I must admit that it appears the third stage of our nation's current housing slide may linger far longer than most of us had envisioned. That conclusion seemed to be substantiated Tuesday by woeful prognostications coming from two of the nation's major homebuilders.
Early Tuesday, Fort Worth-based D.R. Horton (NYSE:DHI) said that sales for its third quarter (which ended June 30) were down by 40% from the same period last year and that its cancellation rate for the quarter was still at 38%. As a result -- and while the company has cut its inventory prices -- it "will realize significant asset impairments, which will result in a loss for both the quarter and the nine months..." The extent of the loss will be announced on July 26.
Tuesday afternoon, California-based Ryland (NYSE:RYL) disclosed that it likely will report a loss of $1.25 to $1.35 a share for the quarter, a range materially different from the $0.32 profit that analysts had apparently expected. As with Horton, the loss will result from inventory impairments and write-offs.
These two disclosures came one day after Stephen Kim, Citigroup's capable housing analyst, downgraded a host of builders, including Hovnanian (NYSE:HOV), KB Home (NYSE:KBH), Horton, Ryland, Lennar (NYSE:LEN), Pulte (NYSE:PHM), and Toll Brothers (NYSE:TOL). Kim had expected the housing market to strengthen this summer but now anticipates softness throughout the year. In fact, he believes that home prices will need to fall further before the currently excessive inventory is worked off.
And so, here we are in what appears to be the third stage of the housing collapse, with no end in sight. The first stage saw orders reduced for the big builders, along with a drop in housing starts. In that stage, which basically consumed the last half of 2006, most observers believed that the softness would be fairly short-lived. But as we moved into the second stage, the enormity of the mortgage problem underlying the slump became apparent, and much of America learned that subprime did not refer to an inferior cut of beef.
The third stage, which clearly will be the most protracted, involves the cutting of prices by both builders and those wishing to dispose of their pre-owned homes by amounts that ultimately will rationalize the nation's bloated housing inventory. At the same time, there's a continued effort to deal with the economically dangerous mortgage lending contagion.
How long all this will take is anybody's guess, but that very uncertainty and the piling of bad news upon more bad news for the homebuilders indicates that, for now, Fools should give the whole group a wide berth.
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Pulte was a pick of the Stocks 2007 Report.
Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your questions or comments. The Motley Fool has a disclosure policy with a solid foundation.
