Lower New Home Prices With Builder ‘Focus On Volume’
A homebuilder had first quarter numbers out. “D.R. Horton Inc., the No. 1 U.S. home builder, on Tuesday said quarterly orders rose about 10 percent, but the average sale price fell on softer demand for more expensive homes. The decline in new order prices was a further reflection of a softening U.S. housing market and the company’s focus on volume versus price, analysts said.”
“‘We attribute the lack of price appreciation to the weaker market conditions and Horton’s efforts to maintain a strong pace of sales,’ securities analyst Daniel Oppenheim wrote. Oppenheim warned he expects earnings declines in 2007 and 2008 based on margin erosion. ‘We believe that the focus on developing and pricing homes to maintain a high level of affordability will limit the decline in earnings relative to other homebuilders,’ he said.”
“‘A moderation in sales of $1 million-plus homes in California and lower-priced products in (Las) Vegas, New Jersey and (Washington) D.C., contributed to the West’s and Mid-Atlantic’s declines,’ Janalyst Michael Rehaut wrote. The value of the new orders rose 7 percent to $4.4 billion. Yet, the average sales price fell 3 percent.”
“Some expect order growth to become more difficult for home builders, such as D.R. Horton, which have seen gains slip from 26 percent to 16 percent to 10 percent in the past three quarters. Additionally, many home builders have reported declines or small increases in first-quarter orders.”
The first quarter financials aren’t available yet, but a look at the previous quarter is instructive. At the end of 2005, the firm had $225 million in cash, and had accounts payable of $1.9 billion. Small wonder they are doing this. “D.R. Horton, Inc. sold $750 million in two-part notes, UBS Investment Bank said on Tuesday. The size of the deal was increased from an originally planned $500 million.”
Inventory had surged over $1.5 billion in ththe last three months of 2005, up to $10 billion. A look at this statement shows that cash outflow for ‘change in inventory’ made up the entire gain, and dwarfed all other cash catagories.
And with over $7 billion in debt, the small $21 million in recorded interest expense reminds us that the homebuilders capitalize the interest by adding it to the inventory, rather than reduce net income.
‘ Oppenheim warned he expects earnings declines in 2007 and 2008 based on margin erosion.’
So the biggest US homebuilder is short of cash, is cutting prices and making it up with volume. The analyst sees even lower prices two year out, and his chief praise is that Horton shouldn’t fare as poorly as its rivals. The firm had a negative cash flow in Q4 2005 of over $900 million.
Sounds like Horton is burning up the cash faster than the average flipper…
All the builders are waiting for the big selling season .
Is he running an airline or homebuilder?
Inventory increasing and prices falling..
How long before they will have to write off excess inventory to recognize lost value?
Everyone in RE should like this: lower prices and more sold. From RE agents to lenders to appraisers, the quantity sold is more important than the price.
Here’s a thought: Exising home owners are the ‘villian’ since they are so reluctant to lower their price and there are fewer sales.
Yeah, that makes sense.
$21 million in recorded interest expense reminds us that the homebuilders capitalize the interest by adding it to the inventory, rather than reduce net income.
I don’t think they have a choice…I believe the interest “Must Be” capitalized as a “Cost of Construction”…..Someone please correct me if I am incorrect…
That is correct.
JWC, cpa
There is an alternative. They could build homes using cash they have already earned. But the new trend is to borrow on Wall Street and build up massive inventories, while jumping up and down yelling ’shortage’. What would their net income be if the rules were different?
The result - losses quarter after quarter - during the biggest boom in their history!
Ok # 1 please take with a grain of salt, OR shot of whiskey any report from a JP Morgan, Goldman, Sacs, Lehman Bros….from here on in..they are out to save their “fractional money supply NECKS”.
#2 Real Estate stocks were a)oversold; b) spring is here “slope of hope”; c) interest rates will soon turn if they didn’t last week! …all ths will be eleviated by some time in MAY whne the economy will be reported as true signs are obvious to even WASHINGTON!
#3 Executive options - why should Rela Estate Execs. be any different. Wall Street convinces every eXEC. that buying shares back is the only true sense of Ownership with your forecasts. {And a complete fraud on traditional EPS.that used to be plowed back inot a business} …Now ALL excess cash flow attempts to support prices so WALL STREET can get the H out!!!!
Ben- you’re thinking like a shareholder, not an insider. Gotta use the cash for stock buybacks. Need to support the stock price so the they can cash out their options before this whole thing tanks.
Don’t you love the complete disregard for the shareholders best interests?
How can the bagholders, er, I mean, shareholders, not see through this? Certainly there must be something else propping up these share prices beside shareholder stupidity — maybe those stock buybacks. But nonetheless, if the only purchases were buybacks, then I don’t think the stock price would stay up for long.
Good point on the stock buy back SCAM! All the buy back does is allow the options to be cashed and the other shareholders gain ZERO!
The “shareholders” often don’t even know what company they hold. Just check out the earlier comments on crappy 401k mutual fund selections.
The key word now days is OPM (other people’s money). Most volume in the markets is by people spending OPM. The bag holders are clueless (yes, me too - I can’t exercise much control over my 401k, so why bother reading the stupid prospectus to find out that 0.5% of fund A is in DR Horton and 0.2% of fund C is in TOL).
OPM guys…………… This is not Capitalism. The I tulip guys call it the Frankenstein economy. I
Share buybacks were mentioned in the Fitch review of the debt issuance today.
‘In November 2005, DHI’s board authorized the repurchase of up to $500 million of common stock and up to $200 million of outstanding debt securities, replacing the previous common stock and debt securities repurchase authorizations. During the three months ended Dec. 31, 2005, DHI repurchased 1 million shares of common stock at a total cost of $36.8 million. As of Dec. 31, 2005, DHI had $463.2 million remaining of the board’s authorization for repurchases of common stock and $200 million remaining of the authorization for repurchases of debt securities.’
Look at their financials. Negative free cash flow, in other words - all their increase in cash is from DEBT ISSUANCE! This will end badly for them!
crispy;…That was that extra 500 mil on there line increase wasn’t it….
Error;….250 mil….
Without it, the cash is almost zero?
OT but there are “MAJOR PRICE REDUCTIONS” in San Diego’s Condo Market of upto 90k:
http://www.777lofts.com/index.html
At least SD has a lovely condo-strewn skyline now (until the lights go out, at least…).
“A collection of loft condominiums as unique as San Diego. As sophisticated as you are.” (and money foolish)
“Designed expressly for those for whom life is a sensory banquet.” (Feel, don’t reason)
“And who welcome a purity of style.” (Pure style over any substance)
Yep, they must be pitching at people’s logic centers….
Oh my goodness. I can ’save’ 90K, and get granite countertops. I say, San Diego condos for all.
The buliders can keep margins somewhat positive by building smaller houses. Not all price “decrease” has to come totally out of the margin. Keep in mind that affordable houses have not been built since the 1950’s. I’d bet there is still demand for condo priced houses built on a nice lot.
Besides, corporate bankruptcy is almost totally painless for management (many of them actually get bonuses to stay on to help compensate for their worthless options). What do they really care about the future? Who else gets such a cushy gig, where total failure leaves you set for life? - politicians of course and they’re the ones responsible for the laws.
Here’s some bozo that built (7) affordable homes in Salton City, CA…only 250k with granite. And they’re near the sea!
http://www.harmonhomes.com/browse/homes-for-sale/California/2022/Salton-City/results/detail/12448973
I wonder if the big builders started off like this.
When Horton’s built in my area, they’ve been starter homes by modern standards- 3 bedroom, 2 bath, 2 car garage and 1300-1800sf with prices just a little less than the current mediam sales price. Their construction quality seemed to be pretty mid-level for a McBuilder. I’ve seen better and far worse for the same sort of tract homes.
Around here, DR Horton builds triplexes. Mass produced, high-density, butt-ugly triplexes.
You talking about Horton’s new hoods in Crestview? Haven’t been up to see any of those yet… probably like the rest of Crestucky south of I-10… one 3/2 brick home after another all looking exactly the same…
They did a couple of developments in Navarre a few years back that I was thinking of. Pretty bland tract homes with no landscaping and no trees, but they were built to new hurricane code, and at a price point that the enlisted Air Commandos from Hurlburt could make the payments on a 30 year fixed loan.
It wasn’t a pretty neighborhood, but it was middle class affordable in an area with low crime and decent schools.
We looked at homes in Crestview when we decided to buy. But it was too urban sprawl, too close to Alabama, and no one we knew actually liked Crestview itself; they just tolerated it because they could buy a home for $50-$60/sf including lot. (We bought a smaller place in Bluewater instead, and I’m so glad we did) And it’s not like you can get those prices anymore, so why should you buy there now?
I don’t understand why everyone is so hostile to a homebuilder who is doing exactly what we want. Cutting prices!
Thank goodness for the homebuilders who will price their homes competitively. They make the market. Without them the resellers can sit on their asking prices and delude themselves that the homes are ‘really’ worth that much. You can’t pretend anymore when the new homes are selling for far less. The fact is that if the big homebuilders can move houses at lower prices they may still be able to make money. Their profit margins will shrink, sure. But they can build pretty cheap and don’t have that much overhead. They may have another good year.
Next year when all of the forclosures hit the market is when they will get killed. But for now, they are deflating the bubble by cutting prices.
I also have to add that share buy back programs directly benefit existing shareholders, just as granting stock options hurts them. I wish every company I ever owned used their cash to buy back shares, instead of wasting it on stupid acquisitions added no value to the company. I’d have a lot more money today.
I also have to add that share buy back programs directly benefit existing shareholders
I must disagree. KBH’s quarterly report maybe two weeks ago revealed that they used $150M of company money to buy back stock at about $75 — very close to its all time-high — and by the end of the quarter the stock was worth $63 a share. KBH simply blew roughly $25M in the process.
Most of the homebuilders are doing the same thing. I just don’t see any way that it can be painted as good for anybody except as a delaying tactic for the insiders, who are limited in how much and how quickly they can unload their own shares, to cash out.
It is one thing for a company to use redundant cash for share buybacks but quite another to borrow heavily for the purpose.
Nothing wrong with share buybacks. Just make sure you are one of the ones selling BACK to them. Duh.
D.R. Horton will release their official numbers before the stock market opens next Tuesday the 18th. I’m champing at the bit to see how much they blew on stock buybacks to fudge their EPS just enough to get a headline number that fools Wall Street.
Psst! Hey! Anyone think about whether Horton used appreciated calculations for their inventory increase? I mean, it’s probably not like they went out and incurred debt to buy more inflated unimproved lots when the market shows signs of weakness. It’s far more likely that they marked up their existing inventory “values” based on a continued up market so their reports don’t freak out Wall Street.
Reality? If the market corrects 20%, the inventory “value” falls and they have essentially no positive balance. Oh, wait. If it falls, they lost sales and contracts, too. That would put them solidly in the red… Yep, I’d be selling stock if I was an insider.
Comstock has been building a small neighborhood of townhome-style condos for the past year in Woodbridge. When they first started, the banner said “Starting in the 400’s”. Late last fall, that changed to “Starting in the upper 300’s”. Now, they just changed it again, this time the “mid-300’s”.