Filed Under: ,
Tickers in this Article: CTX, TOL, RYL, PHM
The earnings report from homebuilder Centex (NYSE:CTX) delivered the usual doom-and-gloom outlook, along with a surprise prediction by CEO Timothy Eller that the housing market has the elements of a bottom.

The outlook was similar to reports from competitors Pulte Homes (NYSE:PHM) and Ryland Group (NYSE:RYL) last week.

More Losses
Centex reported revenue of $1.01 billion and a per-share loss of $1.62. Good news in the report included total impairments and write-offs totaling $102.8 million, down considerably from the $983 million in the same quarter last year. Stabilization of book value is one sign I am looking for that the industry has hit a bottom. The company also ended the quarter with $1.3 billion in cash. (Learn more about impairment charges at Impairment Charges: The Good, The Bad And The Ugly.)

Centex also increased its valuation allowance on the deferred tax asset on its balance sheet to $945 million, or $7.50 per share. The company can monetize this asset, subject to government rules, once the company returns to profitability.

Macroeconomic Weakness
Eller delivered the standard macroeconomic warning that most builders have outlined for the quarter.

"It's an understatement to say that unprecedented economic conditions have had an increasingly negative impact on the housing industry," he said. "Sales may well weaken further in the December quarter."

However, Eller tempered his comments with the prediction that "Virtually all elements of a bottom for the housing cycle are in place." He did not give further detail on this statement and refused to say how long the industry would bounce along the bottom.

"Frankly, conditions will probably get worse before they get better, especially in light of the continuing financial and credit turmoil and increasing job losses," he said.

During an industry conference in September, Eller outlined six signs of a bottom in housing:
  • Foreclosures increase.
  • A slowing economy leads to a recession.
  • Housing starts fall precipitously to trough levels.
  • New home market corrects much faster than existing home market, as disciplined public homebuilders cut investment.
  • Land prices begin to soften more widely as private builders go under.
  • Homebuilders with liquidity begin to reinvest capital in business.
Eller also cited an increase in the "homebuyer sentiment index" - a measure of home consumer confidence - as a counter-cyclical indicator that the bottom is near. (Read more about the volatility in the sector at Why Housing Market Bubbles Pop.)

Still Too Much Inventory
The industry still faces considerable headwinds. The latest report from the U.S. Department of Commerce showed that inventories of new homes hit 10.4 months worth of sales in September - about double normal inventory. The Case-Shiller index, a closely watched metric of home prices, dropped 16.6% in August from the same period in 2007. Analysts expect a higher unemployment rate in 2009 to lead to more foreclosures and inventory hitting the market as well, according to the Mortgage Bankers Association.

More clues to the timing of the housing recovery will come November 11 when Toll Brothers (NYSE:TOL) discusses its fourth-quarter earnings.

Centex reported a net loss for the quarter, but the CEO says he can see the traits of a bottom in the housing market - a bold prediction considering the fragile state of the economy.

comments powered by Disqus

Trading Center