Home Builder CEO: 2007 Housing Market will Suck

Forgive our language in the headline - but that wasn’t the word we chose to describe the world of home mortgage loans.

The same can’t be said for D.R. Horton Inc. The largest U.S. home builder expects builders’ pricing power to return by January 2008, after the hard-hit industry works its way through inventory of unsold homes, the company’s chief executive said Wednesday.

“I don’t think ‘08 is going to be a great year, but it’s going to be much better than ‘07,” CEO Don Tomnitz told the Citigroup Industrial Manufacturing Conference.

He added: “‘07 is going to suck.”

Home price slump continues
D.R. Horton said it may have to make further write-offs to reflect unsold homes or lower land values.

“We may have more impairments coming,” Tomnitz said. “We’ll know that on a quarter-by-quarter basis.”

First-time home buyers account for about 40 percent of the company’s sales. Its treasurer, Stacey Dwyer, said subprime/bad credit mortgage borrowers - those with weaker credit histories - account for fewer than 5 percent of its customers.

The Fort Worth, Texas-based company, which builds homes in 27 states and had a backlog of 16,694 homes as of Feb 13, has demanded price cuts from its vendors and has reduced selling and general expenses in recent months, the CEO said.

The company is targeting free cash flow of $1 billion in its fiscal year, which ends on Sept. 30.

Tomnitz said in the current environment it was hard to determine the value of land, so merger and acquisition activity was not likely to pick up in the sector. The main purpose of a merger was to get another company’s land and lot position, he said.

“It’s a little early to be talking about M&A,” Tomnitz said.

D.R. Horton, like its rivals Toll Brothers (Charts) and Pulte Homes (Charts), has cut the number of new homes it starts to build, but a large supply of existing homes is also forcing homebuilders to reduce prices or offer home buyer incentives.

For example, in Las Vegas, formerly a “hot” market, there are 2,500 unsold new homes, Tomnitz said. But this Nevada housing market has 25,000 unsold existing homes, many of them unoccupied.

The company’s least profitable market right now is California, with particular weakness in the north and south of the state, Tomnitz added. Adjustable-rate home loans in that region have caused problems for current owners, while also scaring away future ones.

SOURCE: CNN Money