Falling new-home orders have caused Standard Pacific CEO Ken Campbell to reconsider when he thinks the home building market will return to a semblance of normality.
“2015 is when we get there,” Campbell said, answering questions from analysts during the company’s third-quarter conference call Wednesday. “It’s probably a year later today than I thought six or nine months ago.”
Standard Pacific’s orders were down year-over-year by 38% to 555 homes in the third quarter, which ended Sept. 30. Closings were down 33%, to 599 homes. The company’s backlog slid to 605 homes, a 39% downward slide compared to the same quarter last year.
Despite those dismal numbers, Standard Pacific managed to turn a slight profit for the second quarter of $4.5 million, or 2 cents per share, compared to a 10-cent loss-per-share in the same quarter of last year.
Standard Pacific has managed to reconstruct itself so that it is able to sustain itself with little. To make a profit, it needs to sell just 1.5 homes a month on average in each community, and its costs continue to fall. Standard Pacific’s third-quarter SG&A expenses were down $7.4 million, which is a reduction of 17.6%.
“Given our breakeven rate is as low as it is. … I think we are fairly confident that we can continue to eke out income at these sales rates,” said Scott Stowell, the company’s chief operating officer.
Stowell credited the sales slowdown to a lack of urgency to buy from consumers as well as difficulty selling existing homes, would-be buyers not being able to bring as much equity as they had hoped to a new home purchase, and/or having difficulty qualifying for financing.
In terms of pricing, Campbell said there could be some downward pressure on home prices in the future; he suspects some large builders perhaps overbuilt in expectation of business from the home buyer housing tax credit, leaving them with extra specs. Standard Pacific currently has 918 spec homes on the books, with 391 of those completed construction, which Campbell suggested was most likely too many.
Still, the company has been able to hold the line on prices. Standard Pacific’s average sales price actually moved up 14% to $302,000 in the third quarter.
“The shift was about mix and where we sold them,” said Campbell, adding that it was selling out of some Florida communities earlier in the year at lower prices while the company sold more California homes in its third quarter that net higher prices and better margins. Gross margin from home sales in the quarter was 23.6%, which represents a 5-percentage-point improvement on an annual basis.
Standard Pacific plans to continue buying land during the downturn, although slower sales are likely to slow the pace of acquisitions. (Sales velocity affects how much a builder is willing to spend to get new land.) In its third quarter, the builder approved $93 million in land purchases, although it has not actually spent that money yet. Those approvals include 1,800 lots valued at $127 million. Of that land, about 73% is in California. “That’s where we think land will be most scarce when the market picks up and also some of the most difficult to get (development) approved,” Campbell said.
He noted that Standard Pacific is not the only builder who has slowed its land buying. “Land market demand has shifted a little bit, softened,” Campbell said. “The levels of transactions have slowed down.”
The company expects to increase its net community count by seven by the end of the year and boost its total count to an average of 150 compared to 130 this year. New communities, with gross margins in the 23% range, still make up a minority of Standard Pacific’s holdings.
Campbell blames himself for the limited number of new communities. “The delay is my fault, because as we were rolling new communities out, we decided that this would be a great time to redesign our new homes,” he said, adding he thought it prudent to offer homes that match new buyer desires. He is also reluctant to hire the employees that might be required. “I am not going to add staff,” he said.
Standard Pacific also offered more clarity in its exposure to mortgage put-backs. The company has made 23,000 mortgage loans since it started a mortgage company in 2004. So far, only 62 loans from that pool have been sent back to Standard Pacific due to default. Most of that group was from 2005 to 2007, when consumers were able to get loans without proving income with documentation.
“Obviously with 23,000 loans, that is a big nut out there,” Campbell said. “I’m not saying that it (a large number of put-backs) is not going to happen, but there certainly is no evidence that it is going to happen.”
Teresa Burney is a senior editor at BUILDER and BIG BUILDER magazines.