OK, Fools, this is a quiz: Please name one market sector that's been the subject of as steady a stream of bad news as the homebuilders have in 2007. Fortunately, since I'm administering the quiz, I won't have to take it, because I can't for the life of me think of a good answer.
Earlier this week, it was Beazer (NYSE:BZH) and Hovnanian (NYSE:HOV) delivering the latest tales of woe. But it almost could have been any of those companies' peers -- Centex (NYSE:CTX), Ryland (NYSE:RYL), D.R. Horton (NYSE:DHI). Plug in those names or others, and the story would only change by degrees.
OK, perhaps it's been somewhat worse for Beazer than for most of the others. The company now says that, while it can't provide detailed information on its September quarter in the face of an internal probe into its lending and other practices, it believes that its new orders for the month fell by 53% to 973 units.
And if that weren't enough, its cancellation rate reached an "unusually high" 68%. That means, as I don my statistician's cap, that fully two-thirds of the buyers who wrote contracts with the company in the quarter, ended up exclaiming some form of, "Ah, shucks, we were only kidding."
Management has offered up that about half the recent cancellations resulted from disarray in the mortgage market, while many of the rest may have been driven off by rumors that the company may be facing bankruptcy. And just as it has announced the elimination of its dividend, the company also must contest calls by CIW Investment Group, a Washington, D.C.-based consultant to unions on shareholder issues, for the resignation of the company's CEO, Ian McCarthy.
For its part, Hovnanian released preliminary results of its October quarter. (Someone please explain to me why the builders have taken it upon themselves to provide us with double doses of quarterly negativity.) It appears that the company's net contracts fell by about 10% year over year, while its cancellation rate is running about 40%. At the same time, its contract backlog now is down 30% from a year ago.
So Fools, I know that many of you are chomping at the bit to sock away big positions in the fallen-from-grace homebuilders. Please don't. It's beginning to look more and more like there could be fallout among some of the industry's players before a real brightening occurs.
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