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Bonds News

Home builders pare down to weather storm

NEW YORK (Reuters) - There is no good news for some the largest home building companies in the United States.

Construction workers put up second story framing as they build homes in Carlsbad, California November 17, 2005. There is no good news for some the largest home building companies in the United States. REUTERS/Mike Blake [Photo via NewsCom]

"We do think if you're dumb enough to buy a home builder (share), you ought to buy us," Ryland Group Inc.RYL.N Chairman and Chief Executive Officer R. Chad Dreier, told an investor audience at the JP Morgan Basics and Industrials Conference this week.

Against a backdrop of plunging sales and rising contract cancellations, there was little talk of a turnaround or a bottoming out of the housing market.

Since reaching a high in July 2005, the Dow Jones U.S. Home Construction Index .DJUSHB, a yardstick that measures home builder performance, has lost half its value.

The meltdown in the subprime mortgage market has exacerbated the home builders’ pain, even though those buyers with checkered credit history account in most instances less than 5 percent of the U.S. home builders’ customers.

"The indirect impact has been substantial because of this anchor or weight around consumer confidence," Pulte Homes Inc.PHM.N CEO Richard Dugas Jr. said.

Reflecting the industry’s struggles, the Mortgage Bankers Association reported on Thursday that loans in the process of foreclosure rose to a record level in the first quarter.

Most U.S. home builders have taken defensive positions looking to generate cash. They have also been selling unsold homes, land positions, paring debt, laying off employees and cutting prices to generate sales.

"Our goal is close as many homes as we can in this fiscal year," said Don Tomnitz, chief executive of D.R. Horton Inc.DHI.N, the largest U.S. home builder. He tells his sales force that "If the buyer's got a pulse, and they're warm, take them out of the market place" by getting them to sign a contract.

DEBT REDUCTION PRIORITIZED

To match demand, Horton has slashed the number of homes it has under construction to 26,000 at the end of March from 40,000 at the end of June 2006. Horton had 266,000 lots owned or controlled at the end of March, down from 396,000 a year earlier. The Fort Worth, Texas-based company expects to cut more than $220 million in costs by the end of the fiscal year ending September 30.

Horton generated $1 billion cash in the first nine months of its fiscal year

“The first purpose is to pay down debt,” Tomnitz said. The company has called $250 million in senior notes and will pay off another $215 million in senior notes in December.

Ryland also said it would use its cash to pay down debt. It has reduced its lot position to about 60,318 from 75,671 last year, and plans to halve the 900 unsold homes it has completed.

Stephen Scarborough, chairman and CEO of Standard Pacific Corp.SPF.N said the Irvine, California-based home builder plans to reduce its revolving credit to zero by the end of the year.

“The focus is very much on the balance sheet, and working our inventory level down, and paying off debt,” he said at the Bank of America 2007 Home Builders Conference on Thursday.

The company has slashed its work force by 15 percent and Scarborough said more cuts are likely.

Pulte also has reduced the number of homes it has built without first having a buyer, down to 4,300 at the end of the first quarter from 9,000 at the end of the second quarter last year. Of those 4,300 homes, 1,200 were finished,

“I would suspect you’ll see lower numbers in coming quarters,” CEO Dugas said. “Are you going to see another 50 percent drop? I doubt it.”

The company plans to end the year with $1 billion in cash up from the $500 million started with, he said.

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