Last week, the big banks had to write down huge losses because of subprime. Now it's the builders turn. S&P cuts the bond ratings of 6 of the nation's biggest builders: Lennar, Centex Group, Pulte Homes, Ryland Group, Standard Pacific Corp. and D.R. Horton.
With the exception of Standard Pacific, five of the six sell new homes in Washington DC, Maryland and Virginia market. Interesting how the builders try to blame it on the media instead of looking at both external and internal factors. The market indicators -- overbuilding, high inventories, slow sales, tighter home loans underwriting -- clearly contributed to the financial losses. Especially, the big builders that are publicly-owned companies. Who knows what happen to usually privately-owned small home builders.
Start with Toll Brothers. Their business is on the pricey luxury new homes. Toll Bros. got hit on three front: cancellations, drops in average sales prices, and drops in signed contracts. It reported a 36% drop in year-to-year revenue to $1.17 billion. They had 417 cancellations for the quarter with only 250 new orders. Its cancellations actually lower than the fourth quarter of 2006 with 585 cancellations. Nevertheless, their cash-on-hand is higher than their peers.
Hovnanian's cancellation rate stands at 40%. Since they sold more than half of its homes in the 3-day fire sale, sales have gone down since then. Cancellation on the three day sale is below average, however expect rate that to grow. Since they do it the first time buyers are accustomed to discounts and incentives. They want more of it. All the co. care right now is to cash flow rather than profitability.' That means, their cash on hand is really low. To survive they needed to raise cash quick. That translates to: Opportunity for buyers. Got that?
How so? Because raising cash is a priority, Hovnanian will do whatever it takes to get them there -- reduce prices, give incentives and discounts -- to MOVE their inventories! That's how they'd do it. Starting with this sale [below].
WCI got hit pretty bad. They have a big liquidity issue. Their market is in the higher up range. Like Foster's Run in McLean, where priced of homes are in the above $3 million range. In this market, if you're on higher up market, it is tougher. Buyers would rather walk away from their deposits than got stuck with $$$ loans for 15 or 30 years? Revenues from their bread-and-butter product, single family homes, down by 25.9% from last year. To save cost, 575 employees are to get pink slips by end of the year. What's more - BBOL reports that the company is in violation of their loan covenants. Not good. With the violation, if no agreement is reached with their lenders, technically the "..lenders can foreclose on their collateral and demand payment in full." Like domino effect, the action could trigger other lenders to demand full payments. With little cash to survive if the lenders pull the plugs on them, they might face bankruptcy.
Searching for deals? Go straight to new homes constructions. There are plenty of supply out there. Outside the beltway area, Prince William county is 'the place' to find expansive supply of new homes. Fairfax, Loudoun has plenty, too. But not as expansive as in PW. These guys are in 'the business.' They only make money when they sell homes. They need to unload their inventories quick (sale) to stay in business. That's why, it's easier for them to offer you whatever you can think of -- discounts, incentives -- than the regular Joe homeowner. A homeowner doesn't have to move unless the lender foreclose the home.
And the last few remaining new homes or condos usually have better deals than auction.