Tim Eller, Centex Corp. chairman and CEO, calls the changes in the mortgage market a "new challenge in affordability." By lowering prices as tighter lending standards make it tough for buyers to obtain loans, the Dallas-based big builder is essentially fighting fire with fire.
Centex, which reported a $644 million second-quarter loss Tuesday, had to shift gears in August when Eller says there was a "complete reset of mortgage products available." Knowing that the mortgage and credit issues weren't going away anytime soon, Eller says prices were adjusted - the average price of a Centex home sold in the latest quarter fell 8 percent and discounts and incentives totaled 11 percent of housing revenue.
"We responded quickly by adjusting home prices in many of our neighborhoods to levels that would enable buyers to qualify for FHA mortgages," Eller said in a company teleconference Wednesday morning.
Despite the price reduction, the builder saw a 14 percent drop in closings and a 13 percent slip in orders. But the company expects the price adjustment to have a positive influence on future sales.
Moving forward, the price reductions are one of the elements of what Eller calls "being focused on the fundamentals of home building." Along with markdowns, Eller says focusing on experienced management, minimizing inventory, attacking construction costs, and turning assets faster are also part of the game plan.
Centex CFO Cathy Smith acknowledged that prior to resetting home prices, the mortgage mess took the builder by surprise. "I was somewhat optimistic last quarter," she explains. "Unfortunately, the world changed dramatically on Aug. 1."
She added, "We recognized that this [current housing sector conditions coupled with the changes in the mortgage market] is a dynamic environment."
Centex, which also slashed its payroll by 40 percent during the second quarter, was No. 4 in the 2006 BUILDER 100.
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