Major Builder Slashes Earnings Outlook By 30 Percent; Market Worse Than Predicted?
One of the largest home builders in the country has cut its full-year earnings’ projections by 30 percent Thursday, a move suggesting that the market slowdown may worse than expected.
The cooling of the housing market has been evident since the beginning of the year, but DR Horton, a Texas-based builder and the nation’s largest in terms of unit sales, had been more optimistic than most of its rivals, believing that the economies of scale principle would allow it to take market share from smaller competitors.
However, many new buyers have been deterred by rising mortgage rates, and the speculative purchasers who fueled much of the incredible home price appreciation over the past three years have retreated. What remains is an economy that’s far less certain, particularly in the most overpriced markets.
DR Horton and rivals have been forced to raise discounts to shift unsold homes in many areas as cancellation rates rise and homes stay on the market for longer periods. The company’s large footprint (it operates in 26 states and 77 markets) also calls into question views of some economists who expected the slowdown to be limited to hotter markets such as Las Vegas, Florida and Southern California. Parts of the Florida housing market have been drastically slower this year as prices have left the state’s lower and middle classes reeling.
Luxury home builders have been hit the hardest by falling sales so far this year, but DR Horton focuses on first-time buyers and first move-up buyers, with their homes carrying an average selling price of $261,000. DR Horton issued its profit restatement after reporting a 4.4 percent drop in net new sales for the quarter to June 30.
The drop was smaller than that reported by many rivals, but the overall value of new orders slipped 7.4 percent, thanks to the heavy discounting prevalent in the market. It also aims to close on only 50,000 homes, on par with a year ago, compared with earlier predictions that it would close 59,000.
“Our people worked very hard to achieve these net sales orders given the difficult selling conditions the homebuilding industry is experiencing. The current home sales environment is characterised by an increase in both existing and new homes available for sale, higher than normal cancellation rates and an increase in the use of sales incentives in many of our markets,” said Donald Horton, DR Horton’s chairman.
Pulte Homes, the largest U.S. builder by revenue, also cut its full-year earnings guidance by 20 percent last month, and has lowered its expected closings accordingly. The southwest was the only one of its five U.S. regions to report a rise in sales in the June quarter, with the sharpest fall seen in the Midwest.
