Builders Crumble Under Pressure

The second quarter is proving to be troublesome for homebuilders. They have been cutting their full-year earnings projections in droves as orders look weak and cancellation rates rise.

The latest salvo came Monday after Standard Pacific (SPF) and Technical Olympic (TOA) announced weak order numbers, sending builder shares lower across the board. The selloff suggests that investors are having trouble seeing a bottom for the group and would rather not buy into a sector that may represent a value trap.

"If it is not already painfully apparent, the soft-landing thesis for the homebuilding industry is dead," wrote A.G. Edwards analyst Greg Gieber in a research note in which in he cut Standard Pacific from buy to hold.

Standard Pacific said new orders in April and May fell 41%, largely because of increased cancellation rates and continued softening of demand in markets such as California, Florida and Arizona. Because of the disappointing orders, Standard Pacific said it expects to lower its earnings guidance for the year when it reports second-quarter numbers in late July.

Technical Olympic, a Florida-based small-cap builder, said it expects net orders to be down 25% to 40% in the second quarter, though it didn't adjust its full-year guidance.

Technical Olympic shares dropped 8.9% Monday, while Standard Pacific shares fell 8.7%. Meanwhile, Ryland (RYL) dropped 8.1%, Pulte Homes (PHM) fell 5% and Toll Brothers(TOL) shed 4.3%.

Ryland, Toll and Pulte all recently cut their earnings guidance for the year due to weak order numbers in the second quarter.

One hedge fund manager, who plays the sector long and short, said that Monday's selloff could point to a worse-than-expected downside scenario for builder stocks, where the news gets bad at a very fast pace, rather than a slow shakeout over an extended time frame.