Home builders see bottom of housing slump
The worst of the housing slump may be over - but it could take a while before prices rebound.
NEW YORK (CNNMoney.com) -- The year-long slump in the housing market may be near a bottom, say home builders - though it could take a while before prices rebound.
Toll Brothers (Charts) reported a sharp drop in fiscal fourth quarter earnings early Tuesday and forecast a big drop in profits for the coming year. But despite that bad news, chairman and CEO Robert Toll said that the market for new homes may finally be leveling off after more than a year's worth of declines.
"Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above," said Toll in a statement accompanying the earnings report. "The metro D.C. suburbs of northern Virginia, which was the first market in which we saw activity slow, seems to have stabilized, although at levels much lower than those we have enjoyed over the past few years."
Jerry Howard, CEO of the National Association of Home Builders (NAHB), sounded a similar note in a meeting with CNNMoney.com Tuesday morning. Howard said a turnaround should begin in the first quarter of 2007. "The market," he says, "is at the bottom now."
Favorable factors contributing to better times will be low (and declining) interest rates, solid wage and job growth and low inflation. Long term demographic trends also spell housing market growth.
Do not, however, expect a return to national, double-digit home-price growth. Those days may be over for a while, according to the NAHB's chief economist, Dave Seiders. Instead, the recovery will be marked by fewer houses sitting on the market. "Inventories will drop," says Seiders, "and prices will stay flat for a couple of years."
He points out that housing prices don't usually overcorrect after a long run up. Instead, "They generally decelerate and then grind along as income grows until they come into balance."
The building boom of 2005, which resulted in record new home construction and price gains, has been followed by a sharp drop building and prices this year, with the Census Bureau reporting a record glut of completed new homes available for sale on the market.
Toll Brothers, which concentrates on luxury homes, is the nation's No. 6 builder in terms of sales. The five larger builders, Pulte Homes (Charts), Lennar (Charts), Centex (Charts), KB Home (Charts) and D.R. Horton (Charts), have all seen their profits fall sharply, with many lowering their forecasts.
Toll Brothers' results and guidance were not bad compared to expectations. The company earned $173.8 million, or $1.07 a share, in the quarter ending Oct. 31. While that's down more than 40 percent from the $310 million, or $1.84 a share, it earned a year earlier, it beat the average forecast of $1.06 a share by analysts surveyed by earnings tracker First Call.
The company forecast net income in fiscal 2007 of between $1.58 to $2.08 a share, down from the $4.17 a share earned in the just completed period.
But the 2007 forecast includes a change in accounting practices that should shift between 22 and 29 cents a share to subsequent years. And even without that change, the bottom of end of the forecast is better than bottom of the range of estimates from First Call of between $1.45 to $2.96 a share. The current consensus forecast is $2.30 a share, but it is not clear if that takes into account the new accounting method.
The company also said it now estimates $60 million of pre-tax land-related write-downs in the new fiscal year, which is above the $16 million it had budgeted annually in recent years.
According to Robert Toll, many of the toughest markets now are the hot ones that had attracted speculators in recent years.
Reno has been doing poorly, Toll said on a conference call to discuss the company's results. "Las Vegas qualifies as a rotten market. Phoenix did well for us ... but has turned south," he said.
On the other hand, New York is "roaring" and some other markets including Texas, Raleigh, N.C., and Maryland are also strong, he added.
5 home trends we never saw coming