More Heartache for Housing

Bad news piles up for the sector as homebuilder Ryland warns of a big loss and an industry group issues gloomy forecasts on sales and prices

by Karyn McCormack

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Warnings from homebuilders continue to pile up, indicating that a bottom in the housing downturn is still nowhere in sight. Ryland Group (RYL) became the latest victim on July 11. The Calabasas (Calif.) builder warned that it expects to post a sharp loss because of the continued deterioration in the housing market.

Ryland said it expects a second-quarter loss of $1.25 to $1.35 per share and expects to take additional charges of about $145 to $155 million related to inventory impairments and write-offs associated with assets in Arizona, California, Florida, and Nevada. Excluding inventory impairments and write-offs, the company expected to earn 70 cents to 80 cents per share during the second quarter.

Ryland said preliminary sales for the second quarter were 2,521 units, down 16.6% from a year ago. Cancellations were around 34% of orders for the quarter.

Poor Outlook from Analysts and Industry

"We foresee slow demand for new homes and potential for more write-downs into 2008," said Standard & Poor's equity analyst Tom Smith in a note, adding that he had expected Ryland to earn 32 cents per share in the second quarter before its warning. He downgraded Ryland shares to strong sell from sell and cut his 12-month target price by $2, to $31. Smith also slashed his 2007 earnings per share estimate to a loss of $1.35 per share from $1.20, and his 2008 forecast to $2.60 from $2.75.

Adding to the sector's woes, the National Association of Realtors trimmed its existing-home and new-home sales forecasts on July 11. The trade group also predicts that median prices will drop 2.6%, to $240,100, for new homes and by 1.4%, to $218,800, for existing homes this year.

Ryland shares fell 0.7% to $36.04, on the New York Stock Exchange on July 11, not too far from their 52-week low of $33.86 reached July 18, 2006. Homebuilders' stocks have been heading downhill after a brief recovery early this year. The S&P Homebuilding index has dropped 25.5% so far this year through July 6, on top of a 20.6% decline in 2006.

Continuing Subprime Fallout

The news came a day after worries about the subprime mortgage mess spread when Standard & Poor's Ratings Services and Moody's (MCO) said they plan to downgrade billions of dollars worth of mortgage-backed securities, causing a drop in stocks and bond yields (see BusinessWeek.com, 7/10/07, "Stocks: Another Subprime Stumble" and "S&P Warns on Subprime-Backed Issues"). Said S&P in its report: "We expect that the U.S. housing market, especially the subprime sector, will continue to decline before it improves, and home prices will continue to come under stress."