Housing Chill Grows Worse, Bites Consumers

By SUDEEP REDDY and MICHAEL CORKERY
September 26, 2007
WALL STREET JOURNAL

The housing market is going into a deeper chill, and consumers are starting to shiver.

Sales of existing homes in August fell sharply, and home inventories by one measure soared to an 18-year high, according to data released yesterday. One major home builder, D.R. Horton Inc., is auctioning homes this weekend with starting prices for some units at 50% off an earlier price.

The housing market is worrying consumers, raising fresh concerns about economic growth. Consumer confidence fell this month to its lowest level in almost two years, a new survey showed. Retailers such as Lowe's Cos. and Target Corp. said they're feeling the pain. Both reported softer-than-expected sales Monday.

"The combination of all this is indicative of an economy that has lost quite a bit of momentum," said Joshua Shapiro, chief U.S. economist at the consulting firm MFR Inc., an economic forecasting firm that advises investors.

Wall Street seems unconcerned for now. Broad stock indexes moved little yesterday, and the Dow Jones Industrial Average is just a few hundred points from its all-time high.

Optimists believe the Federal Reserve's aggressive move last week to cut interest rates will help keep the economy out of recession. Also, exports are rising, thanks to a weaker dollar, and business investment is holding up.

Still, the pace of housing's downturn is accelerating, surprising even some bearish analysts.

Lennar Corp., the nation's second-largest home builder by market value, reported a net loss of $514 million for the quarter ended Aug. 31. That was nearly six times the loss Wall Street analysts on average had expected, and compared with net income of $207 million a year earlier. The company was forced to write down the value of land and write off deposits for land it no longer wants to build on. The writedowns totaled $847.5 million in the quarter. Lennar said it has cut its work force by 35% since last year.

REAL TIME ECONOMICS

• Read more about the decline in home prices at WSJ.com's Real Time Economics blog.

Lennar shares fell 4% and have lost more than half their value this year.

Chief Executive Stuart Miller said the problems are broad-based and stem from an oversupply of homes, turmoil in the mortgage market and weak consumer confidence. "We have not only not seen evidence of any of these items resolving, but instead we have seen further deterioration," Mr. Miller told investors and analysts during a conference call.

Overall, sales of existing homes tumbled 4.3% in August to an annual pace of 5.5 million, the slowest in five years, the National Association of Realtors said yesterday. More worrisome: The number of homes for sale is enough to satisfy 10 months of demand at the current pace. Two years ago the figure was below five months. Analysts cite excess supply in forecasting that an upturn in sales and prices may not come until 2009.

Home prices in July fell 3.9% from a year earlier, according to the S&P/Case-Shiller home-price index. The index, which tracks prices in 20 U.S. metropolitan areas, hadn't measured that big of a decline since just after the 1990-91 recession.

The bottom is "not yet in sight" for housing, said Mr. Shapiro, the economist. He said the growing number of unsold homes "argues for accelerating declines of prices."

The worsening housing slump and turmoil in the credit markets is beginning to take a toll on retailers. Lowe's Chief Executive Robert Niblock, addressing analysts and investors at a conference in Charlotte, N.C., yesterday, refused to hazard a guess on when the housing slowdown will bottom. "The only thing that is consistent is the inaccuracies of the economic forecasts," he said. Late Monday, Lowe's reduced its earnings outlook for this year and 2008. Its shares fell 6.7% yesterday.

Other well-regarded retailers are missing forecasts. Target on Monday lowered its estimate for September sales. In August, Costco Wholesale Corp.'s sales at stores open at least a year rose just 1%, much lower than its original forecast. It cited weakness in California, which has been hard-hit by the housing slowdown. Target mentioned soft sales in the Northeast and Florida.

The Conference Board said yesterday that its index of consumer confidence dropped to 99.8 in September from 105.6 in August, putting it at the lowest point since November 2005. The survey ended on Sept. 18, the day the Fed lowered interest rates by half a percentage point. The share of consumers reporting jobs as "hard to get" rose to 22.1% from 19.7%.

"Looking ahead, little economic improvement is expected," said Lynn Franco, who directs the Conference Board survey.

Builders are divided on how drastically to cut prices to put a dent in supply. Earlier this month, Hovnanian Enterprises Inc. held a 72-hour weekend sale nationwide, dubbed "The Deal of the Century," and offered discounts of up to 30% on certain homes. The company sold 2,100 homes during the promotion, about 10 times the usual weekly number. Hovnanian executives said that demonstrates buyers will come if the price is right.

On Saturday, D.R. Horton is using an auction to sell 53 homes in San Diego. The starting bid for some units will be as much as 50% lower than previous prices, according to the auction Web site. On a one-bedroom unit, the starting bid is $149,000, down from a previous price of $309,990.

Lennar's Mr. Miller questioned the wisdom of deep discounts, saying he's not willing to match some of the incentives offered by competitors. He said some recent price cuts were "just unrealistic and maybe even ridiculous."

Lennar's average home price nationally declined 6% in the third quarter to $296,000 from $316,000 from a year ago. Its average incentive per home -- a figure that includes extra amenities and price discounts -- increased to $46,000 from $36,000 a year ago.

Individual home owners have been slower than builders to bring down their prices to match demand, but that may be changing as the housing slump worsens. "The existing-home market is moving much more rapidly to adjust downward," Mr. Miller said.

The National Association of Realtors reported yesterday that the median national home price was $224,500 in August, up 0.2% from $224,000 in August 2006. Those numbers can be skewed by the mix of homes sold in a particular month. Economists say the Case-Shiller index is less vulnerable to that distortion because it tracks the sales of individual homes over time.

Mortgage companies are scaling back loans to people who have poor credit or can't document their income, while looking to make more loans that can be insured by the Federal Housing Administration.

That trend showed up in Lennar's figures. In the third quarter, 25% of buyers using Lennar's in-house mortgage company used an "Alt-A" mortgage, a category between prime and subprime that often requires little documentation, down from 41% a year earlier. The proportion of FHA-insured loans rose to 25% from 12%.

"The days of no verification, no down payment and low credit scores are past," said Lennar's chief financial officer, Bruce Gross.

--Ann Zimmerman contributed to this article.