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Builders Have New Reason for Worry

Updated from 11:06 a.m. EDT

The scariest piece of Pulte Homes' (PHM - Get Report) earnings call Thursday? Slashing prices on new homes isn't universally translating into increased demand from homebuyers.

This phenomenon, in economic terms, is called the inelasticity of demand. Typically, demand is elastic with respect to price, meaning that demand increases in some proportion to a drop in prices.

Demand is inelastic when prices for goods fall but the quantity demanded barely changes or doesn't change at all. With homebuilders like Pulte trying to clear record inventories of homes, inelastic demand is particularly bad news.

Pulte, which reported a $788 million loss for the third quarter, is the first homebuilder to highlight this problem amid the ongoing housing downturn.

The company's management told investors on its conference call that in certain communities, "price is not moving product a lot" and the situation is "getting a bit inelastic."

Pulte's orders for the third quarter fell 37%, even though the company had been cutting prices aggressively in recent months. Last weekend, the company held a nationwide "Monster Sale" that offered additional 5% to 7% price cuts on certain homes.

The falling housing prices played a big role in Pulte's quarterly loss. The company was forced to record $1.18 billion of inventory impairment charges, largely to reflect that its land and housing inventory is no longer profitable.
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