June 28, 2007 / 3:01 PM / 10 years ago

Better luck next year? Maybe not, say U.S. builders

NEW YORK (Reuters) - For anyone waiting for a rebound in the slumping U.S. housing market, the industry’s top executives have a piece of advice: Don’t hold your breath.

<p>Robert Toll, chairman and chief executive officer of Toll Brothers Inc., speaks at the Reuters Real Estate Summit in New York, June 27, 2007. REUTERS/Brendan McDermid (UNITED STATES)</p>

Home builders at the Reuters Real Estate Summit in New York this week said they didn’t expect any improvement until 2008 at the earliest. And even then, their expectations are modest.

“‘08 is probably not going to be a year of strong recovery,” said Larry Sorsby, executive vice president and chief financial officer at No. 6 U.S. home builder Hovnanian Enterprises Inc. (HOV.N)

“Our hope is that it stays no worse than we are today,” Sorsby said. “We’re not predicting any significant recovery.”

After several years of torrid growth and rising prices, the U.S. home market has stalled, with rising interest rates now deterring prospective buyers. New home sales in May fell 1.6 percent, a sharper-than-expected drop, according to data released on Tuesday.

Robert Toll, chairman and chief executive of luxury U.S. home builder Toll Brothers Inc. (TOL.N), said he expected no pickup this year.

“I see no reason to expect a change in confidence until probably April ‘08, when the candidates will fairly well be settled for the presidential election, and we’ll start to listen to speeches about how we’ll get better,” Toll said.

Reinforcing this grim view were quarterly losses reported this week by No. 2 U.S. home builder Lennar Corp. (LEN.N) and fifth-ranked KB Home. (KBH.N)

The financial woes have weighed on home builder shares. The Dow Jones U.S. home builder index .DJUSHB is down about 25 percent so far this year. The index is has lost about half its value since its July 2005 peak.


Within the United States, the markets hit hardest by the downturn have been the ones where investors speculated heavily on properties where they did not plan to live. Home builder executives cited Florida, which saw a flurry of building in 2004 and 2005, as the worst housing market in the United States.

Even with discounts of $100,000 on some homes, builders said they had realized that some developments simply would not sell and were opting to just hold onto the land for a few years in hopes of a market pickup.

Toll had one word to sum up the Florida market: “Bad.”

“There was a tremendous rocket ride up in Florida during the boom times,” said Toll. “You had tremendous speculation in Florida, tremendous numbers of condo purchasers who had no intention of moving in, but just flipping the contract or flipping the real estate.”

Hovnanian bought into Fort Myers, Florida, in August 2005, just as the market crashed.

“We were the perfect timing in terms of how not to do it,” Sorsby said.

While Florida stands out as the darkest spot in a troubled market, New York City and particularly the borough of Manhattan, is the highlight, executives said.

Manhattan island property prices have benefited from a limited supply, a pickup in foreign buyers motivated by the weak dollar and a renewed desire for urban living, particularly among aging baby boomers, said Dottie Herman, president and CEO at Prudential Douglas Elliman Real Estate.

Executives also said the District of Columbia was holding up well and noted that San Diego, one of the first markets to cool, has started to pick up.


The crisis in subprime lending -- loans to the least-creditworthy buyers -- further dampened the market by blocking some of the poorest buyers from it.

Subprime borrowers last year accounted for about 14 percent of U.S. home buyers. But the crisis, which has commanded headlines with stories of layoffs at lenders and foreclosures on homes, has had a ripple effect.

“Someone that is highly qualified is saying: ‘Wait a second, maybe now is not the best time to buy a house. Maybe there’s another shoe to drop. And therefore, rather than buy, I‘m going to wait a little bit longer,'” said Hovnanian’s Sorsby.

Mark Zandi, chief economist at Moody’s Economy.com, said that rising interest rates and tightening lending standards were making it all the harder for Americans to afford homes. That suggests, he said, that sales will not rebound until people trying to sell their homes start cutting prices.

Our Standards:The Thomson Reuters Trust Principles.
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