US housing worries deepen as DR Horton sales slide

US housing worries deepen as DR Horton sales slide
By Doug Cameron in Chicago
Copyright The Financial Times Limited 2007
Published: April 10 2007 14:29 | Last updated: April 10 2007 14:29



DR Horton, the largest US homebuilder by sales, on Tuesday provided further evidence that the market has yet to hit bottom as the industry nears the end of the crucial spring selling season.

The Texas-based builder has been one of the most aggressive users of discounts to shift the large stock of unsold homes, which have depressed sales prices and dented national consumer confidence.

Sales dropped by 37 per cent to 9,983 homes in its fiscal second quarter to March 31, and were 41 per cent lower by dollar value, with California and the south-west region returning the largest declines. The company said its cancellation rate remained unchanged from the previous three months, despite boosting incentives.

DR Horton is also viewed by analysts as one of the most exposed builders to the fallout from the crisis in subprime lending because of its focus on affordable housing which could appeal more to buyers with poorer credit histories.

Management will be quizzed on the financial impact of the slide in subprime lending at its quarterly earnings’ call on April 19, but its orders for the period add weight to industry expectations that there will be no national marker recovery before the end of the year.

DR Horton, which closed 53,000 homes in the year to September 30 2006, has halved new construction and ended almost all speculative building, as well as cutting overheads and boosting discounts and other incentives.

The efforts helped trim its cancellation rate at the end of last year, but the rate remained stubbornly flat at 32 per cent in the three months to March 31.

The company, like its smaller rival Lennar, was bearish about the spring selling season from early February to mid-April, which traditionally accounts for two-thirds of new and existing home sales in the US. Don Horton, chairman, said the season “had not gotten off to its usual strong start”.

Don Tomnitz, chief executive, has maintained that there is pent-up demand among potential buyers waiting for more clarity in the market. However, some analysts remain concerned that builders may have started a new phase of construction too early, adding to the stock of unsold homes.

Moreover, median prices have remained stable, and housing experts believe prices may have to fall by 10-20 per cent in some markets to start clearing a backlog of 546,000 unsold new homes at the end of February, the latest figures available.

Mr Tomnitz, who has characterised the company as ”the Wal-Mart of homebuilding”, said earlier this year that a second round of cost cuts had been identified to preserve DR Horton’s industry lead in terms of operating costs.

All six of its operating regions were profitable in the December quarter, despite lower average selling costs as the company boosted incentives, cutting its gross margin to 18.6 per cent, a 2.6 percentage point fall from the previous three months.

Mr Tomnitz also signalled that Horton had no immediate plans to seek acquisitions, despite speculation among analysts that smaller private builders would seek buyers as their cash flows eroded.