D.R. Horton & Subprime News Worsens: No Shades Needed Today

What a difference a year makes. Last year the national home builders anticipated a market turn-around in 2007. Wall Street echoed that sentiment and predicted that 2007 would be the year to buy back home builder stocks. So we all anticipated a bottoming-out of the market in 2007, but the clouds just keep getting darker.

Does anyone remember the tune, "The Future's So Bright I Have To Wear Shades"? No sunglasses needed here. I hated the D.R. Horton news today. Morning reports announced their first quarterly loss in over 12 years – since they went public. Sales tanked 40% in the 3rd quarter. The biggest culprit for Horton was the California market where they suffered a 62% decline in sales. Their sales agents are doing double duty selling the same house a several times before getting one to stick long enough to get to the closing table. If practice makes perfect this may be the silver lining, but I doubt anyone would see this as a positive training concept.

"We expect the housing environment to remain challenging," Chairman Donald R. Horton said in an interview this morning. Man, what an understatement. But then he took so much heat when he said “the market sucked” he is now doing the downplay dance and being the Chairman Talking Head. He should stick to his first assessment. Not only is it more to the point, it aptly depicts what most home builders are feeling.

Coupled with the subprime downgrades, today's news put a real damper on the afternoon. Moody’s Investors Service cut its ratings for 399 residential mortgage-backed securities because of higher than expected delinquencies. And Standard & Poor’s said it may start cutting ratings on mortgage-related debt based on expectation of more defaults and a contining drop in US home prices. "This subprime situation is being underestimated and is worse than many people had expected," said Thomas Metzold, a portfolio manager at Eaton Vance in Boston. "Investment managers' exposure to this is greater than they say and they will get less recovery than they expect." Ouch! Two seemingly bottomless pits.

“Because most subprime loans carry adjustable interest rates, more borrowers face trouble making payments as loans reset at higher rates. And declining home prices mean that borrowers unable to pay loans cannot solve their problems by selling their homes.” Tell us something we don’t know.

Diana Olick, Realty Check, posted a blog this afternoon with email replies to the query: “Why the home builders didn’t see this downturn in the housing market coming?” The replies are not surprising, but they are interesting, heart-felt, and from various corners of the industry. Have a look.

My personal take on the question…what we didn’t see was the subprime implications and its detriment to a recovery. Add this one to the lessons from previous downturns. Let’s be careful out there.

What’s your take?