CEO of Nation's Largest Homebuilder: 2007 Is Going to 'Suck'
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The chief executive of the nation's largest homebuilder by volume said Wednesday that 2007 would "suck" for his company, providing the clearest signal yet that a recovery in the battered sector is farther off than many thought.
Speaking at an investor conference in New York, D.R. Horton CEO Donald J. Tomnitz said he expects to get more pricing power in 2008 but not before home prices continue their decline this year as builders try to sell the glut of houses currently on the market.
"I don't want to be too sophisticated here, but '07 is going to suck, all 12 months of the calendar year," Tomnitz said.
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He said excess inventory, built up during a five-year boom cycle that saw land purchases and housing construction reach all-time highs, is the biggest problem facing the sector.
After months of declining prices and home sales, there were signs late last year that the market had reached bottom, prompting many to predict a recovery by midyear. But builders have had to keep curbing construction volumes and offering price discounts.
Tomnitz said Horton is currently building 26,000 houses, down 35 percent from its peak of 40,000, but further cuts are coming.
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It is going to be "tough" for the Horton to reach its internal goal of 50,000 closings in 2007, based on the current construction figures, Tomnitz said. That would put 2007 closings below the year-ago level.
The executive said Fort Worth, Texas-based Horton has taken all the charges it could legally take to write down the value of undeveloped land and to forfeit options to buy land, but he did not rule out further hits to the balance sheet.
"We may have more impairments coming. We'll know that on a quarter-to-quarter basis," he said.
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The charges are an admission that the company will not be able to develop properties for a profit, but they also free up cash for other purposes.
"The future is not as bright as we would like it to be, but we feel we're in a strong position going forward," the CEO said.
This isn't the first time Tomnitz has offered gloomy predictions for 2007. In January, Horton announced earnings had fallen 64 percent in the last three months of 2006. At the time, Tomnitz said the slowdown had begun in early 2006 and that the market would eventually bottom out this summer.
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"We don't see anything on the horizon that would change that opinion," he said then.
Horton's net income for the quarter ended Dec. 31 plummeted to $109.7 million, or 35 cents per share, from $310.1 million, or 98 cents per share, a year earlier.