A Nasty Hangover for Homebuilders

Lennar becomes the latest industry player to announce big writedowns on inventory as the housing slump continues

It was a rude New Year greeting for housing-market optimists. Homebuilder Lennar Corp. (LEN) warned on Jan. 2 that it will have a sharply lower than expected profit during the fourth quarter, as the Miami-based concern struggles in a slowing market.

Lennar now expects to earn between 70 cents per share and 75 cents per share during the fourth quarter ended Nov. 30. The mean analyst estimate had been for Lennar to earn $1.07 per share, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

After taking adjustments and write-offs for things such as inventory and land-related losses, Lennar expects to lose between 88 cents per share to $1.28 per share during the quarter.

Lennar is not the first big industry player to announce writedowns. Hovnanian Enterprises (HOV) on Dec. 18 reported a third-quarter loss of $117.9 million after $355 million in charges related to inventory impairments and land option write-offs (see BusinessWeek.com, MM/DD/YY, "Homebuilders Take Another Hit").

"Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery," said Lennar's CEO Stuart Miller in a press release. "While we are hopeful that low interest rates, strong employment and a healthy economy will help stimulate a recovery in 2007, we have continued to focus on strengthening our balance sheet by delivering our backlog, selling inventory aggressively and renegotiating our land positions."

Lennar has much fewer unfilled orders for homes this year compared to last. The company's total dollar value of homes in backlog as of November 30, 2006 was $4.0 billion, compared to $6.9 billion as of November 30, 2005. The company says it had much lower profit margins on home sales because of the deteriorating market conditions in the homebuilding industry.

Lennar is taking steps to control the damage. The homebuilder also on Jan. 2 highlighted its plan with the real estate company LNR Property Corporation to sell a 62% stake in LandSource Communities Development LLC to MW Housing Partners. The new MW Housing venture will contribute cash and property with a combined value of around $900 million.

Lennar's stock did not trade Jan. 2 as U.S. equity markets were closed in observance of President Ford's death. The stock closed at $52.46 on Dec. 29, 2006, well above its low for the year of $38.66 reached in July. Investors may wish to prepare for more volatility as the housing slowdown plays out.

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