Housing downturn swats home builders
The roof is falling in on home builders, further spooking investors who have recently driven down the prices of their shares–as well as optimism–into the basement.
Facing increased cancellations of new homes and the likelihood that rising interest rates will further dampen demand, builders today said their own confidence in the market has slipped to its lowest level since 1991, according to the National Home Builders Housing Market Index.
The increasingly dour mood comes less than a week after one of the country's largest builders, D.R. Horton, downsized its yearly sales target by some 8,000 homes and cut its earnings outlook for the current quarter by more than 30 percent. It was just the latest home builder to rein in forecasts as once-hot demand for new homes slows amid rising interest rates and sky-high house prices.
Horton, based in Fort Worth, Texas, is something of a bellwether because it's among the biggest and most geographically diverse builders in the industry. Stock market analysts were quick to label its dour sales projections a sign that the soft landing many have predicted in the housing industry could, in fact, end with a hard thud.
"This has all the hallmarks of past housing downturns, like the one that started in the late 1980s," says Rick Murray, a Raymond James analyst, of a slump in markets like Boston and Los Angeles that shaved 20 percent or more off prices and lasted nearly a decade. "This time around the signs are even less favorable."
He points to three key factors. First, surging inventories of unsold homes have doubled and even tripled from the same time a year ago. Second, rising home prices have so far outpaced buyers' income growth that homes are now less affordable than they've been in more than a decade. Finally, and worst of all, there has been a recent drop-off in sales—20 percent or more in some areas last month—which Murray believes could signal a psychological shift among buyers. "Even those who are capable and willing to buy are now taking a wait-and-see attitude for fear that this isn't the best time to buy a home," he says. "If that goes on very long, things could get a lot worse."
That's especially true for home builders like Horton, which could be left holding the bag with thousands of empty new homes, not to mention thousands of acres of undeveloped land they've purchased in recent years—at high prices. Companies like Toll Brothers, Centex, and Hovnanian Enterprises have already begun to write down the value of some of their holdings, putting further pressure on a sector that has fallen by about 40 percent in stock market value over the past year.
With forecasts like D.R. Horton's, which was blamed largely on customer cancellations, analysts like Murray say home-related stocks could see another 20 percent haircut as both sales volume and prices fall through the floor.
Look out below.
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