One on One with William Mack, Home Building Analyst At Standard & Poor's
Tuesday, November 07, 2006
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SUSIE GHARIB: There's more evidence tonight that the housing market is crumbling at all ends of the spectrum. Three of the nation's big homebuilders reported sharp order declines today. Luxury homebuilder Toll Brothers said orders fell 56 percent in its fiscal fourth quarter. Conventional builder Beazer Homes saw its orders drop by 58 percent in its last quarter and orders at WCI Communities, which builds high rises and conventional homes, plummeted by 82 percent. Those order levels are closely watched by the housing industry, because they serve as a barometer for the revenues the companies will get when homes are delivered six months to a year later. Joining us now for more analysis about the outlook in housing, William Mack, home building analyst at Standard & Poor's. Hi, Bill. WILLIAM MACK, HOMEBUILDING ANALYST, STANDARD & POOR'S: Hi.
GHARIB: This week, Alan Greenspan, former Federal Reserve Chairman, was quoted as saying that the worst in the housing slump is over. And yet today the CEO of Toll Brothers said he doesn't see the end in sight. So who's right here?
MACK: Well, they may both be right. It depends on what statistic you're looking at. If you look at unit orders, across the board and Beazer and Toll Brothers who reported results today for September and their October quarter ends respectively, both showed unit orders approaching declines of 60 percent. That can't get much worse, in my estimation. However, I think other figures that you might look at, including operating margins and gross margins and debt levels and inventory levels, those are all still worsening.
GHARIB: But it seems to be kind of a disconnect with the other news that we're reporting on the economy. It was a pretty strong economy, still, low unemployment, gasoline prices are coming down, the stock market is rallying. What is it that's making consumers so cautious about ordering or buying new homes?
MACK: Well, a lot of these factors have been as good as they are now, in particular job growth, which is a very important determinant for new home demand. It was actually down from past levels. You mentioned the stock market. There is some correlation not with the stock market so much as consumer confidence which itself is tied to the stock market. With the Toll Brothers especially and consumer confidence is important. And consumer confidence has actually fallen from record levels. Interest rates are a little higher than past levels. They're still accommodative. I don't think it's any one thing. It's mostly that we've become accustomed to a very accommodative factors and I just mentioned the three most important ones, interest rates, job growth and confidence in terms of demand and we've had those and so now we need to see something different. And maybe something different is price declines on homes.
GHARIB: What kind of guidance were you getting from CEOs this earnings season not just from Toll Brothers and Beazer, but the others as well about the outlook from here?
MACK: Well, it's all very similar to what Toll Brothers and Beazers' management is telling us is what we've always known, that you can't really look more than three to six months into current demand to the forecast. But what they're telling us is that three to six months out it doesn't look any better. I don't think they're telling us that things will further unravel but I do think things aren't likely to improve soon.
GHARIB: When I last talked to you in the summer, there was only one housing stock that you favored, that you were recommending and that was Centex. What is your view today?
MACK: I still have a "buy" recommendation on Centex. It's our only "buy" recommendation in the group, same reasons. Centex is -- still has among the best track records in the industry. They've got very low debt levels relative to the others and a much healthier balance sleet. I think they're best able to weather the downturn and, in fact, empirical evidence, past downturns would bear that out.
GHARIB: What about your views on the other home building stocks, whether it's Pulte or Lennar or KB Homes, are they "sell" or "hold" or what's your ranking on them?
MACK: I've moved away from "sells" or "strong sells" on the -- what I would call first tier home builders, the Pultes, the Lennars and DR Hortons and have only focused on those that I have weak finances or lack of geographic diversity. And those are Lennar, NVR, Meritage and Hovnanian, I think those are the weakest of the group.
GHARIB: All right Bill. We're going to have to leave it there. Thank you so much.
MACK: Thank you.
GHARIB: We've been speaking with William Mack, home building analyst at Standard & Poor's.
