While the mortgage and banking industries, government agencies, and consumers grow anxious over mounting delinquencies and foreclosures, the new-home building market could remain fairly well insulated from any significant aftershock. At least that's what The Ryland Group CEO Chad Dreier told investors Tuesday morning at the J.P. Morgan third annual Basics and Industrials Conference in New York.
Dreier acknowledged that the foreclosure issue was "another headwind on home building." Foreclosed homes are adding to record levels of existing-home inventory and are exerting some downward pressure on home prices. However, Dreier suggested that the issue might be overblown for new-home builders for several reasons.
First, mortgage rates have remained cooperative. Many adjustable-rate mortgages have recently reset at historically attractive rates, preventing many homeowners from experiencing unmanageable spikes in monthly payments. Because the reset rates are more affordable than many feared, a number of foreclosures have been prevented.
"They're bad, but I don't think they are as deep as people thought they would be," Dreier said, noting that he had recently heard from experts that foreclosures could top out at around two million rather than a previously projected three million.
Second, Dreier said he hardly considered foreclosures direct competition for new-home sales.
"I actually don't think people who are looking at new homes are looking at foreclosures," he said.
While foreclosed homes can be had at bargain-basement prices, a lack of maintenance and care often deters new-home shoppers. Moreover, these shoppers generally see value in a new home that they can't find in an existing home, and they're willing to spend more money to have it, according to Dreier.
Dreier said Ryland had a low foreclosure rate. "We don't have a lot of foreclosures. Our average is below the FHA average, which I think is 1.2%," he said.
But even without the added headache of significant foreclosure activity in Ryland communities, Dreier said sales were still stubborn--a fact that negatively affected return rates. Management has stuck to a 30% internal rate of return even as the market has deteriorated. To meet that target, "you have to sell a house a week, and most of our sales average two a month," he said.
Dreier said Atlanta; Austin, Texas; Charlotte, N.C.; Chicago; Orlando, Fla.; Phoenix; and Washington, D.C., yielded disappointing results. Stagnant growth in Cincinnati for the past five years has pushed management to decide to exit the market. Dallas also remained challenging for the company. "There's way too much inventory, and margins are mediocre on a good day--and it's not a good day," Dreier noted.
But the biggest trouble spot was Fort Myers, Fla. "It's in shambles, and I don't think it'll come back for a long time," Dreier said, pointing out that the market had as much as 45 years of inventory.
But the good news was that cancellations appeared to have stabilized in 1Q2008 to around 27%, and backlog was up sequentially 20% from 4Q2007.
This was thanks in part to good performance in some surprising markets. Dreier said Baltimore was shaping up to be the company's most profitable market in 2008. Indianapolis also was one of Ryland's best markets. "We've got more sales than last year," Dreier said. "We've got a great management team there."
Charleston, S.C., has proved to be a strong market for the company. And Dreier called San Antonio, Texas, a "fantastic market," more stable than some of the other Texas markets because of a large military presence. The company also improved in Houston, where units and profits were up over last year. "It's the best out of all the Texas markets," Dreier added.
Sales were also going well in Denver, where Dreier said the division was short on land. And he remained optimistic about Las Vegas. "I'm a big fan of the Vegas market. We're doing better this year than last year," he said. "We're pretty happy with Vegas."