Homebuilders Digging Their Own Graves

Standard Pacific Homes released a surprisingly large amount of information Thursday afternoon that underscores the trap the homebuilding industry has placed itself in.

Among the highlights:

1. Revenues were down from $937 million to $834 million, just an 11% drop, not a big deal in an of itself.

2. EPS was down to $0.47 from $1.37, so they still appear to be profitable. Nothing to worry about, eh? The housing market will turn around in the Spring, right?

3. Net new home orders for the quarter were 1200 vs. 2888 the year before, a 58% drop, so future quarters should be much, much worse for profitability.

4. Average number of selling communities for the quarter was 209 vs. 165 last year. That equates to 5.74 net orders per community this year vs. 17.05 last year, a 66% decline. Standard Pacific, like all publicly traded builders, tried to expand aggressively just as the market ran out of steam.

5. Inventories are up by over $600 million this year, while liabilities are up by over $700 million. It is only an illusion that this company is profitable. They capitalize construction costs and interest expense for now, but will eventually have to take large write-offs or sell homes at a substantial loss.

6. Backlog of ordered homes is down to 4426 from 7762, or 43%. This should lead to a dramatic slowdown in construction going forward. However...

7. Homes under construction totaled 5657, down from 7649, so the company is building over a thousand homes now that haven't been sold.

8. Completed and unsold homes now sits at 623 vs. 247 last year, and the total should continue to rise given the construction vs. backlog numbers above.

9. Building sites owned was 37,609, up from 35,547, although sites optioned was down from 26,630 to 13,196. Like most builders, Standard Pacific has been writing off options contracts, but they aren't willing to cut their losses on owned land.

10. Joint venture activity is especially suspect, as orders at JVs were only 5 per community (55 total), while construction vs. backlog was 718 vs. 255. Like most builders, the company has off-balance sheet arrangements with mysterious outside investors (think Enron). Activity at JVs suggests somebody's interests are being protected, and it most likely isn't Standard Pacific's shareholders.


As I've said many times before in many different forums: The builders are digging their own grave by building too many homes. They are doing this because they bought too much land and they want to put off taking losses as long as possible. Of course this only means that the eventual damage will be much greater.

The housing market is going to get much, much worse, due to both the overbuilding problem and the rising foreclosure problem. We can thank builders like Standard Pacific and lenders like Accredited Home Lenders for this problem.