Considering the market, Bensalem, Pa.-based Orleans Homebuilders had been posting some positive numbers. It had three consecutive quarters of year-over-year net new orders. But then September rolled around.
Some of its bigger competitors began rolling out across-the-board promotions and price cuts, like "Deal of the Century" from Hovnanian. That brought steep discounts to some relatively good markets in which Orleans builds. The company posted a loss of $2.06 million or $0.11 per share in the first quarter of 2008, compared to a net income of $3.89 million or $0.21 per share in the same period of last year. Its average selling price was $454,000 compared to $446,000 the previous year.
Orleans said he tried to hold his pricing for a couple weeks in September, but then he was forced to give in to market conditions (though in some cases he admitted he raised prices just so he could offer steeper discounts). "After two weeks of everyone having fire sales, we unfortunately had to join in a little bit," Orleans said.
In Orleans' other markets, it wasn't competitors that led to discounting; it was the markets' conditions. Take, for example, Florida, where the company has about 13 percent of its lot inventory. "In Florida, we're doing whatever we have to do to move inventory," Orleans said.
The discounting didn't force a large number of impairments from Orleans though. The company only wrote down $700,000 in land and $400,000 in options. For the quarter before, it wrote down about $3.2 million in inventory and $1.5 million in options.
About 85% of Orleans' projects are in the Northeast and North Carolina, which remain relatively healthy markets. And, perhaps most important given the current lending market, none of its buyers in backlog are relying on subprime mortgages, according to Orleans. About 90% of these borrowers have prime loans, while another 10% are relying on Alt-A. This level of borrowers has helped stabilize its cancellation rate, which has been around 20% for the past three quarters.
Orleans is also working on keeping inventory low. Right now, it has about 100 communities, but Jeffrey Orleans expects to see that number drop to the low 90s a year from now.
With excess inventory and his competitors offering deep discounts in many markets, Orleans, who has been in the business through housing downturns in the past, doesn't expect things to change anytime soon.
"At the present time, we don't expect this correction to be short lived," Orleans said.