Thursday, 27 September 2007

New Home Sales & KB Home's shocker

Sales of new homes dropped 8.3% in August to a seasonally adjusted annual rate of 795,000, the slowest sales pace since June 2000, the Commerce Department estimated Thursday.

The median sales price fell 7.5% to $225,700 compared with a year earlier, the largest year-over-year decline in 37 years.

The inventory of unsold homes fell by 1.5% to 529,000, the fifth straight decline as builders struggle to bring their inventories down. The inventory represents an 8.2-month supply at the August sales pace, the highest since March. A few comments from the esteemed legion of economists:

"This is just hideous," "Sales have further to fall," "people don't like borrowing to buy depreciating assets, and lenders don't like to lend on them either." Ian Shepherdson, chief U.S. economist for High Frequency Economics.

"This is more evidence that it's going to be a long and -- for a lot of people -- a painful process," "the soft housing market will be with us for a long time, at least 18 months." Mike Schenk, economist for the Credit Union National Association.

"The bad news is that the August data only partially reflect tighter mortgage credit conditions," Richard Moody, chief economist for Mission Residential.

While both existing and new home sales are subject to large revisions you'd have to blind not to see the trend emerging. New home sales are a better proxy for current conditions as they reflect sales in the month of August whereas existing home sales includes homes purchased in July and in some cases June.

The reaction from the market suggests investors are getting used to bad housing data as they continues to climb the wall of worry. That's good because there will be plenty of bad news to come.

KB Home's shocker
Home builder KB Home (KBH) had a shocker of a third quarter posting a loss of $478.6 million, or $6.19 a share from continuing operations, compared with income of $129.3 million, or $1.60 a share the previous year.

During the quarter the company sold its 49% stake in French subsidiary, Kaufman & Broad SA, for an after-tax gain of $438.1 million. Including the French discontinued operations, KB Home said it posted a 3Q07 net loss of $35.6 million, or $0.46 cents a share. Total revenue fell 32% from a year earlier to $1.54 billion.

KB Home said it booked pretax charges of $690.1 million related to inventory and joint-venture impairments and land options it's walking away from. It also took a $107.9 million charge related to goodwill impairment. CEO Jeffrey Mezger had this to say:

The results "reflect the seriously challenging market conditions that prevail for home builders across most of the nation." "The oversupply of unsold new and resale homes and downward pressure on new home values have worsened in many of our markets as tighter lending standards, low affordability and greater buyer caution suppress demand."

"At this time, we see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins." "We expect housing industry conditions to continue to worsen through the end of the year and into 2008."

Pretty grim stuff. It may prove 'seriously challenging' just to stay afloat in 2008.