Builders optimistic despite housing slump

By Lisa Kerner

Charlotte, N.C., Dec. 6 - Despite a slump in the housing market, several presenters remained optimistic in their remarks at the NYSSA Homebuilding Industry Conference in New York on Wednesday.

Many builders, braced for a slowdown until at least spring, are focused on controlling costs to combat cancellations and resulting spec house inventories.

Buyer hesitancy is being offset by strong employment, consumer confidence and the economy, according to some.

Andrew H. Parnes, chief financial officer for Irvine, Calif.-based builder Standard Pacific, Corp., said that despite the cyclical nature of the industry, his company's long-term strategy remains the same, with a focus on generating cash and deleveraging the balance sheet. As a result, Parnes said buying back company stock has been put on hold.

Using subcontractors allows the company to respond more quickly when times change, and implementing a national purchasing program is also helping Standard Pacific manage supply costs.

Standard Pacific built about 11,000 units this year. The company's expansion into 20 new markets and six states has helped it grow beyond its California roots to become a coast-to-coast presence.

Even with $420 million in cash and revolver liquidity at the end of the third quarter, the company is reducing its land expenditures and evaluating its pricing strategy.

"We've reduced our land supply by 11% from third quarter of 2005 to the third-quarter 2006," Standard Pacific's treasurer Lloyd H. McKibbin said.

Meritage Homes Corp. chief executive officer Steve Hillman said his company's cancellations are up; however, his company is continuing to survive in the slowed market. The Scottsdale, Ariz. homebuilder closed on more than 11,000 homes and generated $3.7 billion in revenues as of Sept. 30.

"We are in a much different market than we were a year ago," said Hillman. "Our strategy hasn't changed one bit."

Meritage's strategy includes controlling land by optioning 87% of its lot supply. The company also refinanced its debt to 6¼% this year and increased its liquidity by extending credits lines to over $400 million.

According to Hillman, the company is looking to further reduce its debt or repurchase stock "as conditions improve."

"We should see some improvement by next year, signaled by fewer cancellations," said Hillman.

"I'm not sure if we have seen the bottom."

Hovnanian Enterprises, Inc. chief executive officer Ara Hovnanian admits to not being overly optimistic or running his business as if everything will be "hunky-dory in 2007."

"Clearly the market has changed," Hovnanian said, adding that he expects cancellation rates to peak and decline in the next couple of quarters.

The Red Bank, N.J., homebuilder said right-pricing its product will help it gain market share in long-term slow conditions.

"We are going back and renegotiating with subcontractors. We've all had a good year, but now it's time to face reality," said Hovnanian.

His company has been able to negotiated reductions of 3% to 5%. In addition, Hovnanian Enterprises has re-evaluated and renegotiated land options as conditions change each quarter, with 68% of its land controlled by options.

Hovnanian Enterprises has also had success with national contracting for non-commodity materials, such as appliances and kitchen cabinets, in an industry where consolidation is becoming more common.

Remarks by James O'Leary, chief financial officer of Atlanta-based Beazer Homes, Inc. USA, echoed many of those made by earlier presenters.

For his company, 2006 came in like a lion and went out like a lamb, and O'Leary is bracing for "an extremely tough 2007," according to O'Leary.

In order to control costs, the company let go of 1,000 employees, or 25% of its workforce, which is expected to save Beazer about $150 million, according to O'Leary.

The sixth-largest homebuilder sold 18,000 units and generated $5.5 billion this year, but had 50% cancellations last quarter

O'Leary said his company is also reducing its land costs by walking away from options, retrading deals and looking at better value options. The company has also requested price decreases, up to 10%, from its trade and service providers.

Despite the slump, Beazer plans to continue building on its existing geographic footprint, while consolidating spending and reducing cycle times, O'Leary noted.

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