D.R. Horton Holds a Real Estate 'Unauction'

They camped out all night in the cold. Wrapped up in sleeping bags and buried in parkas, the would-be home buyers bided their time, hopeful that the home of their dreams would soon be under contract.

And while that may have been a pretty common sight just a few years ago at the height of the housing bubble, on this particular night at least, the sight of so many people standing in line to buy a home was definitely an oddity. After all, the line that formed that night was in California, the epicenter of the housing bust.

But as you can imagine, what was going at that particular sales center was not necessarily normal either. The buyers were the participants in "The Unauction".

So what's an "unauction" you ask?

Well in short, it's just the latest bit of desperation to be tried by one of the nation's big homebuilders, D.R. Horton Inc. (NYSE:DHI) as they continue to grapple with the bursting of the housing bubble.

So what began with deep discounts during Christmas in July has now become a panic of "auction level pricing without the hassle".

DR Horton: The Nation's Biggest Homebuilder Stages a Firesale

The brain child of the nation's largest builder, D.R. Horton, the unauction is "unlike any sale you've ever seen" according their ad. And with the unheard of discounts of up to 50% off in some 23 developments in Southern California, they may just be right. Buyers, after all, stood to save as much as $320,000 on spec homes that simply weren't moving.

That firesale came just one week after D.R. Horton announced that it had swung to a 41 cents a share fiscal first quarter loss compared to a net income of 35 cents a share only a year earlier.

Revenues plunged at the Fort-Worth based builder to $1.71 billion from $2.8 billion a year ago, as homes closed fell 36% and the cancellation rate remained at a staggering 44%.

Said Chairman Donald Horton:

Lending standards continue to be more restrictive than during the previous year, and buyers continued to approach the home buying decision cautiously. We expect the housing environment to remain challenging.

But that challenging environment is nothing new to the likes D.R. Horton. After all, it was Horton's Donald Tomnitz that told investors last year that "I don't want to be too sophisticated here, but '07 is going to suck, all 12 months of the calendar year."

And as for 2008, it is really not looking much better, for D.R. Horton or for any of the other homebuilders for that matter.

The Homebuilders and the Housing Bubble Fallout

According to data released by the Commerce Department yesterday, the turmoil that hit the residential real estate market last year has continued in 2008 with housing starts for January remaining at their lowest levels in 17 year.

Construction began on 1.012 million homes in January, up 0.8% from December when the number of new housing units was its lowest since 1991, but down 28% from the year-ago period, which was as bad as Tomnitz says it was.

That makes the current spring selling season as critical as it has ever been, especially for builders with cash flow problems.

So is now the time to be bottom fishing in the builders? Well, not exactly.

The "unauction" is just the first of many firesales as the builders struggle to raise capital at all costs in a market that continues to decline.

That will undoubtedly crush margins even further as it continues to unfold and will leave investors out in the cold this go round as their share prices drop even further.

But it could be worse, you could be one of the people in those "unauction" developments that just saw the equity in their homes cut in half.

They will be out in the cold much longer than just a few nights.

A Note On Home Mortgage Rates

Despite massive rate cutting by the Fed, home mortgage rates have barely budged. That's because as powerful as the Federal Reserve is, it just can't simply jawbone the 30 year fixed rate lower the way that most people believe that it can.

In truth, it is actual market action, and not mere edicts that sets those rates. So while further rate cuts may indeed be in the picture, they may actually produce very little in the lower home mortgage rates that so many are hoping will help bail out the housing market.

In fact, according to the data released by the Mortgage Bankers Association yesterday, U.S. mortgage applications filed last week dropped 22.6% from the previous week, as interest rates on fixed-rate mortgages increased. That marked the biggest decline in more than four years as the highest mortgage rates in two months weakened demand for home buying and refinancing-proving that the Fed's ability to push mortgage rates lower is limited at best.

The bottom in housing is nowhere in sight.