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Tough Macro Environ Dilapidates Pulte Homes, Ryland
The latest earnings reports from Pulte Homes (NYSE:PHM) and Ryland Group (NYSE:RYL) show a continued deterioration of the macro environment in the housing sector, putting off any turnaround for the distant future.
Pulte Homes reported a net loss of $280.4 million, or $1.11 per share, which included $266.6 million of pre-tax charges related to inventory impairments and land write-offs. The company ended the quarter with $1.2 billion in cash. Ryland Group reported a net loss of $65.7 million, or $1.54 per share, which reflected inventory impairments and land write-offs of $64.7 million. Ryland had $345 million in cash at quarter's end.
Cash is expected to build for both companies, as each produced positive cash flow from operations during the quarter. In addition, both companies expect tax refunds in 2009.
Bad Macro Situation
According to Pulte Homes President and CEO Richard Dugas, Jr., the difficult environment experienced during the first half of the year deteriorated further in the third quarter. "Home prices continued to slide, mortgage lending standards tightened further and the demand for housing continued to fall under these pressures," Dugas said. "Months supply of unsold new and existing homes remained at historically high levels and the increase in foreclosures made this oversupply problem worse."
Chad Dreier, Chairman and CEO of Ryland Group, made similar comments in his opening remarks. "To state the obvious, the business of selling homes remains challenging," Dreier said. "Buyers are understandably cautious and the level of inventory in most markets is too high. The third quarter did little to clear up the uncertainty surrounding the housing market, and also, as a result of the events of the last three weeks, we're off to a weak start for the fourth quarter." (For more about supply and demand of homes, read Why Housing Market Bubbles Pop.)
A Ray of Hope
A report today offered some hope for investors in the housing sector. The National Association of Realtors (NAR) said sales of existing homes rose by 5.5% in September compared to August - the highest jump in more than five years. Unfortunately, the supply of existing homes in the marketplace still is too high, with 9.9 months of inventory. (Dig deeper into NAR's report at Economic Indicators: Existing Home Sales.)
Despite the high inventory, signs of capacity leaving the market have appeared. Several private homebuilders have filed for bankruptcy recently. Pacific Lifestyle Homes, a builder in the Pacific Northwest, became the latest when it filed last week. The last large publicly-traded builder to file for bankruptcy was WCI Communities (OTC:WCIMQ) on August 4.
Credit Still Tight
Unfortunately for homebuilders and consumers, banks are making it more difficult for buyers to get home loans. Every quarter, the Federal Reserve Board issues a report called the Senior Loan Officer Opinion Survey on Bank Lending Practices. The latest issue, dated July 2008, showed that 75% of loan officers had tightened standards on prime loans, up from about 60% in the April survey. The next report, due out next month, is expected to show the same, at best.
Recent comments from bank conference calls confirm this tightening. Prosperity Bancshares Inc. (Nasdaq:PRSP) said during a conference call that the bank has changed its policy on credit lines. "A builder may have a line...we look at every deal before they go into it and if a builder has two specs (speculative homes) or three specs that haven't been selling for a long time and wants to do some more specs, we're not allowing that to happen right now," said CFO David Hollaway.
"We are working on reducing that portfolio (residential construction lending)," said Chris Henson, CFO at BB&T Corp. (NYSE:BBT). "We are giving advice to our builders not to start new houses. When they don't start them, obviously we'll not finance any new developments."
Bottom Line
Management at Pulte Homes and Ryland Group both agree that the macro environment is still deteriorating, making it difficult to predict whether a bottom has been reached in the housing market.
Pulte Homes reported a net loss of $280.4 million, or $1.11 per share, which included $266.6 million of pre-tax charges related to inventory impairments and land write-offs. The company ended the quarter with $1.2 billion in cash. Ryland Group reported a net loss of $65.7 million, or $1.54 per share, which reflected inventory impairments and land write-offs of $64.7 million. Ryland had $345 million in cash at quarter's end.
Cash is expected to build for both companies, as each produced positive cash flow from operations during the quarter. In addition, both companies expect tax refunds in 2009.
Bad Macro Situation
According to Pulte Homes President and CEO Richard Dugas, Jr., the difficult environment experienced during the first half of the year deteriorated further in the third quarter. "Home prices continued to slide, mortgage lending standards tightened further and the demand for housing continued to fall under these pressures," Dugas said. "Months supply of unsold new and existing homes remained at historically high levels and the increase in foreclosures made this oversupply problem worse."
Chad Dreier, Chairman and CEO of Ryland Group, made similar comments in his opening remarks. "To state the obvious, the business of selling homes remains challenging," Dreier said. "Buyers are understandably cautious and the level of inventory in most markets is too high. The third quarter did little to clear up the uncertainty surrounding the housing market, and also, as a result of the events of the last three weeks, we're off to a weak start for the fourth quarter." (For more about supply and demand of homes, read Why Housing Market Bubbles Pop.)
A report today offered some hope for investors in the housing sector. The National Association of Realtors (NAR) said sales of existing homes rose by 5.5% in September compared to August - the highest jump in more than five years. Unfortunately, the supply of existing homes in the marketplace still is too high, with 9.9 months of inventory. (Dig deeper into NAR's report at Economic Indicators: Existing Home Sales.)
Despite the high inventory, signs of capacity leaving the market have appeared. Several private homebuilders have filed for bankruptcy recently. Pacific Lifestyle Homes, a builder in the Pacific Northwest, became the latest when it filed last week. The last large publicly-traded builder to file for bankruptcy was WCI Communities (OTC:WCIMQ) on August 4.
Credit Still Tight
Unfortunately for homebuilders and consumers, banks are making it more difficult for buyers to get home loans. Every quarter, the Federal Reserve Board issues a report called the Senior Loan Officer Opinion Survey on Bank Lending Practices. The latest issue, dated July 2008, showed that 75% of loan officers had tightened standards on prime loans, up from about 60% in the April survey. The next report, due out next month, is expected to show the same, at best.
Recent comments from bank conference calls confirm this tightening. Prosperity Bancshares Inc. (Nasdaq:PRSP) said during a conference call that the bank has changed its policy on credit lines. "A builder may have a line...we look at every deal before they go into it and if a builder has two specs (speculative homes) or three specs that haven't been selling for a long time and wants to do some more specs, we're not allowing that to happen right now," said CFO David Hollaway.
"We are working on reducing that portfolio (residential construction lending)," said Chris Henson, CFO at BB&T Corp. (NYSE:BBT). "We are giving advice to our builders not to start new houses. When they don't start them, obviously we'll not finance any new developments."
Bottom Line
Management at Pulte Homes and Ryland Group both agree that the macro environment is still deteriorating, making it difficult to predict whether a bottom has been reached in the housing market.
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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