NAHB Calls on Congress [on Recess] for Action
As always, interesting timing for the National Association of Home Builders. Both Houses of Congress are on recess until September 8, but the NAHB picks today to call on Congress “to extend and enhance the $8,000 first-time home buyer tax credit due to expire on December 1.”
The NAHB says that extending the deadline by 12 months and opening eligibility for the tax credit to all home buyers would account for an incremental 383,000 home sales, and an added 80,000 starts in the tough year ahead.
- We’ve written here earlier about the initiatives the NAHB is drawing attention to in its release.
Maybe the optimal time to call on Congress to do anything is when they’re home, away from the malarial marsh that is the District of Columbia in August. Away from the cacaphony of their own voices, perhaps they can hear better, and see better, and witness more truthfully what the hell is going on in their own back yards.
That’s what they’ll need to do.
Maybe the NAHB’s timing is deliberate. If not, perhaps it’s inadvertently brilliant. During time off, our elected [yes, here we did typo the word "exected" a couple of posts ago] officialdom may count their lucky stars that we may not be heading for the same kind of September and October we endured in 2008. They may actually try to take the pulse of their constituents on the issues hovering like massive dirigibles that on-and-off blot out the sun light–i.e. healthcare reform, the climate bill, and paying for it all.
If elected representatives actually listen, we wonder what convictions they will return to Washington with after September 8th.
What a fascinating time to believe in a government like ours. We elect Senators and Congressional representatives to serve our collective long-term interests and then spend all our time–deservedly–not trusting them to do just that.
If Senators and Representatives listen during their recess, what will they hear? Will they hear the NAHB calling on them to extend measures the trade group would succor an industry sector that pumps as much as 15% into the Gross Domestic Product?
Will they listen to people who’ve lost their jobs and have little hope of finding new ones commensurate with their skills and experience? Will they listen at all to small businesses–you know, the ones that accounted for all the new jobs added to the economy during the run from 2002 to 2007, that have now been gutted unceremoniously from the economy?
If Senators and Representatives listen to small and medium sized businesses during their three weeks’ recess, how will they feel about health care initiatives that will weigh so heavily on mid-sized and smaller business employers? How will they assess the impact of cap-and-trade measures that will add cost, time, and regulatory obligation to every turn when it comes to construction of anything habitable?
Oddly, the smartest economists cast doubt on our elected officials for not going far enough with their regulatory powers and responsibilities? Here’s Princeton University professor, Nobel Prize-winner and New York Times columnist Paul Krugman–if economists had tabloids at the checkout counter, he and Nouriel Roubini would be the Brad Pitt and Matthew McConoughey of their covers–waxing on on CNBC today about how the government has only begun the job of righting what has gone wrong with the economy and business.
We find it strange that those who are blessed with the intelligence and technical training to understand the most about how the wheels came off the financial system are mostly ones who say that more government is the answer.
Thing is, more government only means a higher price to pay and more time to wait for regulators and inspectors to finish what they need to do so that business peole can go about the business of repairing what is wrong with the economy, which is that there’s an over capacity of workers and too little consumption.
We find it to be interesting timing indeed that the NAHB–which should live, eat, breathe, and sleep the small to medium-sized business interests the trade group represents–should “call on Congress” for more government when more government only lades more of the onus on home builders that hire people and build carbon-emitting dwellings of one sort or another.
As we said, maybe the timing is brilliant, unintentionally.
Safer Borrowers Says Who?
As part of the overhaul of financial system regulation, a new consumer protection agency for borrowers is taking shape.
The New York Times reports:
The Obama administration sent Congress a detailed proposal on Tuesday to create a consumer protection agency responsible for financial products, a move that is the first shot in a heated battle with banks and other financial institutions over how to regulate home mortgages, credit cards and other forms of lending.
For their part, banks and mortgage lenders are placing top priority on killing the proposal.
The proposal would create a stand-alone agency dedicated entirely to protecting consumers. It would be added to existing bank regulators like the Federal Reserve, the Federal Deposit Insurance Corporation and the Comptroller of the Currency.
Mandating Green
The House of Representatives yesterday gave President Barack Obama triumph in a battle amid the broad front of his agenda. The House voted to legislate dramatic reduction in the U.S. emission of greenhouse gas. The New York Times reports:
The vote was the first time either house of Congress had approved a bill meant to curb the heat-trapping gases scientists have linked to climate change. The legislation, which passed despite deep divisions among Democrats, could lead to profound changes in many sectors of the economy, including electric power generation, agriculture, manufacturing and construction.
Victory in the war is another matter.
Ahead of the vote, Big Builder online editor William F. Gloede wrote an informed, impassioned, and somewhat biased opinion piece on how the bill would impact residential builders.
A snippet from Gloede’s essay:
The bill would, among many other controversial provisions, mandate increases in the energy efficiency of homes of 30% upon enactment and 50% above standards set under the 2006 International Energy Conservation Code (IECC) by 2014, increasing by 5% in 2017 and increasing another 5% each three years thereafter until 2030. It would supercede state and local building codes regarding energy efficiency, withhold federal money from states deemed out of compliance and provide civil penalties for builders and/or homeowners. It would give significant new oversight and enforcement powers to the Department of Energy and the Cabinet-level post of Secretary of Energy, an unelected post that goes to a political ally of the President. And each day of occupancy of a structure deemed out of compliance would be treated as a separate violation. Ca-ching indeed. Not to mention dealing with officious federal bureaucrats on the jobsite.
The big problem with these targets–among a multitude of other problems with this bill–is that while they may be feasible, they are impossible as a matter of practicality. Unless builders build, and people buy, today’s equivalent of Buckminster Fuller geodesic-domes, attaining this level of energy efficiency would prove prohibitively expensive. Low-income housing?
The question is how much of the bill will survive the Senate intact. Ironically, construction trade groups have had mixed records in lobbying Senators for their interests.
It will be interesting to see which of the landmark rules as they apply to construction make it into law.
Home Builders’ Manifesto Destiny: Change or Bid Goodbye
One way to phrase the situation for those in the business and operations of new residential construction (and, in the mean time stop paying attention to meaningless, volatile, and highly flawed monthly national data on where housing is in its economic cycle):
Change the skill-set from capacity to ability.
That’s the way FMI Corp. principal Clark Ellis described the challenge for home building companies. It sounds so simple.
Home building companies, until around Spring 2007, had four key stakeholders: home buyers, financial investors, suppliers and local decision-makers, and staff. No longer. A fifth critical stakeholder has emerged out of the profound dislocation that came along with deleveraging household, business, and government economies: Broad public perception and Congress.
Going back to Clark Ellis’ phrase to describe the structural challenge of every home builder to migrate from being a Capacity organization to an Ability organization, the addition of this fifth critical stakeholder makes the challenge that much harder.
Look at the nation’s car business. It grew into empires based on capacity. It has become rubble because it has not found ability. For two deathwish decades Detroit pitted its gearhead engineers against its blustery marketeers. They one-upped and undermined one another into oblivion.
When Capacity was the goal, home builders rose to it with gusto. Now that Ability is the goal, it means having to blow up a lot of the way things worked before. Financial realities forced some of that, but downsizing and other cost actions only get organizations part the way there.
For practical purposes, value engineering, as most people use the term in new-home construction operations, is a misnomer. It’s really a cost strip-out process, as opposed to engineering process and product for optimized value.
So taking out product costs, and getting leaner in overheads and operational expenses, and cutting production time, and renegotiating loan terms and land deals, and eliminating waste are necessary actions. Those steps are strides toward Ability, but they don’t get you there.
What will get you across the chasm from Capacity to Ability is not just cost engineering, but making the new-home a purchase experience like no other. Ability means giving a home buyer prospect something that sets your home apart from a design, community experience, value, and quality standpoint. To become an Ability organization, it’s not enough to be efficient, althought that is a must. You’ve got to be different as well as efficient.
Clearly, save a few anomalous markets, new-home builders are either going to have to compete with distressed home sales for months and months to come or they’re going to go away. Home prices continue to come farther down to earth in relation to household incomes and rent comparisons, and interest rates hover at historically manageable levels.
The three question marks for Josephine Homebuyer are these: Can I get a loan? Will I keep my income at its current level? and Will the price of the house stay stable enough that I won’t be underwater on the loan in a year?
In the economic, financial, and credit environment that we’re in now, a total cost of homeownership analysis could be an increasingly strong argument for people to buy new. More efficient, more repair-free, easier to maintain homes in more sustainable communities may prove to offset the apparent price advantage of buying a foreclosure.
Ability needs to happen holistically. You can’t have it in sales without achieving it in land strategy, operational processes, finance, product development, purchasing and sourcing.
Getting to expanded Capacity was levering up the model and accelerating its output. Getting to Ability is changing the model.
It’s putting a name and a face and an identity on your home buyer. According to yesterday’s new home sales data, there’s only about 32,000 of them a month (unadjusted) to go around for everybody. That’s not nothing, but it certainly calls for Ability vs. Capacity to meet their need.
If you do that though, you’ll be taking care of those other four stake holders, the financial partners, suppliers and municipal decision-makers, employees, and John Q. Public and his elected U.S. representatives.
Why June ‘09 is a Watershed Month for Home Building
Home builders never meet a mixed signal they don’t like.
They’ll take a phrase like, “there’s no time like adversity to go out and find opportunity,” and run with it. Only problem we can see is, there are too many of them gunning for the same opportunity, so more lose than not.
In his post today, Jamie Pirrello lends sharp insight into the structural over-capacity of the home building landscape right now. He notes that demand may well exist, but if the same demand is met by multiple competitors, then somebody wins, and the rest represent excess supply to the market. That’s certain hardship, and, as the small-print on lots of new pharmaceutical offerings often reads, may cause death.
A snippet from the Pirrello take on what’s next:
If builders don’t build too many specs and the tax credit is not extended and interest rates don’t jump to such a point where buyers are willing to forego the tax credit hopeful of lower interest rates in the future, then building specs should generate additional profits.
If on the other hand, builders build specs and too many are built or the tax credit is extended or interest rates rise to the point where buyers leave the market temporarily, then builders could be in a difficult situation. Standing unsold and completed inventory may pressure banks to demand repayment on the related construction loans. In addition, builders may need to heavily discount their spec homes as all competitors will be struggling with excess inventory and the need to discount the price of their homes.
The tail-wind real estate players, including home building companies, enjoyed for the past few months — the first positive conditions they’ve experienced in seven or eight quarters — consisted of four forces that joined, almost miraculously.
Seasonality was one of the unpredictable ones, given that two previous “spring selling seasons” came and went in 2007 and 2008, with nothing good to say about either. A stimulus-package $8,000 tax credit for first-time home buyers, eye-poppingly low interest rates, and home prices dramatically reduced off their 2007 peaks were the other three drivers of the recent flurry in activity.
HousingWire reports:
Tax credit availability and competitive low-end pricing drove the sales, according to the survey. The home buyer tax credit monetization toward closing costs on FHA loans, announced by the US Department of Housing and Urban Development, may contribute to driving sales in coming reports, as 36% of respondents expect a boost of 11% to 25% more sales per month in response to the credit monetization.
Countering those aiding winds are the buffeting blasts of foreclosures, tight home mortgage credit, appraisal hell, and a banker’s joke formerly known as construction lending.
Still, home builders believe they’re beginning to sense the darkest hour before the dawn, and they’re trying to contain their glee.
Here’s how John Burns Real Estate Consulting sums up its 306-executive panel of home building executives weighing in on market conditions:
Despite the continued negative numbers, this month’s commentary is the most optimistic we have seen since the survey began one year ago. Many builders believe we are approaching bottom, particularly in some of the most distressed markets, such as Phoenix.
The conviction of these respondents is that they’ve now seen the worst that the market can throw at them, and now is time for a floor to set in.
Still, now is a kind of new moment of truth for home builders.
A very high stakes game of chicken is about to unfold through the balance of 2009, and one of the most interesting factors to watch is what home builders wish for. As in be careful what you wish for.
Here’s a statement from NAHB Chairman Joe Robson that encapsulates what home builders are wishing for:
Due to expire at the end of November, the current $8,000 first-time home buyer tax credit has proved to be an effective policy targeted toward a specific demographic group that is showing tangible results. Enhancing this credit would help to stoke the economic engine at a key point in our recovery.
But home builders must be careful what they wish for here. If the $8,000 tax credit for first-time home buyers worked as an incentive, part of its effectiveness has been to induce a fear of missing out on it.
If home buyers feel that the government will just keep adding months to the incentive, it will lose its teeth.
So, during the next 30 to 60 days, home builders of all stripes will be taking some big chances amidst some pretty tough odds.
Since it takes roughly 80 days start-to-finish building time to complete a new-home for sale, and since roughly half of homes sold these days are at least started on spec, the game of chicken will be a three-way affair.
Home builders in the most active markets will be betting on their share of a demand as it may go, based on a promising last few months, and a guess that as the clock on the current $8k credit ticks down to the end of November.
No one will want to leave potential sales on the table as that current rebate program runs out.
Player number two in the game of chicken will be The Administration and Congress. Do they “enhance” the tax credit–possibly even goose it–or let it run out this year?
Third, and most important, are potential home buyers. They’ll be balancing several important psychological factors, and will probably have greater visibility by September or October on their own income stability and the direction of the overall economy
If they’re seriously afraid they’re going to miss their once-in-a-lifetime opportunity to buy a first home at a moment when price, mortgage rates, and tax credit are still in full force, but not for long, then they’ll be all over it to get their deals done before the expiration.
So, if home builders get what they want, and get an extension on the credit, they may be removing one of the key motivators toward getting home buyers off the sideline.
One way or another, the fact that more home builders are optimistic things are improving probably means that more home builders will be voting with their feet in the next couple of months.
We’ll likely see a gust of starts in the next 30 to 60 days, all about meeting deadlines for the expiration of the Federal tax credit.
There’ll be hell to pay if the deadline is suddenly lifted, leaving no hard stop to the benefit of a home buyer acting sooner than later.
The Mortage Interest Rate Wild Card
Three stars aligned–home prices, interest rates, and first-time buyer/new-home tax credits. Toss “seasonality” into the mix of positive catalysts, and you can start discounting the nascent March, April, May run in housing as a marketplace behaving the way an injured athlete does after a big cortisone treatment. He might look okay for a while, but you can only wonder whether and how long the painkilling effect will last.
Now, just when data starts rolling in that supports this alignment, interest rates have begun shaking loose from their virtuous bond with more affordable house prices and a kick-back from Uncle Sam or a state for a home purchase.
The Wall Street Journal leads this a.m. with its take on the quantum leap percentage point-plus increase in mortgage rates since the end of May.
“Mortgage rates at these levels will hobble the [housing] recovery, and it was just the beginning of the recovery,” says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.
Investors have been anxiously watching bond yields climb over the past few weeks, pushing up mortgage rates, which normally track 10-year Treasury notes. The yield on the those briefly hit 4% on Wednesday afternoon for the first time since mid-October before ending the day at 3.937%.
Many policy makers see the rise in Treasury yields as a sign that investors are optimistic that the economy is on the mend. But many market participants say higher long-term bond yields indicate investors are increasingly worried about inflation.
What unfortunate timing! Look at a key “take-away” from Wachovia senior analyst Carl Reichardt’s latest “Neighborhood Watch Survey” of new-home community sales managers.
With three straight surveys and a broader base of SMs reporting better-than-expected sales and traffic, we now believe that field conditions saw their low ebb in early 2009. While seasonality plays some role in our data, SMs expect strength this time of year, yet still see activity above these expectations.
This verbiage is rosy, given where it’s coming from. Reichardt notes that upward pressure on interest rates may stall the new-found momentum. Other analysts point also to the fact that tax credit programs for first-time home buyers expire on a Federal level by the end of calendar 2009, and state-funded programs will only last until the coffers run dry.
Hanley Wood Market Intelligence has done an extensive market-by-market analysis that ties the effecitve date of California’s $10K tax credit to new-home purchase activity. The Orange County Register’s Jonathan Lansner quoted the HWMI study at length in his blog post about how the O.C. was SOL when it came to an upside of the combined California and U.S. government tax credits for home purchases.
Click to Enlarge graph of Hanley Wood Market Intelligence Data.
Costa Mesa-based Hanley Wood Market Intelligence reports that Orange County buyers signed 35% fewer sales contracts for new homes in March and April, the first months of a homebuyer tax credit designed to spur the purchase of newly built residences.
The California program gives homebuyers a tax credit of up to $10,000 for new single-family homes selling after March 1. (Uncle Sam will chip in another $8,000 if you’re a first-time buyer!) But while demand has been high statewide for the California tax credit, that has yet to impact the pace of sales and construction here:
What Lansner neglects to report on is whether the 35% decline year-on-year for the two-month March/April period is more or less than the decline year-on-year from, say January-February of 2009 from a year earlier.
He does acknowledge that statewide, the $10,000 tax-credit appeared to have jumpstarted sales in many communities.
In Reichardt’s Neighborhood Watch survey, he notes:
Trends in the West — especially No Cal — made a surprising turn as SMs cited the strongest sales trends compared to expectations.
The big question post the “Spring Selling Season” uptick must be how to keep whatever momentum there is in the market going through the balance of the year… especially without the critical tailwind of low, low interest rates.
California, as of June, is said to be 85% through its $100-million allocation for home buyer tax credits, and nobody expects below 5% home loan rates to come back to roost anytime soon.
Here’s Calculated Risk’s take on mortgage rate trends, and how to stay ahead of the curve on them:
Here is a new tool from Political Calculations: Predicting Mortgage Rates and Treasury Yields
This is based off the chart I posted last Friday and is very timely with the Ten Year Yield pushing 4%.
Using their tool, with the Ten Year yield at 3.99%, this suggests that 30 year mortgage rates will rise to 5.8% based on the historical relationship between the Ten Year yield and mortgage rates.
The question is, does the demand resubmerge when the three stars are not in alignment? Will those who move off the sidelines because of the sense that “there will never be a better time to buy” now begin to feel they’ll do better if they wait out further house price declines?
As most new-home builders have discovered, the monthly payments riddle is the one they need most critically to solve. If interest rates go up, prices have to go down to solve that riddle.
It strongly suggests that in the current policy environment, a strong likelihood is that Fix Housing First’s original plan for both a compelling tax credit and a mortgage buy-down may do the trick of sparking demand, clearing more inventory, restoring scarcity, and putting a new floor of value under residential real estate.
We see a Stimulus 2.0 package emerging during the Fall session of Congress, designed to capture any green shoots still out there, and accelerate the economy’s ability to begin paying down the “Wall of Capital” with which the Fed and Co. met the economic crisis starting last Fall. A mortgage buy-down might likely be in that program, to test new residential construction’s capacity to serve an accustomed role as an engine driving the broader economy.
State Tax Credit Worthy?
The United States Congress passed a $787 billion stimulus bill that includes an $8,000 tax credit for earners who buy their first home in the 12 months, from January through December 2009.
States, which have seen California get some fast traction with an additional tax credit for any home buyer up to $10,000, are starting to ante up programs of their own, providing their tax coffers permit such an allocation.
Big Builder senior editor Lynn Norusis has compiled this map, indicating which states are working resolutions through their respective legislatures, and the status of each bill.
View Larger Map
New Household Product Idea: Debt B’ Gone
The New York Times’ editorial published yesterday, “Helping the House Poor,” echoes in more ways than not the observations of Wall Street and Maine’s bureau manager and chief bottle washer Bill Gloede, who wrote about the Obama housing plan immediately after the President unveiled it.
The key conclusion of the Times’ editorial:
A better way to lower the monthly payments for these people is to reduce the principal remaining on the loan. That way, the payments become affordable and, as equity is rebuilt, the borrower has both an incentive and the means to keep current. The Obama plan provides subsidies for lenders to reduce principal balances, but the option is not promoted as prominently as simply reducing the interest rate. That’s a shame. It is a better way to go, but lenders prefer interest-rate reduction to principal reduction, in part, because it appears to minimize the loss they have to recognize upfront.
This is where Congress can make a difference. On Thursday, the House passed a bill that would allow bankrupt homeowners to have their loans modified in bankruptcy court, where the most common solution is to reduce the principal. The bill is overly restrictive, but if passed — and if the Senate doesn’t weaken it any further from the House’s version — it could give underwater homeowners another way to keep their homes.
Perhaps more important, lenders are more likely to pursue sound modifications if the alternative is to face the borrower in court. Best of all, modifying loans via bankruptcy proceedings costs the taxpayer nothing. The costs are borne by the borrowers and the lenders.
Homeowners — like the banks, much of corporate America and the government itself — are suffering under the weight of excessive debt. The Obama plan will make mortgage indebtedness more manageable, but ultimately the debt itself needs to be greatly reduced. The sooner we as a nation move in that direction, the better.
Hence, we need a consumable packaged good product–”Are You Listening Procter & Gamble and Unilever?–Debt ‘B Gone.
Big Home Builders Vs. NAHB Brush-up Update
Some legislative proposals have nine lives, or so it would seem. Extending the net operating loss provision that would allow companies to recover taxes paid up to 60 months ago is one of them.
The Wall Street Journal’s Michael Corkery has weighed in on the re-emergence of the carryback provision in President Barack Obama’s budget proposal. The story today grazes across the brouhaha created as the NAHB leadership threw the weight of its lobbying support behind the interests of its smaller company members on Feb. 11, as the previous iteration of the measure came under final consideration for inclusion in the $789 billion stimulus program.
Big home builders have lobbied for an expansion of this tax break for nearly a year and appeared close to getting it in the $787 billion economic-stimulus plan. But at the last minute, Congress limited the five-year carry-back provision to firms with annual gross receipts of $15 million or less.
Analysts and some small builders worry the provision could prompt large builders to sell land or homes at steep discounts to generate losses for tax purposes, as companies such as D.R. Horton Inc. and Pulte Homes Inc. have done in recent months. A big labor union and other criticis have argued against the break, saying it would help the very builders that contributed to the housing crisis.
If the version in the Obama budget is enacted, the break is projected to trim federal revenue by about $18.5 billion over the next 11 years, according to the White House Office of Management and Budget. The tax break was dropped from the stimulus plan as part of an effort to lower the package’s cost to the Treasury, to appease Republican and Democratic centrists. Now that cost could be realized in the budget instead.
While the details of which companies would qualify for the latest tax break are being finalized, a spokesman for the White House budget office said its goal is to extend it benefits to “larger businesses” than those covered by the break in the stimulus plan.
The aftermath of a huge, only somewhat successful lobbying effort for both pro-housing stimulus and tax programs has led some big home building company senior executives to question whether the industry trade group can represent the often conflicting interests of large and small builders. [see previous post: Home Builder Trade Group Goes Public, or Rather, It Goes After Its Public Members].
As Toll Rolls, Others May Follow
There are bigger public home builders than Toll Brothers, and there are certainly ones with more mainstream product offerings and conventional business models. Why is it, then, that the financial markets and the media regard Toll as the canary in the coal mine among home builders?
For one, it’s arguably the best known brand name in home building. And if that point is debatable from a national perspective, it’s hardly in question when one shrinks the geography to the northeast corridor of the United States. There’s likely to be a significant correlation between owners of Toll Brothers homes and denizens of Wall Street. It’s a name that simply means home building for many of the investor breed. The world may be Freidman flat, but many of its residents are parochially focused, which still means that West of the Hudson is that wide unknown expanse that is like a foreign concept to many Wall Street players. Which makes Toll the go-to home builder.
What’s more, it has a fiscal year that gets out of the gate Oct. 1, so its financials always seem to be a step ahead of most of the rest of the class. Not to mention Bob Toll, the patriarch of the 42 year old company. Bob opens his mouth, and people listen. Why? He’s funny, and intellectual, and doesn’t seem to be afraid to say what’s really going on. So people listen.
This morning Toll Brothers first quarter financials are out.
The financial media, The Wall Street Journal and CNBC, each sounded the theme that Toll’s performance comped better year on year than the same period in 2008, which echoes the language of the company’s Q1 press release.
HORSHAM, Pa., March 4, 2009 — Toll Brothers, Inc. (NYSE:TOL) (www.tollbrothers.com), the nation’s leading builder of luxury homes, today reported a FY 2009 first quarter net loss of $88.9 million, or $0.55 per share diluted, which included pre-tax write-downs totaling $156.6 million. This compared to FY 2008’s first quarter net loss of $96.0 million, or $0.61 per share diluted, which included pre-tax write-downs totaling $245.5 million.
Excluding write-downs, FY 2009’s first quarter earnings were $9.6 million ($9.55 million of which resulted from the net reversal of a prior tax provision), or $0.06 per share diluted, compared to $57.3 million, or $0.35 per share diluted for FY 2008’s first quarter.
In FY 2009’s first quarter, revenues were $409.0 million, backlog was $1.04 billion and net (after cancellations) signed contracts were $127.8 million. These totals represented declines of 51%, 56%, and 66%, respectively, in dollars, and 45%, 51% and 59%, respectively, in units, compared to FY 2008’s first-quarter results.
The Company ended FY 2009’s first quarter with $1.53 billion in cash, compared to $956.6 million at FY 2008’s first-quarter-end. The Company’s cash position was down slightly from $1.63 billion at FY 2008’s fourth-quarter-end, principally due to the payment in 2009’s first quarter of previously accrued taxes and the retirement of purchase money mortgages and other debt. In addition, the Company had $1.32 billion available under its bank credit facility, which matures in March 2011.
The Company ended 2009’s first quarter with a net-debt-to-capital ratio(1) of 14.5%, its lowest level ever at first-quarter-end, compared to 26.8% at 2008’s first-quarter-end. Stockholders’ Equity at FY 2009’s first-quarter-end of $3.16 billion was down 2% compared to $3.24 billion at FYE 2008 and 7% compared to $3.41 billion at FY 2008’s first-quarter-end.
Big Builder offers a brief post-up of Q1 earnings, quoting the quotable CEO Robert I. Toll in his observation of the primary culprit for continued concern.
“We believe weak buyer confidence still impedes the market,” said Robert I.Toll, chairman and CEO. “We have not yet seen a pick-up in activity at our communities other than ordinary seasonal increases for this time of year.”
In UBS equity research analysis of the sector, analysts Eric Crawford and David Goldberg, note faint silver-lining observations in the data and explication from senior management.
As reported on 2/11, net unit orders -59% YOY, averaging just 1 per community for the Q. Despite this, we are encouraged to hear that mgmt is seeing early indications that pricing on land is becoming increasingly attractive, as we continue to believe this is an early indicator of a trough in housing. With its robust liquidity (the co’s net debt-to-cap was 15% at the end of F1Q), we believe Toll is well positioned to take advantage of these opportunities and gain market share from more capital constrained peers.
Michael Rehaut, executive director for JP Morgan equity research on home building punches the data into his Toll model, and out comes this topline take:
Following its 2/11 release of orders, can rate, closings, backlog, and a charges range of $100-200 mil., TOL reported a 1Q (Jan.-end) loss of -$0.55/share, below the Street’s -$0.41 and our $0.47E, featuring land-related charges of $157 mil., which we note was roughly at the midpoint of guidance, as well as core operating margin of only 1.0%, solidly below our 4.7%E and down sharply from the prior four quarters’ 9-11% range. Additionally, TOL noted that the recent pickup in activity was largely seasonal, which we point out is consistent with our view and most other builders’ view of the recent improvement in activity, and therefore is not indicative of a positive trend in the market, in our opinion. Lastly, it also reiterated limited FY09 guidance featuring ranges for closings (2K to 3K) and ASPs ($600 to $625K). Positively, we do note that TOL continues to maintain a strong balance sheet with strong liquidity. None theless, we continue to look for orders and pricing to remain highly challenged, and given our outlook for continued overall difficult conditions in the housing market well into 2009, we continue to expect large impairment charges for the company and the overall industry. Accordingly, we maintain our Neutral rating on TOL amidst our negative sector stance.
Independent housing and economic analyst, Calculated Risk, has a more stark assessment.
In summary: More losses. More write-downs. More cancellations. No guidance. No pick-up in activity.
Statements from Bob Toll himself focus investors on the company’s balance sheet management strength amid continuing headwinds. But he also took a swing for the political fences with remarks that indicate home building leadership has not by any means abandoned its goal for more decisive government policy intervention aimed at spurring demand for new residential housing.
Click on image for access to Big Builder profile.
“Many experts continue to believe we must first stem home price declines before we can resolve the nation’s economic and financial crisis. The recent stimulus bill shows that Washington is paying greater attention to our industry; however, we think more is needed. We advocate a buyer tax credit of $15,000 to be made available to all buyers of homes, not just first-time buyers: We must motivate the entire food chain of home buyers to stop the decline of home prices. Creating a sense of urgency is necessary to motivate buyers to act now; therefore the credit should only be available for a limited period of time.
“If home prices are stabilized, financial institutions, which today cannot value the mortgage-backed securities on their balance sheets, will once again be able to trade these securities; this, in turn, will help stabilize the financial system.
“Housing starts are at their lowest level since measurement began fifty years ago and the resulting job losses have been brutally damaging to the U.S. economy. The new home industry, combined with the related service, building products and home furnishings industries, are together, perhaps, the largest employer in the United States. If Congress and the Administration can effectively call the bottom and thereby put a floor under home prices, we believe the housing market will recover sooner, jobs will be created, bank balance sheets will improve, and millions of people will be able to return to the workforce.”
No doubt, we’ll hear a similar refrain from home building’s CEO breed as Spring financial results surface in the weeks ahead.