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BusinessWeek Cover Story - Housing: That Sinking Feeling
Friday, 05 October 2007

   COVER STORY             
Housing: That Sinking Feeling 

OCTOBER 15, 2007

By Mara Der Hovanesian and Christopher Palmeri  

Homeowners are getting slammed as builders slash prices. The big question: Will this shock treatment help hasten the end of the painful downturn?


Las Vegas was once the hottest of the red-hot real estate markets. But when sales really started choking up last year, developer KB Home (KBH ) did something drastic. Determined not to be caught with a big backlog of unsold homes through one of the industry's notorious down cycles, the builder started slashing prices. A lot. In the 1,400-home Huntington community, a subdivision of two-story stucco houses west of the famed Strip, homes that started at $320,000 a year ago are now listed for $270,000--just a starting point for potential deals.

Those sorts of discounts seem to be attracting buyers. Pending sales contracts jumped 23% after KB cut list prices by $25,000 in May, one of the recent price breaks in the Huntington subdivision, according to the market research firm Hanley Wood. That may be good for KB, or at least less bad than holding on to a lot of unsold units. It may also be good for current buyers who snap up homes at huge discounts to recent asking prices. "We try to make prudent decisions regarding pricing," says Jim Widner, regional general manager for KB in Las Vegas. "Prices are going to rise and fall over the short term, but long term a home is one of the best investments."
Read Feature Story...  Cover Image: That Sinking Feeling

Chart: The Discount Formula
Sales are cratering... The housing downturn and credit crunch have made buyers wary and scarce

Battered Builders
Online Extra: Commentary: Bullish Analysts and the Housing Market
by Mara Der Hovanesian
Some Wall Street pros are piling back into homebuilding stocks, despite a bleak outlook. What on earth are they thinking?  But a week's rally, or even three months of gains, won't be enough to recoup the year-long drubbing of the sector, which has wiped out more than $30 billion in value for the top 20 stocks. Investors should take their cues from builders' chief executives. After a universally lousy showing in third-quarter results, no builder's CEO was willing to offer investors any upbeat messages about a recovery.  Read Entire Commentary...

America's Most Battered Homebuilders
Online Extra: Slide Show: America's Most Hammered Homebuilders
After years of fat profits, builders are posting negative total returns. The worst hit, TOUSA, fell as much as 84% in the first nine months of 2007. The rest aren't doing much better

By Mara DerHovanesian
Builders are in a funk-and no wonder. Sales are plummeting and cancellations are skyrocketing. Their stocks have taken a beating, falling 65% through Sept. 28, wiping out more than $30 billion in value. As a result, the Home Builders/Wells Fargo index of homebuilder confidence measuring the mood of chief executives has tumbled to an all-time low since the index's inception in 1985.

The worst of the housing downturn may not be over. Wall Street is pressuring builders to sell off assets, especially rapidly deteriorating land holdings. The value of inventory, including undeveloped land and unsold homes, fell by $4.4 billion after write-offs to $41.9 billion for the top five builders as of the end of the second quarter, down from a peak of $49.7 billion last year. But because sales are falling off a cliff, the builders can't seem to shed these assets fast enough-the value of these holdings in relationship to sales has soared 25%.

Worse, the ratio of cash flow to debt has increased from just below 1% to almost two and a half times in a year. "The inability to generate positive cash flow from operations would be a huge negative for credit risk," says Frank Lee, homebuilder analyst at New York research shop CreditSights. "Having a cash cushion is extremely prudent given that this downturn can get much worse."

The following slides list the homebuilders that have posted the biggest negative total
returns thus far in 2007.  See Slide Show...
America's Most Battered Homebuilders
1.   Technical Olympic USA
2.   Levitt
3.   Beazer Homes USA
4.   Standard Pacific
5.   Tarragon
6.   Meritage Homes
7.   Orleans Homebuilders
8.   WCI Communities
9.   Comstock Homebuilding
10. Hovnanian Enterprises
11. M/I Homes
12. Ryland Group
13. Dominion Homes
14. Pulte Homes
15. Lennar
16. Centex
17. D.R. Horton
18. Brookfield Homes
19. KB Home
20. Toll Brothers
21. MDC Holdings
22. NVR

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