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Credit experts: More pain for homebuilders

Despite lower Fed rates and a stock rally, surviving the slump will take slashed prices, layoffs, other cuts.

Homebuilders battered by the slowdown in sales will have to cut prices, sell inventories and slash other costs to stay in business, despite last week's interest-rate cuts by the Federal Reserve, say housing-credit analysts.

"The only recipe for too much inventory is even lower prices, and more pain for the homebuilders," analyst Vicki Bryan of Gimme Credit Inc. wrote last week in a note to clients.

Homebuilder stocks may have broken their fall last week, but analysts attributed the bounce to short-sellers' cashing in on bets last year that the stocks would tumble. Bloomberg L.P.'s U.S. Home Builders stock index rose 10 percent to 186, its first weekly gain since early December.

Toll Bros. Inc., of Horsham, closed at $21.64, up 25 percent for the week, and Orleans Homebuilders Inc., of Bensalem, rose 15 percent to $3.74. Like other builders, they're still far below last winter's highs.

The National Association of Home Builders said its members were losing money and laying off workers. It wants new federal tax breaks for buyers and easier loan terms from the Federal Housing Administration, Fannie Mae and Freddie Mac, along with more interest-rate cuts from the Fed, said president Brian Catalde, a California builder.

So far, lower mortgage rates haven't brought buyers back. "In contrast to previous market declines, in which rate cuts had proven to be effective, the current market malaise will most likely be resolved with basic supply-demand tools: cutting prices to restore equilibrium," analysts Sarah Rowin and Frank Lee of CreditSights Inc. wrote in a report last week.

The average new-home price, which peaked at $329,000 in March, had slipped to $293,000 by November, according to federal Census Bureau data.

Ryland Group, of Calabasas, Calif., reported a 10 percent drop in its average sale prices, and a 30 percent drop in sales, in its 2007 earnings report Friday. "Ryland is in a position to weather this storm," chief executive R. Chad Dreier told investors in a conference call. Dreier offered a "silver lining": It's getting cheaper to buy vacant lots.

Will new-home prices keep dropping? For lower-priced homes, "demand is probably being affected by affordability," said Fred Cooper Sr., spokesman for Toll Bros.

More-affluent buyers, including Toll customers, can still afford to pay, but "they want to have confidence that the price they're paying for their home today is a stable price" and that they'll be able to sell their current homes in the slower market.

Miami-based Lennar Corp., which builds in parts of 18 states, including South Jersey and south-central Pennsylvania, said Thursday that revenue fell by half, to $2.2 billion, during the fourth quarter of 2007, compared with a year earlier. The company cut more than half its workforce and reduced the number of homes under construction in the fourth quarter to 5,500, from 17,000 a year earlier.

"The market continues to deteriorate at accelerated paces," said chief executive officer Stuart Miller in a conference call with investors. While some projects continue, in many locations, "the strategy is to not go forward and to not put more money in the ground at this time," he added.

As a group, builders have cut back on speculative building, with unsold units under construction down 35 percent at 10 major builders during 2007, according to CreditSights.

Only four of 12 builders CreditSights surveyed - Centex Homes, of Dallas; Pulte Homes Inc., of Bloomfield Hills, Mich.; Standard Pacific Corp., of Irvine, Calif.; and Toll Bros. - are likely to keep generating cash flow if trends keep worsening. Each of the companies, except Toll Bros., has asked its banks for debt relief, the CreditSights report said. Bruce Toll, vice chairman of Toll Bros., is also chairman of Philadelphia Media Holdings L.L.C., which owns The Inquirer.

Standard Pacific has been cutting prices 20 percent to 30 percent for some homes, according to CreditSights. D.R. Horton Inc., based in Texas, has sold more than 20,000 Arizona lots where it no longer thinks it can build houses profitably. Lennar has sold more than 8,000 lots in its home state. Orleans said earlier this month that it sold lots in several states, booked at $86 million, for just $32 million.

Analysts pinned last week's rise in home-stock values on short-sellers, who bet last fall that the stocks would decline, and who have in recent days begun buying the shares at previously agreed-to prices to lock in their gains, boosting the shares from their recent lows.

"A lot of people bet that prices would go down," said Matthew H. Taylor, partner at Cheswold Lane Asset Management, in West Conshohocken, "and they made a lot of money."