There wasn’t much uplifting news to be found in the most recent batch of public builder quarterly earnings reports.
While CEOs pointed to the scarce positive sparks in the national economy, as well as progress they have made at cutting costs and opening more profitable communities, that did little to balance out the fact that only four of the 13 largest builders turned a profit in their last 2010 quarter, namely KB Home, Lennar Corp., NVR, and Toll Brothers.
And only two—Meritage and M/I Homes—had order increases compared to the same quarter in 2009. Closing numbers fell for every builder except for NVR, and numbers were down by a third or more for six of the 13 builders. However, the quarter-over-quarter comparisons are somewhat distorted toward the negative because the expiring federal tax credit artificially spiked closings at the end of 2009.
Most CEOs cautioned that 2011 is likely to be a challenging year for builders, even as many are opening new communities that they are expecting to deliver greater margins.
Early spring community traffic reports are offering hope that there will be a spring selling season this year. And, with the tax credit that spurred spring sales last year gone, builders are also hoping this year’s spring rush will be real demand that won’t dry up completely in the summer as happened last year when the tax rebate was over.
The conference calls did unveil two potential sale dampers, said Stephen East, a Ticonderoga Securities analyst.
“The biggest trend I see is that pricing pressure is back,” said East, adding that some builders, in the sluggish quarter, began adding more incentives to move homes.
“Margins are squeezed a little bit,” he said. A number of builders said they wouldn’t continue the larger incentive packages in the busier spring selling season, but East said that the boosted incentives might continue regardless.
And materials price increases expected this year are not going to help with margin pressure.
Getting buyers approved for mortgages is another potential headwind, East said, as the tightened standards continue and uncertainty about the future of Fannie Mae and Freddie Mac could provide another chilling effect.
Two builders reported greatly elevated cancellation rates in the quarter that are reminiscent of the beginning months of the housing crash. M.D.C. Holdings had a 46% cancellation rate in the quarter and KB Home’s was 37%. The tougher mortgage standards were cited as a cause.
Teresa Burney is a senior editor for Builder magazine.