Builders Look To Have Terrible 4th Quarter, Is This Good News?
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New home builders are facing the back side of their big run up and it looks like this quarter is when they will pay the piper. The Wall Street Journal is reporting that many of the builders will be showing losses, and more importantly, taking writedowns on their land holdings.
Lennar Corp., whose fiscal fourth quarter ended Nov. 30, appeared to set the pace when it said this week that it expects to post a loss, “materially lower” margins and a land-related write-down of between $400 million and $500 million when it reports its results next week. Lennar’s land-related write-down was about twice the size Morgan Stanley analyst Rob Stevenson had expected.
JMP analyst Alex Barron expects quarterly earnings to fall 80% on average among the 17 home builders he tracks. He predicts many will post significantly bigger-than-expected write-downs on land. He predicts these write-downs will continue through the next few quarters. Demand will also remain weak, with year-over-year orders falling 37% on average, Mr. Barron said.
Lennar has led the charge in price-cutting and other incentives. It adopted this strategy early on in the downturn, based on its belief that selling homes and maintaining good liquidity was more important than keeping house prices up during the slowdown. via WSJ
While this is not good news, I do not think it is going to be that bad. I worked for a company that lost 40 percent of its sales in a couple of years. It was not a fun experience, but talking with the controller one day he explained that when they did the write down of assets, we were at the bottom of the cycle. Why, I asked.
And he said, “because when we start moving forward, it is better to have gotten rid of all the skeletons in our closets so nothing can hold us back.” So when the builders take huge writedowns and the industry looks very bleak, as it looks like this quarter will be, then they are clearing the decks for the next growth period.
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