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By now, it is no secret that home builders have been battered by the national real estate slump. Builders have always been particularly vulnerable to booms and busts. They can literally print money when the market is strong, but on the flip side when the market is soft, they get hit hard. When soft market conditions prevail, they are often forced to discount their homes, or more likely, offer incentives (free updgrades, free car, trips, whatever it takes) to sell their homes. Also, it is difficult for builders to lower their asking prices, as they would then run the risk of upsetting buyers who bought earlier at higher prices.
This week, 2 of the countries largest builders weighed in on their prospects for the coming year and into 2008.
Toll Brothers, a large national builder out of Texas with projects in Dublin, says the the housing slump is almost over. They base this on the drop in cancellation rates that they are experiencing, giving hope that at this pace they can burn through their unsold inventory in the next few months.
“I would guess, and that’s all it is, it would be another four or five months before you finally burn off inventory in most of the markets,” Robert Toll, chief executive and chairman, said at Citigroup’s Global Industrial Manufacturing Conference.
In the last five weeks, the number of potential home buyers who have put down a deposit with the company and then canceled their order has dropped to 16 percent from a 36 percent high, Robert Toll said.
The cancellation rate may rise because it tends to go up at the end of the quarter, he added.
If it continues to trend lower, however, it would mean Toll is adding fewer homes to its inventory. That could make it possible for the company to sell down its inventory in many markets within four or five months, although some markets could take longer, Toll Chief Financial Officer Joel Rassman told Reuters after the CEO’s speech.
If other builders are seeing the same trend in cancellation rates, it would be a positive sign for the larger housing market, he said.
On the other hand, you have H.R. Horton, currently building high density condos near the Dublin/Pleasanton BART station. They see 2007 as another tough year, with hope that 2008 will show improvement.
“I don’t think ‘08 is going to be a great year, but it’s going to be much better than ‘07,” CEO Don Tomnitz told the Citigroup Industrial Manufacturing Conference.
He also said: “‘07 is going to suck.”
D.R. Horton said it may have to make further write-offs to reflect unsold homes or lower land values.
“We may have more impairments coming,” Tomnitz said. “We’ll know that on a quarter-by-quarter basis.”
So there you have it… 2 outlooks from major players in the homebuilding market. Which one is correct for California and the Pleasanton and Tri-Valley market? Right now, given the recent strength in the market, my money is on Toll Brothers and the more positive outlook.
Sidenote: Be glad you are not in Las Vegas, where there is currently 2500 unsold new homes, and a whopping 25,000 resale homes on the market. Ouch.
The Tale of Two Builders