D.R. Horton's 37% Decline In New Orders: Bad News For Housing

| About: D. R. (DHI)

D. R. Horton (NYSE:DHI) reported a 37% y-o-y decline in net new orders, with all six regions showing negative comparisons.

Orders fell in the Northeast (21%), Southeast (-30%), South Central (-34%), Southwest (-39%), California (-59%), and the West (-28%). Given our belief DHI is a good proxy for the housing industry, today’s report indicates the housing market is still under severe pressure, despite record low interest rates and a very low unemployment rate.

Investors remain concerned about the risk of a price decline, which explains a cancellation rate of 32%. The concerns on price have merit, with two of the company’s markets experiencing selling price pressure. More specifically, average selling prices in the Southeast and the Southwest fell 14% and 11%, respectively.

The markets that were up saw price appreciation in the low single-digit range. On a net basis, average selling prices on all orders taken in the second quarter fell 5.9%.

With the national inventory of new and existing homes on the rise, we see continued risk of further price erosion and continued risk that starts need to fall further. This will negatively impact all the homebuilders, including DHI, and helps to explain Lennar’s (NYSE:LEN) decision yesterday to ask sub-contractors for lower prices on previously completed contract work.

With difficult industry conditions likely to persist for the next three quarters at the very least, we expect DHI to continue to work with suppliers to regain some margin lost from lower prices and heightened incentive use.

Despite these efforts to keep SG&A [sales, general and administrative] low, we believe it will not be enough to stave off overall margin deterioration. Given our forecast for weak average selling prices and increased incentive use, we expect DHI’s gross margins to remain under pressure for the remainder of the year. As a result, we maintain our previously lowered FY07 EPS [earnings per share] estimate of $2.04.

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