It's Crunch Time for Housing

by: John Lounsbury

This is an update of an article posted March 26. Computational errors have been corrected which change the magnitude of calculated results but not the direction they point and the conclusions drawn. Hat tip to Kehong Wen who noticed problems with the original article.

Thursday I published an article at entitled “Housing Market Enters Crucial Phase”. The conclusion was that the new home market must experience a dramatic turnaround in the next two months or 2010 projections have no chance of being realized. The possibility that 2010 could be a poorer year for new home sales than 2009 was explored. Here I will extend and amplify that article.

Analysts' Estimates

Four of the companies looked at have already reported results for the first quarter of their 2010 financial year: Hovnanian (NYSE:HOV), KB Homes (NYSE:KBH), Lennar (NYSE:LEN) and Toll Brothers (NYSE:TOL). The total revenue reported for the four in the first quarter was $1.423 billion. The average of analysts’ projections for the second, third and fourth quarters is $2.160 billion. This is 52% more than the first quarter.

The sales data and estimates for these four builders are given in the following table:

Two different three month periods are appropriate for comparison: (a) November, December and January or (b) December, January and February. New home sales for these three months were (a) 343,000 or (b) 323,000, both annual rates. If the four builders in the previous paragraph are used as a proxy for all home builders, then the annual rate for new home construction must average between 490,000 and 520,000 units, 52% above the reference levels, for the rest of 2010.

The sales growth over the next two quarters for all six companies was estimated to be 25% in the article by consensus of analysts compiled by Yahoo Finance. The reference for that comparison would be the average for new home sales for October through December, a 374,000 annual rate. That means by mid-year the new home sales rate would need to be 1.25 x 374,000, or 468,000.

Putting the two calculations together leads to an average annual rate for new home sales in the second half of the year between 490,000 and 520,000 units, 52% above the reference levels, if the second quarter reaches an annual rate of new home sales of 468,000. These projected data points are needed if analysts’ projections will be upheld are and shown on the graph below:

Click on graph for larger image.

I see little likelihood that these sales levels can be achieved.

Note 1: In making these calculations the assumption has been made that the distribution of price points for each builder will not change during 2010.

Note 2: It is interesting that the three year quadratic trend line above is cupped strongly toward the upside, implying a possible upturn in new home sales volumes may be coming. The 14 month plot of the same data in article is cupped slightly to the downside, implying there may be further decline in sales. Perhaps there may be a flattening, since the downward curve is slight.

Look Out Below

It is possible that analyst estimates will be revised sharply downward in the next couple of months. If the lowered expectations come to pass, some of the homebuilders may be in major pain. The potential for difficulties at several companies is discussed in article. In addition to the four companies mentioned earlier, DR Horton (NYSE:DHI) and Pulte Homes (NYSE:PHM) were discussed.

Disclosure: No positions at this time.

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