditions to improve or canceling their purchase all together, believing they will be unable to sell their existing home for their expected price,’ the home-builder CEO said.”
“He added that markets that got overheated such as Phoenix and areas of California are seeing sales listings grow significantly more.”
The Times Community from Virginia. “Centex Homes Division president Robert K. Davis notified Mayor George Fitch that the Dallas-based company ‘will not move forward and complete the purchase’ of about 385 acres for a gated subdivision on U.S. 29 at the town’s southwestern edge.”
“Centex wanted to build 298 single-family homes, which would have started at $900,000 apiece, according to the company. Supervisor Chester Stribling (Lee District) didn’t expect the company to scuttle the project. ‘I thought they were committed to it,’ he said. But he added, ‘It was high-end expensive housing and the market’s cold.’”
“Brookfield Homes Corp. reported third-quarter net earnings of $27.6 million, down 27% from the year-ago period. The Fairfax, Va.-based home builder posted revenue of $176.2 million vs. $267.7 million. In addition, Brookfield reduced the range of its 2006 per-share earnings outlook due to the impact the continued market uncertainty may have on its estimated home closings and bulk land sales.”
“‘The long anticipated slowdown in housing markets in the U.S. remains a challenge, particularly in our San Diego and Washington, D.C. markets,’ said CEO Ian Cockwell.”
“Denver-based M.D.C. Holdings Inc., the eighth- largest U.S. home builder by market value, said on Tuesday its third-quarter earnings fell 60 percent as potential buyers canceled orders. Potential customers have backed out of purchases over concerns the houses may drop in value and because they are having trouble selling their existing residences.”
“M.D.C. also incurred a $20 million expense to write down inventory and recorded project write-off costs of $9.5 million. CFO Paris G. Reece III said in a statement the inventory writedown related mainly to five projects in California where demand was weak and required ’significantly increased sales incentive requirements.’”
“M.D.C. said it reduced its land holdings and options on land in the quarter to increase cash flow and preserve capital amid the weakness in the housing market. It owned or had options on 31,565 lots in the third quarter, down 28.2 percent from 43,987 lots in the same period last year.”
“Incentives as a percentage of average selling price doubled from 3 percent to 6 percent in the last quarter, said Reece. Demand for new homes, particularly in Colorado, has been weak, Reece said.”
“‘It’s a bit of a mystery,’ he said. ‘We have job growth in a positive way for the last couple of years. It’s a vibrant community. But we’ve seen listings rise, and foreclosures on a per-capita basis are the highest in the country.’”
“The company decreased its land investment by $100 million during the third quarter and reduced the number of lots it controls by 25 percent. But as more homebuilders struggle, land may become available at sharply reduced prices.”
‘Weyerhaeuser Co. said Wednesday that net income and sales fell in the third quarter, hit by charges from production cuts at its sawmills and an ‘abrupt’ decline in the housing market. The Federal Way, Wash.-based wood products and homebuilding company said net income for the three months ending Sept. 24 fell 26%.’
‘The world’s largest producer of softwood lumber, said the charges were mostly due to asset write-downs after it closed plants and shuttered mills in response to lower demand for its wood products. ‘While anticipated, the housing market decline was more abrupt and drove wood products prices and demand into a deeper plunge than expected,’ said CEO Steven Rogel.’
it’s a good thing this slowdown won’t affect and eventually plunder commodities markets.
just a dip in a long-term trend.
Here’s another piece of wood for the fire…
Comstock Homebuilding Default Notice
If Comstock Homebuilding is in default on its credit agreement with Bank of America, the bank will be entitled to accelerate the repayment of the company’s approximate $200 million in outstanding indebtedness, as well as exercise other legal options, according to Comstock Homebuilding’s filing with the Securities and Exchange Commission
http://tinyurl.com/y23yaf
We’re getting a good preview of tomorrow’s numbers from these CEOs.
You’re right especially when we compare the numbers from the home building industry vs. the realtors. I personally trust the one who has to file a SEC 10K.
KB Homes is next in line for default.
Incentives to 6% on homes….add this to the YoY decline why don’t we.
Looked at a place in Hillcrest (San Diego) this weekend because my girlfriend wanted to sign up to win a free Vespa. A small 1 bedroom conversion (No closet space or room for a dresser.) was going for $280k with $20k incentives of anything from cash to HOA prepayment to whatever you wanted it to be. When the agent asked what we thought I didn’t have the heart to tell her I wouldn’t pay more than $100k for it.
If it’s a conversion, I wouldn’t offer any more than $50K for it. Seriously.
Amazing, isn’t it. They all want to build 900K houses even though probably less than 1% of the population is a market for that expensive a place.
Makes you wonder if there isn’t more garbage profit in those very expensive place.
TxChick,
You’ve hit on the issue that has driven me nuts since I had to move to San Diego. Who the hell are they building all these 700 to 900K homes for??? They have to be marked up beyond all reasonability. The median HH income in SD is about 60 - 65K. My wife and I make more than 3 times that. I cannot tell how many times we’ve been gone to house parties where we know that we make twice as much money as the owner and yet they’ve just managed to somehow buy a 700 - 800K house…complete bizarro world here in SoCal.
JWM –
I am in the same boat as you. My wife always assumes that the problem is that everyone else around us (in Rancho Bernardo) is loaded with dough, but I assure her that there are not really enough millionaires in San Diego to afford all the $1m+ homes.
no, these people loaded with the “anti-dough” know as “debt”. soon to work like Kryptonite on these economic idiots.
Rest assure your wife that whatever she is seeing on other people is BUILT ON DEBT NOT ON WEALTH.
That tune is going to change, soon. Here’s what you can watch, from DQ:
“Trustees deeds recorded on homes totaled 3,424 during the third quarter, up 76.9 percent from 1,936 for the previous quarter, and up 362.1 percent from 741 for last year’s third quarter. Trustees deeds, or actual foreclosure sales, peaked at 14,896 in second-quarter 1997, and hit a low of 636 in the second quarter of last year. ”
YoY increase of REOs at 500%. That’s a staggering number and soon the supply of REOs will overwhelm the existing channels that absorb these homes. Won’t be long either…
Apologies. Not YoY, rather Current qtr over last year’s 2nd Qtr, so YoY+qtr. Brace yourself and put the reins on your anxious wife. You need to wait for Q/Q numbers AND Y/Y numbers to show decreases before considering…
If you go to foreclosure.com and pull up your zip and then click on a particular address, the next page give a community link where you can then pull up a community breakdown of household income.
I was “pleased as punch” to look at mine because although I had long felt like the orphan poor family in the community, the truth was we were in the 78%ile. In fact there were only 600 families that were in the levels above us. Guess there’s a lotta posin’ goin’ on!
Thanks for the tip.
I had to laugh though at the crime statistics. Pacific Beach is a San Diego college student Mecca with plenty of bars. Even though all other crime statistics are above the national average, rape is well below. Probably because anyone with a pulse here can get laid relatively easily.
Carrie Ann:
Could you tell what the source data was?
Re: source data on foreclosure.com info, I was wondering the same thing, Sunset Beach Guy. On my print out, it doesn’t disclose that information but I suppose I could kick around the site a bit more.
That should have read 600 households not 600 families. Sorry bout that.
Your useful local observation is indicative of a nationwide malaise - conspicuous consumption. It’s no enough to own something, you have to flaunt it in everyone’s face.
Oh its not just in SoCal …my husband and I just closed today on a property outside Boulder CO. 525…it started at 899 back in January. We put 20% down and carry the rest on a fixed rate mortagage. We make over 200K. My sister, VA, who does not work and whose husband is a commander in the Navy…bought an 800K house…kids in private school…two vacations so far this year…I just don’t get it…We sleep well at night.
As long as credit conditions are loose, the garbage profit potential will remain.
Not only did they want $900k for the homes, according to the article it was supposed to be a “senior citizens-only project.” The hell…?
The high fixed costs of new construction favors building larger to maximize margin.
jb
I’m sure that’s true, but the trick in any business be it manufacturing or otherwise, is ensure that the costs can be absorbed by your customer base. If it can’t be, then you’re in trouble.
Only as long as someone is buying. When no one is buying, there is no margin.
TXChick, you have hit the nail right on the head. The house me and my wife owned was inspected for termites before we sold. The comes in and asks me how much we paid (or, how much debt we took out out). I said this place, we were the first owners went for 142K in 1996. He goes on to ask me how much I thought it cost to build. I played along since he said he has family in the construction business. He told me that these homes were being built for anywhere from 40-70K. Add the property cost and these homes couldn’t have cost more than 100K. 40% markup nice profit. All the other stuff like streets and lights is paid for the home debtors on their tax bill. Nice margin for builders. I wish I could get 40%!
For several people I know (though by no means the majority), it was a combination of willingess to accept more debt and lucky timing. For instance, an acquiantence bought a house for 260k in Mira Mesa around 02. He then sold it and bought a 600k+ house in Carlsbad in 04. Now ordinarily he and his fiance could never purchase that 600k house, but they sold the house in Mira Mesa for 400, so in essence he was moving from a 260k mortagage to around a 400k mortgage. I am guessing a bit on the second purchase as I don’t know the actual price. Did he take on more debt yes. Could he do it reasonably, in his case also yes. Its not that he was earning Lots more money just that the rising tide enabled him (a software developer) to buy bigger while taking on more debt. In this particular case he needn’t have taken on a suicide loan to do it.
Back in realityland though, most of those faux millionares are in for either foreclosure; or if they are lucky alot of top ramen and scraping by.
I may live in a 1 bdrm shitbox in Northpark, but I eat well and I wait.
Josh
Simple chick, as it is all about the amount of the next draw.
Stanley tools reported slowing business as fewer tools are needed in the housing sector. Moronic David Lereah says we are at the bottom. Wonder how many months in a row is this shill going to predict the bottom?
Well, eventually, he’ll be right. And then he’ll crow about what a genius he is…
Hope David brings breathing apparatus, i.e. a very, very long straw. Bottom will be reached under many layers of dark, quasi-liquid substance. Suggest David bring clothespin for nose as well.
“Dallas-based homebuilder Centex Corp. reported Tuesday that its profit for the latest quarter plunged 60 percent with the slowing of the U.S. housing market. Centex said it was forced to write off more than $130 million in costs in the quarter ended Sept. 30 related to canceled land purchases and revaluations.”
More bad news from the big builders; does it ever change? I guess this was already priced in, or else turned on its head by the contrarian geniuses out their, because their stock price naturally rose on the bad news…
I get the feeling that the stock market is awaiting armagendon with each piece of economic news. The market will plunge when it happens, but gets a short term lift anytime it doesn’t.
Resale market may be emotional but home builders rational. Will shortly discount to dump inventory. Resale market is toast.
“Centex said it was forced to write off more than $130 million in costs in the quarter ended Sept. 30 related to canceled land purchases and revaluations.””
What does it mean :canceled land purchases and revaluation? How they lost $130M ?
Did they want to buy a land and changed their mind and in the processo lost $130M? What is the mechanic of this loss ?
Sounds like they reassessed the market value of the land and wrote down the loss in value. I believe they can do that if they can reasonably ascertain that the value of their “inventory” dropped. I’m assuming they are doing that based on cost though. As for “cancelled land purchases”? The only thing I can think of is that they recognized the revenue for the land sales in previous periods, then wrote them down this period when the sales cancelled. They can’t write that down unless they recognized it already.
It could also be the cost of expired options to purchase land. If they purchase the land at below market prices the options have positive value. If the land price drops they lose whatever they paid for the option. It’s actually good business practise. For very little cost they can control the price they pay for land without actually buying it. If land prices go down they just let the option expire. I don’t know how options are handled on the books.
Revaluations means the value has gone down since they bought it. Canceled land purchases probably means the salary of the buyers, agents, lawyers, and other fees that go into the purchase of land. If you buy the land, under accounting rules you would add that to what you paid for the land, if you don’t buy the land those get expensed. In both cases it’s a reflection that previous cash out the door was in excess of what would be needed now, not new cash out the door. Also, even in the current period, $130 million won’t break the bank, yet. When they start writing off more than a year’s income they’ll be close to bankruptcy.
I am quite certain the losses on their books for land are related to canceled options contracts on land they haven’t begun any real work, where in cases they may have attempted to re-negotiate and couldn’t come to terms on a new lower price.
$90 million of the loss was their walking away from $90 million of deposits on land options. $41 million of the loss was their land revaluation - that basically means that they are losing money on a devleopment and have to write down the rest of the land in that development that they haven’t sold yet. Valuations are supposed to be done quarterly.
“M.D.C. said it reduced its land holdings and options on land in the quarter to increase cash flow and preserve capital amid the weakness in the housing market…”
That my friends is capitulation and adoption of a very defensive posture.
And the HB stocks go…UP!
Could the bottom really be in for these builders, even though the worst is yet to come? Are they able to realign their business that quickly (and perhaps sell lots and offer to build custom homes on these lots, instead of the McMansions so many of us despise)?
‘It’s a bit of a mystery,’ he said. ‘We have job growth in a positive way for the last couple of years. It’s a vibrant community. But we’ve seen listings rise, and foreclosures on a per-capita basis are the highest in the country.’
This could be one of those great problems that leaves the Feynmans and Hawkings of the world scratching their heads for decades. Perhaps in the next century some obscure mathematician with no vowels in his last name will publish a paper that explains once and for all why U.S. home sales declined in 2006.
My observation is that guys like that tend not to waste much time thinking about stuff like this. Just not particularly interesting to them. Recall reading Isaac Newton taking a bit of a beating in a bubble. Nobel economists involved in LTCM, no?
Actually that was my point. Anyone with half a brain who is not deluded by visions of housing sugar plums could tell you why U.S. home sales declined in 2006.
Maybe it’s because we have an enormous amount of pay-less job growth. People with pay-less jobs don’t buy houses.
All jobs are not created equal.
Land prices drive home prices- builders huge cancelation
of land options means lower prices for the basic foundation of the RE industry. Your local appraiser, lender, mortgage broker,seller, land spec owner etc will find lower comps for land pricing across the United States
including Calif.
“Eller said inventories of existing homes for sale have doubled or tripled in many markets and in some areas are still rising. ‘Buyers are either waiting on the sidelines for conditions to improve or canceling their purchase all together, believing they will be unable to sell their existing home for their expected price,’ the home-builder CEO said.”
Cannibalizaton hard at work, I’m afraid.
How realistic is it for Countrywide to buy back $2B in stocks? There are only about 600M shares, and even at $40 per share that would imply they intend to buy back 50,000,000 shares–or about 8% of the company.
If this is the case, I may as well sell my April 07 puts at $35 because there is no way that much buyback would ever allow the stock to fall, right?
Mozillo is just going stick it to the shorts over the short term. I’m keeping the couple of Jan 07 puts I’ve got for the moment but it appears CFC is going to use all of the treasure it has to support the stock until things turn around. Can they do it? That’s the 64,000 question!
Do Godzilla and friends believe DL’s prediction for a shallow dip and resumed uptrend in 2007? Maybe it is time to just bite the bullet and buy a home…
No. There are still widespread problems working their way through the system and lenders are still acquiring REO properties at a furious rate. I’ve got three houses for auction next week in Fairfax County, aggregate value of loans = $1.2 million. I fully expect all three to go back to the lenders. (Had a fourth for another $350k, but that canceled).
I’d say it looks pretty realistic. They are at a relativly low capitalization point, the market isn’t pulling liquidity, and they have enough cash to accomplish it. $2 billion isn’t that big of a share buyback (Intel does 1-2 billion every three months).
You can (and apparently have already) on how their balance sheet should be properly adjusted for credit quality and potential interest rate changes, but I see no reason why they would be unable to execute their stated repurchase plans.
As far as what a share repurchase would do to the stock price, that is a far trickier question to answer. The logical response would be that it have no impact on the share price essentially the numerator (business value) declines by the same ratio as the denominator (shares outstanding), but as we all know, the markets are rarely logical in the short run.
“it have no impact on the share price essentially the numerator (business value) declines by the same ratio as the denominator (shares outstanding)”
not exactly. a company’s per share net worth (equity, or book value, per share) wouldn’t change as a result of the buyback. however, the value of the remaining shares would increase. why? the company’s profits are now shared by a smaller number of shares. because share values are usually based on earnings, the value of each remaining share increases.
the company that earned $1m and had 1m shares had $1 in earnings per share. upon buying back 500k of those shares and earning $1m again the following year, the remaining 500k shares had $2 in earnings per share. therefore each share doubles in value.
Anybody remember when we had that post about which public homebuilder would go first. My bet then was on CHCI Comstock Homebuilders. They have already been losing money and today Bank of America announced it is pissed that CHCI defaulted on $2.7M due Sept. 30th. They have number of condo conversions and condo projects in the DC area. They have been dropping prices like crazy and I’m sure that is helping send the cancelation rate through the roof as well.
http://biz.yahoo.com/iw/061024/0176234.html
alright geniuses, how do we feel about SRPIX?
Way too many commercial and hotel property managers in SRPIX. I wouldn’t touch that at all. Its the residential RE that is imploding. Nobody will make money shorting office parks and hotels. The expense ratio on most profunds makes me gag as well.
Please explain what it means if KB Home is “offering $7.50 cash for each $1,000 note held.” Is this as bad as it sounds, or am I missing something here?
——————————————————————————–
6:32 AM ET 10/25/06
[KBH] KB HOME: OFFERING $7.50 CASH FOR EACH $1,000 NOTE HELD
6:31 AM ET 10/25/06
[KBH] KB HOME ASKING CONSENT FROM BOND HOLDERS FOR 10-K DELAY
5:40 PM ET 10/20/06
[KBH] KB HOME: LETTER ASSERTS DEFAULT DUE TO FILING DELAY
5:41 PM ET 10/20/06
[KBH] KB HOME: LETTER DOES NOT SATISFY DEFAULT REQUIREMENTS
5:40 PM ET 10/20/06
[KBH] KB HOME GETS LETTER PURPORTING INDENTURE DEFAULT
6:20 AM ET 10/10/06
[KBH] KB HOME REVENUE IN QUARTER $2.67 BLN, UP 6%
6:20 AM ET 10/10/06
[KBH] KB HOME Q3 EPS TO FALL TO $1.93 FROM $2.55
6:19 AM ET 10/10/06
[KBH] KB HOME: EXPECTS BANK WAIVERS IN ‘NEAR TERM’
6:18 AM ET 10/10/06
[KBH] KB HOME: MAY NEED TO MAKE NON-CASH CHARGES FOR COMPENSATION
6:19 AM ET 10/10/06
[KBH] KB HOME: STOCK OPTION REVIEW NOT COMPLETE
6:18 AM ET 10/10/06
[KBH] KB HOME DELAYS Q3 FOR STOCK OPTION GRANT REVIEW
4:36 PM ET 9/21/06
[KBH] KB HOME Q3 ORDERS 5,989 VS 10,467
4:35 PM ET 9/21/06
[KBH] KB HOME Q3 BACKLOG 23,878 UNITS VS 27,744 UNITS
4:36 PM ET 9/21/06
[KBH] KB HOME Q3 DELIVERIES 9,523 VS 9,812
4:34 PM ET 9/21/06
[KBH] KB HOME Q3 FIRST CALL REV EST $2.61B
4:33 PM ET 9/21/06
[KBH] KB HOME Q3 REV $2.67B VS $2.53B
4:32 PM ET 9/21/06
[KBH] KB HOME REPORTS PARTIAL Q3 RESULTS
4:32 PM ET 9/21/06
[KBH] KB HOME REPORTS PARTIAL RESULTS DUE TO OPTIONS REVIEW
9:54 AM ET 9/12/06
[KBH] KB HOME UP 2.3% AT $42.07
8:47 AM ET 9/8/06
[KBH] CITIGROUP CUTS KB HOME PRICE TARGET TO $75
As I understand KB will pay $7.5 per note in order to get the note holders to agree to an extension of the filing date. Sort of a penalty to KB and an incentive for debt holders to agree to the extension.
Would anyone care for some punch? (BB & Co held the FFR at the permanently low plateau again…)
http://tinyurl.com/br84c
Respiking the punch bowl was not enough to revive the unconscious patient, so the PPT EMT team has stepped in…
http://tinyurl.com/fvju7
We will see what the PPT is made of on Friday when the third quarter GDP growth figures are announced.
Casey makes the news again
http://tinyurl.com/yc4hge
My new theory on Casey. It’s possible that Casey is suffering from a classified personality disorder : Narcissistic Personality Disorder. Casey displays a number of the traits, hence his lack of fear or remorse:
clinical definition:
http://www.halcyon.com/jmashmun/npd/dsm-iv.html
here’s a guy that suffers from it:
http://samvak.tripod.com/
Believe it or not, I’ve seen Sam V. post here. Just thought that was an interesting tidbit.
If you ever want your life reduced to an absolute hell - have a relationship with one.
Hey Karl! Look at all the McMansions in Lakewood/MStreets posted for foreclosure!
http://www.foreclosure.com/search.html?st=TX&cno=113&z=75214
‘The Federal Reserve kept interest rates unchanged on Wednesday for a third consecutive meeting, hoping that a slowing economy will dampen a worrisome rise in inflation. Jeffrey Lacker, president of the Richmond Fed, dissented for the third consecutive time, arguing for another quarter-point rate hike to fight inflation.’
‘The statement explaining Wednesday’s action was little changed from the comments the Fed made at the August and September meetings. The Fed repeated worries about inflation, saying that readings on core inflation, which excludes energy and food, ‘have been elevated’ and also saying that ‘the committee judges that some inflation risks remain.’ Those phrases are seen as signaling that unless inflation moderates further, the Fed is prepared to boost rates again.’
Fed continues to Throttle patient (housing) with both hands. Patient to be losing consciousness shortly.
5.25% is “throttling” the patient? Sounds like a pretty gentle form of throttling to me. It’s still below the historical mean (5.77%) for short rates over the last 50 years:
http://www.federalreserve.gov/RELEASES/h15/data/Annual/H15_FF_O.txt
Show me 8 or 9%. Now THAT’s “throttling”!
Historically, on average, you’re absolutely correct, but we are operating in a-historical times. Considering where the rates were when most of these ARMs were written this is strangling the loan holders. Too since 70% of sales have been using ARMS strangling sales as well.
Many, including Mish have been calling for the next move to be a drop, but I don’t think so. I think they’ll hold steady till after the election and then continue raising.
If you don’t think where the rates are now compared to where they were is strangling housing, what do you think David Lerah and the rest are screaming about?
Do I think the rates are still to low? Absolutely. But IMHO where they are now is more than enough to render the patient comatose.
8% or 9% boy you are a sadist! That would be a shot of digitalis to the heart! But man, I’d love to see it!
New Market Realities. As David says, or maybe it’s Rodney
Not bad, huh? I’ll have more units
in the next two years!
I bet they’d love a great shopping mall
right here!
Condos over there! Plenty of parking.
Country clubs and cemeteries…
…are the biggest wasters
of prime real estate!
Dead people? They don’t want
to be buried nowadays. Ecology, right?
Ask Wang. He’ll tell you.
We just bought property…
…behind the Great Wall. On the good side!
Could I please have decoder ring that goes along with this secret message? Me not understand.
It’s Caddyshack. Irrational exhuberance. David always reminds me of Rodney. It’s like he makes me laugh every time he opens his mouth. And, he’s so sure of himself.
Hey DL, “You will get nothing and LIKE IT”
Caddyshack
“Fifty bucks says the Smales kid picks his nose…..fifty says he eats it.” I imagine Spalding and David Lereah to be the same person.
Where’d the [housing market] land?
Right in the woodyard, [David].
Thanks,…… i really gotta get out more! (or watch more cable tv!)