Housing Chill
Grows Worse,
Bites Consumers
By SUDEEP REDDY and MICHAEL CORKERY
September 26, 2007; Page A1
The housing market is going into a deeper chill, and consumers are
starting to shiver.
Sales of existing homes in August fell sharply, and home inventories
by one measure soared to an 18-year high, according to data released
yesterday. One major home builder, D.R. Horton Inc., is auctioning
homes this weekend with starting prices for some units at 50% off an
earlier price.
The housing market is worrying consumers, raising fresh concerns about
economic growth. Consumer confidence fell this month to its lowest
level in almost two years, a new survey showed. Retailers such as
Lowe's Cos. and Target Corp. said they're feeling the pain. Both
reported softer-than-expected sales Monday.
"The combination of all this is indicative of an economy that has lost
quite a bit of momentum," said Joshua Shapiro, chief U.S. economist at
the consulting firm MFR Inc., an economic forecasting firm that
advises investors.
Wall Street seems unconcerned for now. Broad stock indexes moved
little yesterday, and the Dow Jones Industrial Average is just a few
hundred points from its all-time high.
Optimists believe the Federal Reserve's aggressive move last week to
cut interest rates will help keep the economy out of recession. Also,
exports are rising, thanks to a weaker dollar, and business investment
is holding up.
Still, the pace of housing's downturn is accelerating, surprising even
some bearish analysts.
Lennar Corp., the nation's second-largest home builder by market
value, reported a net loss of $514 million for the quarter ended Aug.
31. That was nearly six times the loss Wall Street analysts on average
had expected, and compared with net income of $207 million a year
earlier. The company was forced to write down the value of land and
write off deposits for land it no longer wants to build on. The
writedowns totaled $847.5 million in the quarter. Lennar said it has
cut its work force by 35% since last year.
Lennar shares fell 4% and have lost more than half their value this year.
Chief Executive Stuart Miller said the problems are broad-based and
stem from an oversupply of homes, turmoil in the mortgage market and
weak consumer confidence. "We have not only not seen evidence of any
of these items resolving, but instead we have seen further
deterioration," Mr. Miller told investors and analysts during a
conference call.
Overall, sales of existing homes tumbled 4.3% in August to an annual
pace of 5.5 million, the slowest in five years, the National
Association of Realtors said yesterday. More worrisome: The number of
homes for sale is enough to satisfy 10 months of demand at the current
pace. Two years ago the figure was below five months. Analysts cite
excess supply in forecasting that an upturn in sales and prices may
not come until 2009.
Home prices in July fell 3.9% from a year earlier, according to the
S&P/Case-Shiller home-price index. The index, which tracks prices in
20 U.S. metropolitan areas, hadn't measured that big of a decline
since just after the 1990-91 recession.
The bottom is "not yet in sight" for housing, said Mr. Shapiro, the
economist. He said the growing number of unsold homes "argues for
accelerating declines of prices."
The worsening housing slump and turmoil in the credit markets is
beginning to take a toll on retailers. Lowe's Chief Executive Robert
Niblock, addressing analysts and investors at a conference in
Charlotte, N.C., yesterday, refused to hazard a guess on when the
housing slowdown will bottom. "The only thing that is consistent is
the inaccuracies of the economic forecasts," he said. Late Monday,
Lowe's reduced its earnings outlook for this year and 2008. Its shares
fell 6.7% yesterday.
Other well-regarded retailers are missing forecasts. Target on Monday
lowered its estimate for September sales. In August, Costco Wholesale
Corp.'s sales at stores open at least a year rose just 1%, much lower
than its original forecast. It cited weakness in California, which has
been hard-hit by the housing slowdown. Target mentioned soft sales in
the Northeast and Florida.
The Conference Board said yesterday that its index of consumer
confidence dropped to 99.8 in September from 105.6 in August, putting
it at the lowest point since November 2005. The survey ended on Sept.
18, the day the Fed lowered interest rates by half a percentage point.
The share of consumers reporting jobs as "hard to get" rose to 22.1%
from 19.7%.
"Looking ahead, little economic improvement is expected," said Lynn
Franco, who directs the Conference Board survey.
Builders are divided on how drastically to cut prices to put a dent in
supply. Earlier this month, Hovnanian Enterprises Inc. held a 72-hour
weekend sale nationwide, dubbed "The Deal of the Century," and offered
discounts of up to 30% on certain homes. The company sold 2,100 homes
during the promotion, about 10 times the usual weekly number.
Hovnanian executives said that demonstrates buyers will come if the
price is right.
On Saturday, D.R. Horton is using an auction to sell 53 homes in San
Diego. The starting bid for some units will be as much as 50% lower
than previous prices, according to the auction Web site. On a
one-bedroom unit, the starting bid is $149,000, down from a previous
price of $309,990.
Lennar's Mr. Miller questioned the wisdom of deep discounts, saying
he's not willing to match some of the incentives offered by
competitors. He said some recent price cuts were "just unrealistic and
maybe even ridiculous."
Lennar's average home price nationally declined 6% in the third
quarter to $296,000 from $316,000 from a year ago. Its average
incentive per home -- a figure that includes extra amenities and price
discounts -- increased to $46,000 from $36,000 a year ago.
Individual home owners have been slower than builders to bring down
their prices to match demand, but that may be changing as the housing
slump worsens. "The existing-home market is moving much more rapidly
to adjust downward," Mr. Miller said.
The National Association of Realtors reported yesterday that the
median national home price was $224,500 in August, up 0.2% from
$224,000 in August 2006. Those numbers can be skewed by the mix of
homes sold in a particular month. Economists say the Case-Shiller
index is less vulnerable to that distortion because it tracks the
sales of individual homes over time.
Mortgage companies are scaling back loans to people who have poor
credit or can't document their income, while looking to make more
loans that can be insured by the Federal Housing Administration.
That trend showed up in Lennar's figures. In the third quarter, 25% of
buyers using Lennar's in-house mortgage company used an "Alt-A"
mortgage, a category between prime and subprime that often requires
little documentation, down from 41% a year earlier. The proportion of
FHA-insured loans rose to 25% from 12%.
"The days of no verification, no down payment and low credit scores
are past," said Lennar's chief financial officer, Bruce Gross.
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