How are homebuilders still in business?

Bob Moon Jun 25, 2009
HTML EMBED:
COPY

How are homebuilders still in business?

Bob Moon Jun 25, 2009
HTML EMBED:
COPY

TEXT OF STORY

Steve Chiotakis: We got word yesterday of an unexpected dip in new-home sales, which tells us a housing recovery could be long and slow. And the nation’s homebuilders have been hanging on throughout
the market glut. One of them, Lennar, reports quarterly earnings this morning, and analysts expect a loss. So how are homebuilders getting by? Here’s Marketplace senior business correspondent Bob Moon.


Bob Moon: I was reading yesterday about a backlog of more than 45,000 pending foreclosures that have stacked up in the Phoenix area, when one of the comments posted below caught my eye: “Tell me again,” the reader wanted to know, “why new home builders are still in business?”

Although scores of small builders have gone belly up, no major U.S. homebuilders have closed shop. So how are they getting by? Seems some were lucky enough to build up their cash reserves before the market tanked.

Analyst Robert Stevenson at Fox Pitt Kelton points out in some cases, unloading their empty lots has been critical:

Robert Stevenson: Simply because they’re selling their land and converting that into cash. But the margins continue to be under a great deal of pressure, given the operating environment.

Some have even been able to get by on hope — raising cash by selling bonds to investors on the promise of an eventual recovery. This all makes for a head-scratching assessment from Stevenson:

Stevenson: Most of these companies are still cash-flow positive, but they’re earnings negative.

How long can the life-support hold out? Just this week, the head of Pulte Homes said while his company’s in strong shape, he sees more homebuilder bankruptcies on the horizon if things don’t improve soon.

I’m Bob Moon for Marketplace.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.