Builders Poised to Post
Big Profit Drops

U.S. home builders are poised to post double-digit earnings declines and hefty land-related write-downs when they report fourth-quarter results.

Builders have been stepping up their use of price discounts and incentives to move sales. The price slashing will take a toll on gross profit margins.

Lennar Corp., whose fiscal fourth quarter ended Nov. 30, appeared to set the pace when it said this week that it expects to post a loss, "materially lower" margins and a land-related write-down of between $400 million and $500 million when it reports its results next week.

Lennar's land-related write-down was about twice the size Morgan Stanley analyst Rob Stevenson had expected.

JMP analyst Alex Barron expects quarterly earnings to fall 80% on average among the 17 home builders he tracks. He predicts many will post significantly bigger-than-expected write-downs on land. He predicts these write-downs will continue through the next few quarters.

Demand will also remain weak, with year-over-year orders falling 37% on average, Mr. Barron said.

Lennar has led the charge in price-cutting and other incentives. It adopted this strategy early on in the downturn, based on its belief that selling homes and maintaining good liquidity was more important than keeping house prices up during the slowdown.

Still, there have been a few voices in the industry that have offered glimmers of hope that a bottom could be approaching. Toll Brothers Inc. Chairman Robert Toll said last month that he was seeing a "floor" in some markets, and Hovnanian Enterprises Inc. Chief Executive Ara Hovnanian has talked of "hopeful indicators that the markets may be stabilizing."

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