Two devastating hurricanes — Harvey and Irma — are taking a toll on homebuilders’ forecast for the soon-to-be-reported quarter. D.R. Horton, Inc. (DHI - Free Report) has reduced its fourth-quarter as well as fiscal 2017 forecasts due to delays caused by the recent tropical storms.
Leading national homebuilder D.R. Horton now expects its backlog conversion rate for the fourth quarter to be approximately 85% compared with the previously guided range of 88-90%. SG&A (selling, general and administrative) expenses, as a percentage of homebuilding revenues, is now estimated to be roughly 8.6% compared with 8.3-8.4% projected earlier.
Importantly, the company radically trimmed its 2017 forecast for cash flow from operations due to delays caused by the catastrophes of late. D.R. Horton, which mainly sells single-family homes, now anticipates cash flow from operations of about $150 million for the fiscal year, down from the previous forecast of about $300 million.
Not only D.R. Horton but another noted homebuilder Lennar Corporation (LEN - Free Report) has also provided views recently regarding fiscal third-quarter deliveries and new orders, post the havoc of hurricanes. The company maintained that the natural disaster is anticipated to cause delays in home deliveries. Sad but true, the destructive hurricanes have affected Lennar’s communities across Texas, Florida, Georgia and South Carolina, representing 40% of the company’s annual homebuilding revenues.
Per Atlanta-based homebuilder Beazer Homes USA, Inc.’s (BZH - Free Report) recent report, the company also expects new home sales and closings to be lower in the quarter ending Sep 30 on a year-over-year basis due to storm-related impacts.
The latest U.S. housing data also reflects the ongoing weak sales pace. Existing home sales declined to a one-year low in August, per the latest report from National Association of Realtors or NAHB. Existing home sales slipped 1.7% last month to a seasonally adjusted annual rate of 5.35 million. This marks the fourth decline in five months, bringing the annual rate to rock-bottom level in 12 months. Purchases in Houston dropped 25% year over year and sales would have been flat excluding the Harvey effect.
Housing starts also came in at a seasonally adjusted annual rate of 1.18 million last month. This is 0.8% down from a revised July estimate of 1.19 million.
Earlier this month, September readings gauging builders' view on sales over the next six months slipped from August. Economists are of the opinion that ongoing higher labor and material costs have already been hitting the industry hard. Also, inventory shortage has started taking toll on the sales’ pace. Now, scarcity of skilled construction labor is further anticipated to worsen following the two devastating storms and rebuilding operations are likely to drive construction costs higher causing delays.
Rising labor costs are threatening margins of noted homebuilders like D.R. Horton, Lennar, KB Home (KBH - Free Report) , PulteGroup Inc. (PHM - Free Report) , Toll Brothers, Inc. (TOL - Free Report) among others.
Nonetheless, homebuilders remain optimistic and expect post-disaster rebuilding efforts to drive higher demands for new homes next year.
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