The subprime mortgage crisis will have a long term effect on new home building. Prior to the mortgage meltdown, a significant portion of new home buyers were of subprime credit. It will be quite a while before these types of buyers can qualify for a mortgage, putting a big dent in homebuilder's future sales prospects.
D.R. Horton Inc. (DHI) reported a $1.3 billion fiscal second quarter loss for 2008, and slashed its dividend by half as the United States continues to suffer through the worst housing recession in a generation.
The largest U.S. homebuilder has been hard hit by the troubles in the domestic housing market and was forced to write down $834.1 million of land and inventory as home prices continue to decline. The resulting $1.3 billion loss, or $4.14 per share far exceeded analyst expectations of a loss of 64 cents per share. The spring season is typically one of the busiest for home sellers, but not this year. Home prices continue to fall, but the lower prices have yet to bolster demand. Meanwhile, banks scarred by the subprime crisis remain wary of lending as they look to maintain comfortable levels of cash reserves to prove their own financial viability.
Despite the U.S. Federal Reserve’s rate-slashing campaign and continued efforts to boost liquidity in the credit markets, lending standards remain tight. Banks scarred by the subprime crisis remain wary of lending as they look to maintain comfortable levels of cash reserves to prove their own financial viability.
Homeowners facing higher mortgage-rate resets are therefore unable to refinance, and as prices continue to decline the value their homes are no longer high enough to cover their mortgage balances. Unable to meet the higher payments, more homes are going into foreclosure.
D.R. Horton is "most concerned about the level of foreclosures entering the market and I think to the extent that those are significantly greater than what they are currently, then that’s going to negatively impact our pricing moving forward," Chief Executive Officer Donald Tomnitz said on a conference call.
The end of the tax credit may temporarily cool things off. However, if current new job projections prove accurate for 2010, combined with already stabilizing existing home prices, look for the middle class/prime candidates to cash in on any capital gains and purchase a newer and more efficient home.