Trouble on the Home Front

Orders fall short at Ryland and Centex, and existing-home sales are lower than expected.
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Updated from 10:45 a.m. EST

Homebuilders

Centex

(CTX)

and

Ryland

(RYL)

both reported strong quarterly earnings, but their new-order numbers, which will drive future growth, look dismal.

Meanwhile, in yet another signal of a housing market slowdown, data released Wednesday showed that sales of existing homes fell even further than expected in December.

Late Tuesday, Calabasas, Calif.-based Ryland said its net income rose 49% to $162 million, or $3.32 per share, compared with $108.7 million, or $2.17 per share, a year earlier. The results handily beat the consensus $3.12 estimate on First Call.

But Ryland's unit orders fell 5% year over year for its latest quarter. The lackluster performance led A.G. Edwards analyst Greg Gieber to cut his rating on Ryland to sell. He also dropped his 2006 EPS estimate to $10.25 from $10.90. In a research note Wednesday morning, Gieber noted that the only area of strength in Ryland's orders came from Texas, where unit sales were up 27%. However, the average selling price in Texas is 36% below the company's average, with equally low gross margins, he said.

"Using our new 2006 EPS estimate, Ryland currently trades at a 7.3 times multiple. That is a 12% premium to the group's current average 2006 multiple of 6.5 times. We don't believe Ryland warrants any premium to the group," Gieber wrote.

Centex, which reported a 30% increase in its quarterly earnings, reported order growth, but it was weaker than analysts expected.

The Dallas-based builder said its new orders rose 4% to 8,128 homes. Sales were strongest in the Southwest, where orders spiked 28% year over year. On the West Coast, orders rose 10%. But orders fell 15% in the Southeast, 8% in the mid-Atlantic and 3% in the Midwest.

"This is not particularly positive to hit only 4%, though we don't know all the details behind it," says Gieber, who was expecting nearly 11% order growth.

Centex said net income rose to $329.3 million, or $2.49 a share, for its fiscal third quarter ending Dec. 31, up from $253.8 million, or $1.91 a share, a year earlier. Excluding discontinued items, Centex posted earnings of $332.7 million, or $2.52 a share. Analysts expected earnings of $2.48 a share, according to Thomson First Call.

Revenue rose 25% to $3.74 billion, shy of analysts' forecast of $3.81 billion.

Centex's earnings growth came amid an 18% increase in home closings, which rose to 9,504 units from 8,047, and a 130-basis-point jump in operating margin.

On its conference call, Ryland blamed the overall order slump on its West Coast division, where orders fell 34%. The company said results there were hampered by community opening delays in Las Vegas, along with a slowing Phoenix market and tough year-over-year sales comparisons in the area. The Las Vegas communities have since been opened, and management expects rebounding orders there in the first quarter. Conditions also remained difficult in Colorado. The company said it is bullish on the long-term prospects of each of these markets, however, given strong job-growth trends.

Northern California saw a slowdown because of rising prices in the region, while San Diego and California's Inland Empire had strong sales, Ryland's management said. Washington, D.C., sales also were slow, given the growing inventory in the market, while orders were strong in Florida, Texas, the Carolinas and Atlanta.

Centex also blamed slowing sales in Washington, D.C. on excess inventory in the market, and said pricing growth and sales flattened in Phoenix. The company attributed its 15% order drop in the Southeast to the hurricanes and the company's plan to limit sales to match production delays, namely labor and supply issues The company said sales would have been flat in the region if the company hadn't closed its South Carolina division.

Centex said order growth was good in Texas, Las Vegas, most of the Midwest (except Minneapolis) and areas of California (except San Diego and Sacramento).

Existing-Home Sales Slow

The National Association of Realtors reported Wednesday that total existing-home sales -- including single-family, townhomes, condominiums and co-ops -- dropped 5.7% to a seasonally adjusted annual rate of 6.6 million units in December from the revised pace of 7 million in November.

Sales were 3.1% lower than the 6.81 million-unit level in December 2004. Economists expected an annual rate of 6.89 million unit sales in December.

David Lereah, NAR's chief economist, said he expected the monthly sales decline.

"This is part of the market adjustment we've been discussing, with a soft landing in sight for the housing sector," he said in a statement. "The level of home sales activity is now at a sustainable level, and is likely to pick up a bit in the months ahead. Overall fundamentals remain solid, driven by population and employment growth as well as favorable affordability conditions in most of the country, so we expect the housing market to remain historically high but lower than last year's record."

Overall sales in 2005 set a fifth consecutive annual record, rising 4.2% to 7.072 million.

The national median existing-home price for all housing types was $211,000 in December, up 10.5% from December 2004, when the median was $191,000. For all of 2005, the median price rose 12.7% to $208,700 from a median of $185,200 in 2004.

Total housing inventory levels declined 4.4% as of the end of December to 2.8 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace.