Far be it from me to argue about homebuilding conditions with the CEO of one of the nation's largest and most successful builders. But in releasing KB Home's (NYSE: KBH) results, the company's Jeffrey Metzger noted that in its 50-year history, his company has "been through these cycles before."
Minor point of order: There really never has been a cycle of this type, where the entire financial underpinning of the homebuilding and -selling process effectively collapsed and severely threatened other aspects of the economy in the process. I would argue that this cycle is more pervasive, deeper, and likely will be longer-lasting than any of its predecessors.
For the quarter, KB Home reported a loss of $35.6 million, or $0.46 per share, versus a profit of $153.2 million, or $1.90 a share, just a year ago. In the quarter, the company took pre-tax non-cash charges of $690.1 million to pare down the value of its inventories, joint venture assets, and land options, along with a $107.9 million charge related to goodwill impairments. Partially offsetting those charges was an after-tax gain of $438.1 million from the sale of its French subsidiary. Management wisely applied those proceeds to the redemption of $650 million of debt during the quarter.
KB Homes' release followed similarly soft results earlier in the week at Miami-based Lennar (NYSE: LEN). They likely will similarly be followed in one form or another by losses at such other builders as Meritage (NYSE: MTH), Ryland (NYSE: RYL), Centex (NYSE: CTX), and Beazer (NYSE: BZH). Indeed, KB's cancellation rate was 50% in the quarter. That's down from 60% when things began to unravel a year ago, but higher than the 34% in the sequentially prior quarter.
This brings us to the Commerce Department's Thursday report that sales of new homes dropped by 8.3% in the August quarter. But reality surely is far worse than that: The August figures don't factor in those fat cancellation rates that are hitting all the big builders. In fact, for Metzger's part, he noted an expectation that housing industry conditions will "continue to worsen through the end of the year and into 2008."
Of course, the difficulty this time is that we're not simply awaiting a general feeling among potential buyers that prices have declined enough to tickle their fancy. This time, a housing recovery will depend upon new stability in lending, big inventory reductions, and the passage of most of the fallout from the currently expanding foreclosure rates. Until these factors align, Fools shouldn't venture near this hemorrhaging sector.
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