Home builder KB Home on Thursday reported a $148.7 million loss in the second quarter ended May 31, which company officials blamed on a housing oversupply, affordability problems, and tightening credit in the subprime and near-prime mortgage markets.
Other large, publicly traded builders have been hit hard by the market downturn, too, which struck more suddenly and severely than some economists and analysts expected. Builder Lennar Corp., for example, on June 26 reported a second-quarter net loss of $244.2 million, compared with net earnings of $324.7 million for second-quarter 2006.
KB Home’s net loss in the second quarter represents a 172.4 percent decline from its net income of $205.4 million in second-quarter 2006. The company reported $1.41 billion in second-quarter revenues, down 35.9 percent compared to revenues of $2.2 billion in second-quarter 2006.
The company’s second-quarter loss amounted to $1.93 per share compared to a gain of $2.45 per share in second-quarter 2006.
The loss from continuing operations for the quarter was $174.2 million, compared to income from continuing operations of $184.4 million in second-quarter 2006.
KB reported that its average sales price declined 8 percent, from $295,300 in second-quarter 2006 to $271,600 in second-quarter 2007.
Unit deliveries declined 36 percent in May to 4,776 units, compared to 7,402 units in May 2006, and the company’s construction business generated an operating loss of $263 million in second-quarter 2007, down $556.5 million compared to operating income of $293.5 million in second-quarter 2006.
As announced in May, the company has entered into a binding share purchase agreement to sell all of its 49 percent equity interest in French subsidiary Kaufman & Broad SA, and the company said it expects this all-cash sale to close in third-quarter 2007 and to generate about $800 million in gross proceeds.
The company’s unit backlog declined from 20,924 units in second-quarter 2006 to 13,672 units in second-quarter 2007, and the cancellation rate was 34 percent, roughly flat with the first-quarter 2007 rate but an improvement from a 58 percent cancellation rate in fourth-quarter 2006.
KB officials said they expect the company will deliver 22,000 to 23,500 homes in 2007, though, “given current market conditions, we are not able to provide an earnings estimate for the year.” The sale of French operations, if it closes as expected, should bring “positive earnings in both the 2007 second half and full year,” according to the earnings announcement.
KB’s stock price fell 54 cents Thursday to $39.89 from the previous day’s closing price of $40.43 per share, and the stock was trading at $39.95 per share late Friday.
In addition to the market decline, KB was also shaken by a corporate scandal in the past year. Bruce Karatz, the company’s longtime CEO, resigned in November amid an investigation of the company’s reporting of stock-options grants.
Karatz agreed to pay $13 million to the company, and he has been replaced by Jeffrey T. Mezger. The company’s board terminated Gary A. Ray, the company’s head of human resources, and also announced the resignation of Richard B. Hirst, who served as executive vice president and chief legal officer.
Scandal has also rocked home builder Beazer Homes USA Inc., which announced Thursday the firing of its chief accounting officer for his alleged “attempts to destroy documents in violation of the company’s document retention policy.”
That announcement follows earlier disclosures about a U.S. Securities and Exchange Commission inquiry, a grand jury investigation and a series of class-action lawsuits. Several of the actions are related to the company’s mortgage origination practices.
On April 26, Beazer Homes reported a net loss of $43.1 million for the quarter ending March 31. The company had total revenues of $826.3 million for the quarter, compared with $1.27 billion for the same quarter of 2006. The company’s stock price closed on Thursday at $25.81 per share, down $2.73 (9.57 percent) compared to the previous day’s close of $28.54 per share. On Friday, Beazer’s stock was trading at $24.69 per share late Friday.
Beazer reported that the average sales price for its homes dropped 7 percent in the first quarter compared to first-quarter 2006, falling from $374,800 to $348.400. New orders for the quarter fell 3.3 percent compared to the same quarter in 2006, and the company’s aggregate dollar value of backlog homes dropped from $2.79 billion in first-quarter 2006 to $1.67 billion in first-quarter 2006.
Lennar Corp., which on June 26 announced a loss during the quarter ended May 31, reported that the average sales price of its homes declined 7.5 percent, from $322,000 in second-quarter 2006 to $298,000 in second-quarter 2007, “primarily due to higher sales incentives offered to home buyers.” The company offered an average of $43,700 in incentives per home delivered in second-quarter 2007, up 76.9 percent compared to $24,700 in incentives per home delivered in second-quarter 2006, according to the report.
Lennar also reported that losses on land sales totaled $108.8 million in second-quarter 2007, compared with gross profit of $41.1 million from land sales in second-quarter 2006. The company’s 8,940 home deliveries in second-quarter 2007 compare with 12,506 in second-quarter 2006.
Standard Pacific Corp.
Home builder Standard Pacific Corp. in May announced a net loss of $40.8 million for the first quarter ended March 31, down 143 percent compared to net income of $94.8 million in its first-quarter of 2006. The company delivered 1,965 units in the quarter, down 22 percent compared to 2,512 homes delivered in first-quarter 2006. The company also reported that net new orders, including joint ventures, declined 18 percent to 2,059 in the first quarter compared to the same quarter last year.
The company’s average home price rose 2 percent, from $361,000 in first-quarter 2006 to $368,000 in first-quarter 2007 including joint ventures. The average price rose 5 percent for the company’s Southern California homes but fell 26 percent for its Northern California homes in the quarter compared to first-quarter 2006, Standard Pacific reported. And the company reported a 22 percent rise in the average selling price in the Carolinas and a 20 percent rise in Arizona in the first quarter compared to the same quarter last year.
Weaker housing market conditions contributed to an increased sales cancellation rate in the second half of 2006, the company reported, and its supply of completed and unsold homes, excluding joint ventures, as of March 31 increased 103 percent to 768 homes compared to the same period last year.
Pulte Homes, in its first-quarter report for the quarter ended March 31, reported a net loss of $85.7 million in first-quarter 2007, compared to net income of $262.6 million in first-quarter 2007. The average selling price of Pulte’s homes dropped 1.8 percent, from $336,000 in first-quarter 2006 to $330,000 in first-quarter 2007. Net new orders declined 20.8 percent, from 10,725 in first-quarter 2006 to 8,499 in first-quarter 2007.
In May, builder D.R. Horton Inc. reported net income of $51.7 million for the first quarter ended March 31, down 85 percent compared to the same quarter last year. Homebuilding revenues declined 26 percent, the number of homes closed declined 22 percent, net sales orders fell 37 percent, and the average selling price of homes fell 7 percent to $257,500 in the first quarter compared to the same quarter last year, the company reported.
Toll Brothers Inc. on June 8 reported net income of $36.7 million for the quarter ended April 30, compared to $174.9 million in the same quarter last year.
The company signed $1.17 billion in net new contracts in the quarter ended April 30 compared to $1.56 billion for the same quarter last year.
“We believe this slowdown is attributable to a decline in consumer confidence, an overall softening of demand for new homes, an oversupply of homes available for sale, the inability of some of our home buyers to sell their current home and the direct and indirect impact of the turmoil in the sub-prime mortgage loan market,” the company reported in an earnings announcement.
“We attribute the reduction in demand to concerns on the part of prospective home buyers about the direction of home prices, due in part to many home builders’ advertising price reductions and increased sales incentives, and concerns by the prospective home buyers about being able to sell their existing homes.
“In addition, we believe speculators and investors are no longer helping to fuel demand,” though “we have been impacted by an overall increase in the supply of homes available for sale in many markets, as speculators attempt to sell the homes they previously purchased or cancel contracts for homes under construction, and as builders, who, as part of their business strategy, were building homes in anticipation of capturing additional sales in a demand-driven market, attempt to reduce their inventories by aggressively lowering prices and adding incentives.”
For the three-month period ended April 30, 2007, Toll Brothers reported that home buyers cancelled 384 contracts, or 19 percent of the gross number of contracts, compared to 9 percent of gross contracts cancelled during the same period last year.
For the six-month period ended April 30, 2007, the company reported a 1 percent decline in the average selling price of its homes, and the company expects to deliver 6,100 to 6,900 homes in the 2007 fiscal year, with an average price between $670,000-$680,000.
Builder MDC Holdings Inc. in May reported a net loss of $94.4 million for the first three months of 2007, compared with net income of $95.4 million for the same period last year.
The building industry “continued to experience uncertainty and reduced demand for new homes, particularly in our California and Nevada markets,” in the quarter, the company reported. The company cited several contributors, including: “reduced consumer confidence, on-going homebuyer concerns about the housing market and the lack of stabilization in home sales prices, and concerns over higher-risk mortgage loan products such as Alt-A and sub-prime.
As a result, there was lower demand for new homes, more competition for new-home orders, some heightened levels of incentives, increases in the supply of new and existing homes, and more difficulty for prospective homebuyers seeking to sell their existing homes, the company reported.
MDC reported that it closed 2,001 homes during the three-month period ended March 31, compared to 3,198 homes for that quarter last year. The company had 2,558 net home orders in first-quarter 2007, compared with 3,800 net home orders for first-quarter 2006.
The average selling price for the company’s homes dropped 1 percent in the first quarter to $352,600 compared to $357,900 in first-quarter 2006, MDC reported.
Hovnanian Enterprises Inc. on June 11 reported a net loss of $30.7 million available to common stockholders, compared to net income of $101 million for the quarter ended April 30. The company reported a decline in the average sales price of its homes in the Northeast and Mid-Atlantic regions in first-quarter 2007 compared to first-quarter 2006.
In the Southeast region, Hovnanian’s homebuilding revenues fell 34.1 percent, deliveries declined 41.8 percent and the average selling price plummeted 14.7 percent in the quarter ended April 30 compared to the same quarter last year. Homebuilding revenues in the Mid-Atlantic region fell 13.4 percent, deliveries declined 18.1 percent and the average selling price dropped 7.9 percent in the quarter ended April 30 compared to the same quarter last year.
And Hovnanian’s homebuilding revenues in the Northeast region decreased 7.9 percent, deliveries decreased 6.4 percent and the average selling price decreased 2.6 percent in the three-month period ended April 30 compared to the same quarter last year, the company reported.
The company’s homebuilding revenues also dropped 53.8 percent in the West, 14.2 percent in the Southwest and 12 percent in the Midwest in the quarter ended April 30 compared to the same quarter last year.
In May, builder Ryland Group Inc. reported consolidated losses of $24.4 million for the first quarter ended March 31, compared to net earnings of $90 million for first-quarter 2006. The company reported that the average closing price of its homes rose 1 percent, from $295,000 in first-quarter 2006 to $298,000 in first-quarter 2007. Ryland’s homebuilding revenues were $691.4 million in first-quarter 2007, compared to $1.06 billion for first-quarter 2006. New orders dropped to 2,989 in first-quarter 2007 compared to 4,021 in first-quarter 2006, and closings fell from 3,554 to 2,302.
Excess supply is partly to blame for the sales declines, the company reported in its earnings announcement. “For several years prior to 2006, the price appreciation of homes was relatively high in most markets and, in turn, attracted speculation. As price appreciation slowed, consumer confidence and demand declined, causing national homebuilders to experience increasing inventories that resulted in a dramatic rise in the number of homes available for sale,” the earnings report states.
“In order to compete in this environment, the company has maintained its current operating strategy of increasing advertising, price discounts and other incentives to generate sales; reducing inventory and commitments to purchase land in the future through contract renegotiations and cancellations; lowering overhead expense to more closely match projected volume levels; and renegotiating contracts with subcontractors and suppliers.”
Centex Corp., a home builder company, in its annual report in May reported net earnings of $268.4 million in the year ended March 31, compared to total annual earnings of $1.29 billion in the year ended March 31, 2006, and $1.01 billion for the year ended March 31, 2005.
The number of units closed declined 38 percent for the full year ended March 31, 2007, compared to the previous year, the company reported, falling from 1,454 to 901. The company’s average revenue per unit was $307,810 for the year ended March 31, 2007, up 1.3 percent compared to $303,850 for the year ended March 31, 2006.