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California and the West

Glum Outlook Is Offered by Home Builders

KB cuts a profit forecast, Hovnanian posts lower earnings and Toll's CEO sees a parallel with a steep 1980s downturn.

September 07, 2006|Annette Haddad | Times Staff Writer

Three of the nation's biggest home builders issued downbeat news about the housing market Wednesday, warning that buyers' increasing wariness could affect their businesses more severely than previously thought.

Citing weaker-than-expected demand, Los Angeles-based KB Home cut its full-year profit forecast for the second time in three months. Separately, Red Bluff, N.J.-based Hovnanian Enterprises Inc. said quarterly profit dropped 36%.

And Robert Toll, chief executive of Horsham, Pa.-based Toll Bros. Inc., told Reuters that the current national housing slump was worse than the "soft landing" predicted by some.

He said today's market recalled the real estate recession of the late 1980s, when prices took more than three years to recover.

For The Record
Los Angeles Times Friday September 08, 2006 Home Edition Main News Part A Page 2 National Desk 1 inches; 33 words Type of Material: Correction
Home builders: An article in Thursday's Business section about home builders gave an incorrect location for the headquarters of Hovnanian Enterprises Inc. The company is based in Red Bank, N.J., not Red Bluff.

"This isn't a soft landing -- it's harder than a soft landing," said Toll, whose company builds move-up homes in nine states, including California.

But Toll denied that the market was headed for a more dramatic decline. "We are not crashing," he said.

Toll argued that demand for housing and consumer confidence had been hurt by concerns about terrorism, the Iraq war and the U.S. government response to Hurricane Katrina.

"It appeared that we were no better prepared for floods than Bangladesh and now that's been exacerbated by continuing bad news out of Iraq," Toll said. "It gets into the psyche of the American consumer."

Negative news about the housing market has been mounting since late last year amid high prices, rising interest rates and a surge in the supply of existing homes for sale.

The current quarter is expected to be particularly challenging for the building sector because many builders posted double-digit growth in new-home orders a year ago.

"The overall demand environment for new homes is clearly weak," Carl Reichardt, a Wachovia Securities analyst, said this week in his monthly survey of new-home communities. He said that builders' ability to book increased orders would remain challenging.

The changing market prompted KB Home to report after the market closed that higher cancellation rates led to a 43% drop in preliminary net orders in its fiscal third quarter ended Aug. 31. The company now expects full-year profit of $8 to $8.50 a share, down from the $10 it had forecast in June. It also projected third-quarter profit of $1.85 to $1.95 a share.

Some analysts were expecting an average profit per share of $2.31 for the quarter and $9.67 for the year.

Chief Executive Bruce Karatz said KB was being hurt by weaker-than-expected demand and growing inventories in markets that had experienced rapid price appreciation and substantial investor activity.

Hovnanian President and CEO Ara K. Hovnanian said it was unclear "how long the elevated levels of resale listings will persist and it is equally difficult to predict what events might cause a reversal in buyers' sentiment. Thus, we are making decisions today with the assumption that current conditions will persist for the foreseeable future."

Hovnanian reported after the market closed that its fiscal third-quarter profit totaled $74.4 million, or $1.15 a share, compared with $116.1 million, or $1.76, a year earlier. Revenue rose 18% to $1.55 billion. The company's profit still beat analysts' consensus by 5 cents a share.

Hovnanian shares, which closed at $25.47, down $1.20, rose to $25.90 after hours. However, KB shares plunged to $38.76 in after-hours trading after closing at $40.39, down $1.34. Toll shares, which finished regular trading at $25.60, off 69 cents, fell to $25.35 after hours.

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annette.haddad@latimes.com

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