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| Cancellations Vary But Continue to Impact Builders |
| Written by Jonathan Smoke | |
| 07.30.2007 | |
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Discuss this article on the forums. (0 posts) In last week’s earnings calls by several public builders, cancellations were a definite theme, but like average prices discussed in Friday’s post, cancellation rates and trends experienced by the builders varied. D.R. Horton reported cancellation rates in April – June as “some of the highest ever” averaging 38% for the quarter. In the Q&A dialogue, the company revealed they felt that cancellation rates were being driven by consumer credit issues.  Beazer Homes reported cancellation rates ticking back up to 36% on average from a trend down in the prior quarter to 29%. Beazer also mentioned that cancellations were lower than the average related to a large national sales promotion they conducted in February. This was an encouraging sign as it may indicate that when customers feel strongly about a purchase or a deal they received, they stick with the contracts through to closing.Standard Pacific bucked the trend and reported cancellations down to 28% compared to 36% in the prior year same quarter. But Pulte reported flat results compared to prior year quarter (both at 28%), but like Beazer they had seen an increase since the first quarter of the year. Builders aren’t experiencing the exact same rates and trends because they serve different customer segments and do not have identical geographic coverage and concentration. Of the group of builders who reported earnings last week, D.R. Horton had the highest cancellation rates, which likely reflected they have customer segment targets who are most impacted by credit issues. The others seem to be impacted as well albeit less severely. The impacts are likely to be from both the credit tightening that had occurred since the subprime markets began to have trouble in March, and indirectly through customers who can’t sell existing homes due to inventory issues and similar problems with potential buyers for those homes being impacted by the credit tightening. Although the trends don’t look good, there is some hope since cancellation rates are lower relative to last year when buyer sentiment became decidedly negative mostly related to home price stability. If prices remain steady going forward, the key to future improvements will be through declining inventories of new and existing homes. For builders who are focused on customer segments and geographies where affordability is a major concern, net sales may continue to be a challenge. 
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