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House falling in on related industries

Diantha Parker Nov 7, 2006

KAI RYSSDAL: The prospect of divided government had investors practically giddy. There were big gains in the equity markets. But today brought two more nails the housing market didn’t really need. Toll Brothers is one of this country’s top builders of luxury homes. Beazer Homes builds houses mostly for first time buyers. But both of them reported sharp drops in new orders and lousy third quarter results. From Chicago, Diantha Parker reports.

DIANTHA PARKER: The deflating housing bubble is already taking the air out of related businesses. That’s according to retail and home-building analyst John Tomlinson with Majestic Research.

JOHN TOMLINSON: Anything that will be impacted by people buying a new house, redecorating — you know, you’ll have the construction companies, you’ll have the building products companies. . . . Lowes and Home Depot also warn about the slowdown in housing and what kind of impact it’ll have on their results as well.

And it won’t stop there. The National Association of Home Builders says every dollar spent on buying a new house is worth another $7 to $8 to the overall economy, from spatulas to fertilizer.

With that in mind, consider that Toll Brothers revenue fell 10 percent to $1.8 billion — they made $2 billion at this time last year.

And Beazer’s new orders dropped by more than half. Instead of the nearly 5,000 houses they were going to build last year, they’re now down to just over 2,000 — provided no one cancels.

Tomlinson says part of the problem is that during the boom, home prices inflated rapidly, leaving people’s cost-of-living increases in the dust.

TOMLINSON: Now those factors have slowed and the balance of power has shifted more to the buyer, and things will have to come — especially pricing — back into equilibrium.

For that to happen, he says, companies like Toll and Beazer will have to wait for existing new houses to sell, almost certainly at a loss. Buyers, take note.

In Chicago, I’m Diantha Parker for Marketplace.

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