New Home Sales Hit 7 Year Low - Homebuilders Suffer a Down Market

Another article highlighting the current homebuilding market. New Homebuilders are sucking win and paying for their greed, and poor planning. Homebuyers and employees of these builders continue to suffer.

NEW YORK (CNNMoney.com) -- The mortgage bomb hit the demand for new homes even harder than expected in August, leaving the nation's builders with their weakest level of sales since the summer of 2000, when the nation was struggling with a stock market collapse, rising interest rates and a looming recession.

And the government's latest snapshot of the battered housing market, released Thursday, may actually be understating the problem: It does not account for the rising cancellation rates or sales inducements that builders have reported in recent months. New home sales hit a 7-year low in August in the face of problems in the mortgage market.

According to the Census Bureau, new homes sold at an annual pace of 795,000 in August, down 8 percent from the revised 867,000 sales pace in July.It was the slowest pace of sales since June 2000, as legions of buyers had trouble finding mortgages or selling their existing homes. Economists surveyed by Briefing.com had forecast that sales would fall to a pace of 825,000.

The report also showed the median price of a new home fell 7.4 percent from year earlier levels to $225,700 in the month, as prices were pressured by both the problems in mortgage finance and the excess supply of homes on the market. The inventory of new homes on the market rose to an 8.2 month supply, as the glut of completed homes without a buyer was near a record high, with 180,000 completed homes listed for sale, just off the record high of 182,000 set in May of this year. The July report wasn't the only month revised lower by the Census Bureau; it also dropped its sales estimates for May and June, leaving sales 34,000 below the previous estimates.

The decline in sales came despite a pickup in sales in the Northeast and Midwest compared to July. But the South, which accounts for nearly half of the nation's new home sales, saw a nearly 15 percent drop from July levels, while sales in the West declined more than 20 percent. Sales in each of the four regions were off more than 10 percent from year-earlier levels, and nationwide the pace of sales is down 21.2 percent from a year ago.

This is just the latest sign of trouble for the housing market. On Tuesday, a report from the National Association of Realtors showed the pace of existing home sales dropped in August for the sixth straight month to their lowest level in five years. And the new home sales report likely did a better job capturing the turmoil in the real estate market in August, as it is based on contracts for new homes signed in the month. The existing home sales figures are based on when a deal is closed, typically a month or two after the contract is signed.

The new home sales report, besides serving as a leading indicator of the overall housing market, is closely followed because of the importance of construction to the overall economy. The home building boom helped support the nation's economic and employment growth during 2003 to 2005. But economists are growing increasingly concerned that the current weakness could become a large enough drag on the economy to help tip the nation into recession. The latest report on gross domestic product, also released Thursday, shows investment in housing subtracted 0.6 percentage points from the nation's overall growth in the second quarter. Still, as weak as the new home sales report is, experts caution it could actually be masking other signs of weakness.

Builders have reported significantly higher cancellation rates for buyers who have signed a contract but then back out of the sale. So demand could be weaker than the report suggests. Also about three quarters of builders surveyed by their trade group report offering incentives, such as paying for closing costs or offering additional features on a new home for free, in order to maintain demand.

So the drop in prices could actually be more severe than the report indicates. The nation's major home builders have been hammered by the downturn in both home sales and prices in the last year. On Thursday, KB Home, the nation's No. 5 home builder, reported a loss in its most recent quarter, compared to a solid profit a year ago, as the company warned it expects conditions to worsen through 2008. Lenar, the nation's No. 1 home builder by revenue, posted a bigger than expected loss Tuesday. In addition, No. 2 homebuilder D.R. Horton and No. 3 Centex both reported losses far bigger than Wall Street had expected, while No. 4 Pulte Homes and No. 6 Hovanian Enterprises both have reported losses for the last two quarters and analysts project losses for at least the next year.

Lennar Homes Cuts Jobs, Posts Q3 Loss. Realtors Report Lennar Cuts Commissions to $10,000 Flat

In late septeermb, Miami-based Lennar Corp. reported a third-quarter loss of more than $510 million dollars. Lennar said it had cut its work force by 35 percent and warned it expected further job cuts.

The nation's second-largest homebuilder said on Sept. 25 that its results swung to a net loss of $513.9 million, or $3.25 a share, for the three months ending Aug. 31 from a profit of $206.7 million, or $1.30 a share, a year ago. Revenues from home sales fell 44% -- mostly on a 41% drop in the number of home deliveries and a 6% decline in the average sales price of homes sold. Lennar had to suck it up financially to move a lower number of houses. Gross margins fell to 14.0% from 19.5% a year ago due to a $10,100 hike in sales incentives to $46,000 per home, which was responsible for the lower average sales price.

And sagging home sales weren't the only nightmare for Lennar. The Miami-based company took an $847.5 million pretax impairment charge to write down the value of its assets. That included a $344.7 million loss on land sales, of which $242.5 million was for write-offs of deposits and pre-acquisition costs related to 15,000 home sites under options that Lennar decided not to buy.

This was the biggest writeoff Lennar has taken since the housing slump began and added to the $1.05 billion in write-offs the company has taken since 2006, Banc of America Securities said in a research note (BAS does investment banking with Lennar.)

New orders deteriorated from a 31% year-over-year decline in the second quarter and were worse than the 22% drop that BAS had expected, probably due to more challenging market conditions overall and tough comparisons with the high sales volume Lennar maintained throughout 2006.

One Realtor said "I stopped taking buyers to Lennar Homes, they cut off commissions to realtors. $10,000 flat commission, as opposed to the 5% other builders were offering. Bad move."