Housing Boom Is a Memory:
Lennar Is Latest Builder to Fret

It was a tough week for the biggest U.S. home builders, as one company after another slashed earnings guidance to deal with a faster-than-expected downturn in the housing market.

Lennar Corp., based in Miami, was the latest bearer of bad news when it warned Friday that earnings in its fiscal third quarter, which ended Aug. 31, would be much lower than analysts on Wall Street were anticipating.

"The U.S. housing market has continued to deteriorate," said Stuart Miller, Lennar's chief executive. He blamed increased use of sales incentives and certain land adjustments for the shortfall, and cut fiscal-third-quarter guidance to a range of $1.25 to $1.35, down from Thomson Financial's consensus estimate of $1.81.

However, Lennar fared better than many of its rivals when it came to orders. It reported only a 5% decline in orders, which is significantly better than its peers. Los Angeles-based KB Home, for example, said on Thursday that orders for new homes fell 43% in its fiscal third quarter, ended Aug. 31, and the company cut earnings guidance to a range of $1.85 to $1.95 a share, down from Thomson's estimate of $2.31.

Beazer Homes USA Inc. said on Thursday that orders fell 49% and cancellations surged to 50% in the first two months of its fiscal fourth quarter.

As a result, the Atlanta builder reduced its 2006 earnings guidance to a range of $8 to $8.50 a share, down from previous estimates in the range of $9.25 to $9.75 a share.

Meanwhile, St. Joe Co., based in Jacksonville, Fla., announced late Thursday it planned to leave its home-building business altogether. The company said it would continue to entitle and develop its massive land holdings in Florida, but would no longer build homes. Instead, it would sell lots to home builders. The decision came after the company had seen orders fall 50% in the first quarter and 55% in the second quarter.

So, does the small order decline at Lennar mean the company is faring better financially? Not necessarily.

Raymond James analyst Rick Murray sees the small order decline as a warning sign that Lennar has been far more aggressive at offering incentives and slashing prices than its rivals. He said this will likely take a toll on Lennar's gross profit margins, which he estimates fell 6.10 percentage points to 18.9% in the quarter from 25% a year earlier.

Morgan Stanley analyst Rob Stevenson said the difference in orders between Lennar and other builders reflect different strategies. He'd prefer to see builders be frugal about incentives -- even if it means giving up sales.

"If you're just throwing as much product out there regardless of the price, that's a dangerous slope for these guys," he said. That's because once prices fall on a widespread basis, home buyers will sit on the sidelines waiting for prices to trough. This will delay sales, and make it tougher for home builders to bring pricing back up to previous levels.

Mr. Stevenson hasn't seen any builder get overly aggressive yet, "but that is the fear at the back of your mind."

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