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Gloomy outlook from top U.S. homebuilders

Hopes of an imminent housing recovery are dimming as the nation’s largest homebuilders continue to report slumping sales and profits.
/ Source: The Associated Press

Hopes of an imminent housing recovery are dimming as the nation’s largest homebuilders continue to report slumping sales and profits.

Toll Brothers Inc., the nation’s largest builder of luxury homes, on Wednesday warned that it won’t meet prior earnings projections while homebuilders Hovnanian Enterprises Inc., Pulte Homes Inc. and D.R. Horton Inc. have reported similar malaise.

Toll placed part of the blame on stricter lending requirements that have been tough on buyers who want to upgrade but can’t sell their current residences. Analysts said problems in subprime mortgages earlier this year have dampened a recovery.

“Twenty months into this housing downturn, we continue to face difficult conditions in most of our markets,” Toll’s chief executive officer, Robert Toll, said in a statement.

In addition to tighter lending standards, “lack of buyer confidence may have served to impede the glimmers of a rebound we had started to see in early February,” he said.

Problems in subprime mortgages, which target borrowers with poor credit histories, have choked early indications of a recovery in the housing market.

“If we hadn’t seen the problem in the subprime market, the spring selling season might have been a little bit more buoyant,” said Celia Chen, director of housing economics at Moody’s in West Chester. “Some of the indicators were stabilizing earlier in the year and now I think the outlook has weakened.”

The delinquency rate in subprime mortgages rose to 22.4 percent in the first quarter after bottoming at 18.5 percent at the end of 2003, according to data collected by Equifax and

Subprime mortgages had helped drive the housing market from 2005 through last year. As the housing market reached a crescendo, home loans became more accessible for people with poor credit.

As defaults rose, lenders started pulling back on the easy money. A survey of bank loan officers by the Federal Reserve showed that the net percentage of banks tightening standards for mortgage loans jumped to 16.4 percent in the first quarter from 1.9 percent at the end of 2006.

“Lenders are being more circumspect,” Chen said.

She expects the housing correction to last until the end of 2008, with prices falling by 3.6 percent this year and 2.9 percent next year. The market peaked in mid-2005.

It helps that the economy is still generating jobs, even though at a reduced pace compared with the past few years, she said. Interest rates should also remain stable.

Last week, the average 30-year mortgage rate was 6.16 percent, with 0.5 percent in fees and points, according to Freddie Mac. The rate has ranged from 6.14 percent to 6.34 percent this year.

On Tuesday, the National Association of Realtors lowered its projections for existing home sales to 6.29 million this year and 6.49 million in 2008. Last year, sales were 6.48 million.

The median price for existing homes is also forecast to dip 1 percent to $219,800 this year, but to rebound 1.4 percent in 2008. The group anticipates new-home sales of 864,000 in 2007 and 936,000 next year, down from the 1.05 million last year. The median new home sales price is forecast to remain unchanged at $246,400 in 2007 and then gain 2.2 percent next year.

In February, Horsham-based Toll Brothers had projected 2007 home-building revenue of $4.2 billion to $4.96 billion and net income of $240 million to $305 million, or $1.46 to $1.85 per share.

Analysts surveyed by Thomson Financial were expecting profits of $1.41 per share.

For the second quarter, Toll Brothers expects to post home-building revenue of $1.17 billion, which is down 19 percent from the same quarter a year ago.

Net signed contracts in the quarter was $1.17 billion, down 25 percent from the prior year. The backlog at the quarter’s end fell by 32 percent to $4.15 billion.

On Friday, Hovnanian warned of a wider-than-expected second quarter loss.

In April, D.R. Horton said profits plunged 85 percent in the January-March quarter and the weak housing market would continue into 2008.

Pulte Homes lost $85.7 million during the first quarter of 2007 amid a slum in closings on new homes and a massive inventory.

But Toll Brothers said it still expects to post a profit for the second quarter. Bright spots include markets such as metro Philadelphia, in and around New York City, southeastern Connecticut, the Raleigh, N.C., area, parts of Texas and parts of Northern California.

Its full earnings report will be released on May 24.