New Home Orders in California Falling Off a Cliff

A little more than three weeks ago (Fri Sept 8th) Standard Pacific Homes (NYSE: SPF), a home builder with substantial exposure to the California market (see pg. 11 of their 2005 annual report which shows all the markets they operate in and the breakdown of their new home deliveries for 2005 by state) issued a startling press release:

Net new home orders for the first two months of the 2006 third quarter were down 58% from the year earlier period…..

Think about it: these guys make money by selling new homes.  In July and August of 2006 they received 58% less orders for new homes than they did last July and August.  That just blows me away. 

This piece of data confirms for me that home market’s slow down is accelerating. 

Consider that in the 1st quarter of 2006 (released April 27) Standard Pacific delivered 2,512 new homes, including joint ventures, as compared with 2,407 in the 1st quarter of 2005.  During that quarter, they had 2,553 net new home orders as compared with 2,825 in the 1st quarter of 2005 – a decrease of 9.6%.  In California they delivered 619 as compared with 691 the year before and had net new orders of 611 as compared with 786 (a 22.2% decrease).  So the 1st quarter wasn’t really all that bad.  They delivered a few more new homes than they did in 2005 and net new home orders were off only about 10%.  It was a bit worse in California but not so bad.  Seems like a soft landing.

What about the 2nd quarter (released July 27)?  Overall, they delivered 2,732 homes as compared with 2,850 in 2005’s 2nd quarter.  So the trend isn’t good but you still might think this is a soft landing.  But here’s the shocker: Net new orders dropped 39.8% to 1,985 from 3,298.  In California, they delivered 703 new homes as compared with 766 in the comparable quarter.  But again: new new orders dropped 54.3% from 955 to 436.  So the 2nd quarter is starting to look pretty bad.  Home deliveries are holding up on the strength of past orders.  But the future is starting to look extremely shaky as net new orders plummet: 39.8% overall and 54.3% in California. 

And now the press release announcing that net new orders for July and August were down 58% from the year ago period.  Again 1st quarter net new orders: -9.6%.  2nd quarter net new orders: -39.8%.  July and August net new orders: -58%. 

So this is starting to get very ugly. 

All the same, the stock has been rallying since closing at $21.02 on Friday July 21 closing today at $23.78 – a 13.13% 10 week rally.  All the other homebuilders have had similar rallies in that time period. 

In fact, the day after Standard Pacific announced its 2nd quarter results, Friday July 28, the stock gained $1.24 on heavy volume.  The Sept 8 announcement didn’t have a negative effect on the stock either.

Looks like investors are pretty confident that we’ve got a soft landing underway.  But I’m wondering: Are they looking at the same data I am????

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