Home Builders Show Some Optimism Despite Grim Earnings Season

A reporting season filled with narrowed quarterly losses, talk of increased traffic and the possibility of a $15,000 tax credit for buyers is giving battered builders something they haven't had in a long time: hope.

"We're seeing some optimism out there," said Jerry Howard, president and chief executive of the National Association of Home Builders trade group. "The end is in sight.

"Obviously," he added, "there's some downside risk to these predictions."

It remains a rough road for the industry, which has seen business crumble during the worst downturn in decades. Builders thought the worst had passed, only to see their turmoil exacerbated and prolonged by the global credit crisis.

Companies are cutting costs, exiting markets and hoarding cash to pay the bills. Layoffs remain rampant. Since its fiscal 2006 peak, Beazer Homes USA Inc. (BZH) has slashed its headcount by more than 70%, with about 300 since Dec. 31.

Industrywide, orders and revenue remain depressed. Massive incentives on new homes continue, as does price erosion driven by mounting foreclosures. Barclays Capital expects national home prices to fall another 20% from mid- to late 2008, with most of the decline concentrated at the end of last year and 2009's first half. A "slow bleed" is likely into early next year. That means additional impairments are likely, which could fuel further losses.

Even so, faint optimism is beginning to emerge.

Several builders have recently detailed smaller losses, showing improvement from a string of bloody quarters. Earlier Tuesday, MDC Holdings Inc. (MDC) reported a fourth-quarter net loss of $1.92 a share, versus a per-share loss of $6.14 one year earlier. The company finished 2008 with more cash than debt.

On Monday, Beazer said it lost $2.08 a share in its fiscal first quarter, compared with a loss of $3.59 a share a year earlier.

Centex Corp. (CTX), the nation's third-largest builder by closings and revenue, recently reported a fiscal third-quarter loss of $5.34 a share, compared with a $7.94 per-share loss the previous year.

Industry titan D.R. Horton Inc. (DHI) shaved its loss by about half, 20 cents a share from 41 cents. "It is a wonderful quarter," said Donald J. Tomnitz, president and chief executive, in last week's fiscal first-quarter earnings call. Builders also said some buyers, long paralyzed on the sidelines, are venturing to sales centers just in time for the crucial spring selling season. While not all are inking contracts, even the return of browsers has excited the industry.

"Sales momentum returned in December and has carried into January," said Timothy Eller, Centex's chairman and chief executive, in its earnings call Feb. 4. "We sold more homes in December than October/November combined, and January was better than December."

To be sure, business slows down for the year-end holidays and deals have been hard to come by for builders. "An improvement off of abysmal is not something to do the dance of joy about," said Joe Snider, vice president and senior credit officer at Moody's Investors Service. Even so, the trends are encouraging. Builders are cautiously giddy about a $15,000 buyer tax credit that could be included in the government's final stimulus package. The incentive, for which the sector lobbied strongly, should help clear out existing inventory and, eventually, drive new construction.

A survey by the builders' association, which has more than 200,000 public and private members, found that one-third of respondents and 61% of renters would be more likely to buy a home should the tax credit be enacted into law.

Some potential buyers have already begun shopping.

Said Howard: "The bottom line is that there is a flurry of activity where it had been very dormant before."

-By Dawn Wotapka, Dow Jones Newswires; 201-938-5248; [e-mail]