I just ran across this article on Home Builders that speaks volumes to what we are seeing in our marketplace. Builders are drastically slashing prices on existing inventory and there are some great deals to be had. It also makes a direct point on the downward pressure on our existing home prices. Land continues to fall in value and there is less and less interest in new construction starts.

Bloody Week in July

The last week has been an apocalyptic one for the home building industry, as you can see from the stories below. Public companies posted more than $2 billion in combined losses during the most recent quarter. Figuring that they might as well get it over with now, since no one expects the market to get better real soon, these companies took big impairments in land, and they abandoned option contracts.

What does this mean to the rest of the industry? It's only going to heighten competitive pressures and squeeze margins. When the publics say their land is worth less now than it used to be, they start from the new basis in pricing their homes. Land write-downs partly explain how prices in that community of $320,000 homes suddenly dropped in the latest phase to $240,000.

D.R. Horton reported a staggering $852 million in write-offs of land and options, the biggest single quarter impairment charge in recent history. Pulte was a close second with $749 million. Standard Pacific took $165 million, and so on down the line. And the publics aren't done yet, though they are past the half-way point; there's likely to be another round next quarter.

For many of these companies, the losses are on paper only. Before impairments, many produced operating profit and generated positive cash flow. Meritage, for instance, would have made $13 million, if not for $70 million of write-offs.

Nearly all the publics, to allay growing concern in the debt markets, emphasized that they are in campaigns to bolster cash flow. What does that mean to competitors? It means that public companies are very eager to make a sale. They want to convert their fixed assets, land and inventory, into liquid ones, cash. They are willing to make concessions to make it happen.  

This bloody week in July potentially speaks to even bloodier ones in the new home sales marketplace for the remainder of the year.

Michael Polly

Vice President Denny Grimes & Company