There's probably not a Fool among us who doesn't vividly recall the infamous bursting of the technology bubble early in this decade. So overwhelming was that momentous sector collapse that the simultaneous takeoff of most of the homebuilders' fortunes is, at best, a tiny afterthought in most of our memories.
Indeed, who among us remembers that, largely as the new decade dawned, tiny Meritage Homes (NYSE:MTH), which had begun as a localized Phoenix-area builder, expanded to California, Texas, Florida, and Colorado? At just about the same time, its share price went from less than $3 (adjusted for splits) in January 2000 to a level above $90 in mid-2005. During precisely the same time, Atlanta-based Beazer (NYSE:BZH) saw its own shares climb from less than $6 to more than $70. And concurrently, the share price of Fort Worth, Texas-based D.R. Horton (NYSE:DHI) went from less than $3 to just below $40.
All three of those companies -- along with other big builders -- reported the results for their June-ending quarters last week, probably the worst week for housing in a dog's age. As all Fools know well, fortunes have plummeted dramatically across the homebuilding spectrum. All companies have taken impairments in their land positions, which seemed to be worth more in the past than they are today. Now that land must be written down to currently realistic levels on the balance sheet. The difference becomes a hit to earnings and, typically, a loss for the company.
A lineup of losses
And just as the builders told us about their quarters, the U.S. Commerce Department said that June single-family home sales dropped 6.6% from May, while the median sales price fell 1.3% to $237,900. The 537,000 new homes for sale in June were comparable to the number on the market in May.
Looking at the individual companies, we see that Michigan-headquartered Pulte Homes (NYSE:PHM) saw its fortunes swing to a loss of $507.6 million, or $2.01 per share, in the quarter, compared with earnings of $243 million, or $0.94 a share, just a year ago. The numbers for the most recent quarter stemmed from almost $750 million in pre-tax charges -- amounting to $1.87 per share after tax -- for reconciling the company's land position with what at least appears to be current reality.
Sixty days ago, Pulte also announced that it plans to cut about 16% of its workforce, or about 1,900 jobs. Management believes that the cuts ultimately will save Pulte an estimated pre-tax figure of $200 million annually, although for the quarter, the cuts cost the company $40 million, or approximately a dime a share.
California-based Ryland Group (NYSE:RYL) said its swing from a profit of $94.8 million, or $2.03 per share, last year to a net loss of $52.4 million, or $1.25 per share, in the most recent quarter resulted from a charge of $147.1 million. But for that charge, the company's management said, its earnings would have been about $0.80 a share, or at the high end of management's own $0.70-to$0.80 per-share forecast. Interesting, but the charge is there, nonetheless.
Texas
toast
D.R. Horton, the nation's second-largest homebuilder by revenue, reported a sobering loss of $823.8 million, or $2.62 per share, compared with a profit of $292.8 million, or $0.93 per share, in the prior year. Those results included $1.28 billion -- that's with a "b" -- in charges, including $835.8 million in inventory impairments, in the quarter. Net sales orders for Horton in the June-ending period declined 40% year over year from the rate in the quarter that ended in June 2006.
Horton's results weren't particularly surprising. Not that I'm clairvoyant -- the company pre-released, as has become the norm for more and more builders. And unlike some other builders -- Centex (NYSE:CTX) comes to mind -- the company was somewhat slow out of the chute with regard to land-position cuts. It's now apparently playing catch-up.
In its June-ending quarter, the aforementioned Beazer saw its revenue slide by 37%, along with a cancellation rate that's still just a percentage point lower. The latter figure is up from "just" 29% in the prior quarter. The company's loss of $123 million, or $3.20 per share, in the quarter compared with a profit of $102.6 million, or $2.37 a share, since the previous quarter. The obvious gremlin: charges of $188.5 million.
And finally ...
And then there was Meritage. In the quarter, the company took pre-tax real estate-related and joint-venture impairments of $80 million, along with goodwill-related impairments of $28 million. The latter charge involved the write-off of intangible assets that were part of a 2005 acquisition in the Fort Myers and Naples area of southwestern Florida. Because the nation's housing malaise has hit that area so especially hard, those assets were written off. The result was a net loss for the company of $57 million, or $2.16 per diluted share, compared with earnings of $77 million, or $2.82 per share, just a year ago.
So we've been ministering to the nation's housing woes for slightly more than a year now, and they continue to worsen. When we turned the corner into 2007, we all received a quick education in the meaning and relevance of the subprime sector of the mortgage market.
But now the all-important credit aspects of housing appear to have spread beyond the least creditworthy tier to other areas of mortgage lending as well. And it even seems reasonable to maintain that wider-ranging credit worries played a real role in the 500-point bashing of the U.S. equity market in the final two trading days of last week.
How long will this plague last? Nobody knows. Perhaps the only way to approach a minimal duration is to note that in 2006, a number of "2/28" mortgages for buyers with subpar credit were granted, wherein the initial two-year interest rate resets in the third year. That, of course, would be 2008, and the result could be yet another round of foreclosure woes, with their attendant negative effects on housing inventories and prices. It also would mesh with a comment last week from the management of mortgage lender Countrywide (NYSE:CFC) that the housing slump could last well into 2009.
In the meantime, questions and concerns about the very viability of some builders are beginning to percolate somewhat. In the midst of this continuously declining set of circumstances, I'd urge Fools to build a barrier between themselves and the battered builders.
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Fool contributor David Lee Smith does not own a single share in the companies mentioned above. He welcomes your thoughts. The Motley Fool has a disclosure policy.
