Pulte slashes home prices, warns of lower earnings

Jennifer Shubinski

Tuesday, Oct. 5, 2004 | 10:56 a.m.

Homebuilders' stocks tumbled this morning after Pulte Homes Inc. lowered its third quarter and full-year earnings estimates -- blaming a slowdown in the Las Vegas housing market.

Pulte's announcement, and its reduction in home prices in its Las Vegas area communities -- in some cases by as much as $170,000 -- sent a chill through the market.

Pulte's stock was down 8.43 percent, or $4.75, to $51.58 this morning.

Other public homebuilders with operations in Las Vegas also took a hit, including KB Home, Richmond American Homes, Centex, Lennar, DR Horton, Beazer Homes and Meritage. All saw their stock fall this morning.

Raymond James & Associates Inc. analysts lowered Pulte Homes' rating today, indicating concern about the "Vegas meltdown," its large land holdings in the West and other markets where Pulte builds that "could be on the verge of overheating," such as Los Angeles, Phoenix, and San Diego.

Ken Perlman, project director at California-based Hanley Wood Market Intelligence, formerly the Meyers Group, said Las Vegas is still a strong market.

"It's leveling out a little bit," he said. "We always contended there was not a bubble ... This is not indicitive of a crash, but more of a market returning to a state of normalcy."

The change in Pulte's Las Vegas home pricing is a huge blow on a housing market many called the hottest in the country. A few market watchers nationally have warned in the past months that Las Vegas was overpriced and overheated and that a bubble was about to burst; while many locally have said recent changes are a mere adjustment in pricing.

Many homebuilders have been aggressive with their pricing of new homes, but Pulte Homes garnered a considerable amount of local attention earlier this year after it increased home prices in a Summerlin subdivision by as much as $142,000 in less than two months. Pulte, based in Bloomfield Hills, Mich., also builds under the Del Webb brand.

"Pulte's Las Vegas operations have raised prices aggressively, with some communities implementing price increases aggressively, with some communities implementing price increases well above the 50 percent increases experienced in the broader Las Vegas market," Richard J. Dugas Jr., Pulte's president and chief executive said in a statement. "Consumer acceptance of these increases at certain price levels have apparently reached a ceiling, suggesting that prices have become higher than what the market will support."

Pulte reduced prices at its four Las Vegas Del Webb communities over the weekend between 5 percent and 25 percent, or $50,000 to almost $160,000.

At Sun City Anthem, a 2,722-square-foot model was reduced to $499,000 from $657,000.

Pulte also reduced prices in 18 of its 23 Pulte Home communities, with reductions ranging from $25,000 to $170,000.

At its Anthem master-planned community, a 1,976-square-foot home in Anthem Highlands was reduced to $425,000 from $596,000.

The change affects about 1,000 homeowners that had contracts pending as of Oct. 2. Those owners had the base price of their houses adjusted.

Pulte Homes had already lowered prices between $25,000 and $85,000 at about 40 percent of its Pulte Home brand Las Vegas communities in September.

"We are in the process of contacting every customer in contract and offering them the difference in purchase price to new pricing," said Sheryl Palmer, Nevada area president of Pulte Homes and the Nevada Division of Del Webb. "The response has been very good."

The company has received some complaints from people that have recently closed escrow and who will not see the benefit in the price reductions.

"I understand their frustrations; there is no perfect timing for a decision like this," Palmer said. "All we can do is move ahead and reduce prices and continue to sell prices."

Palmer said the company hit a price ceiling of what consumers were willing to pay for a new home.

She also said the prices reflect the changing market conditions, which have considerably cooled from earlier this year when price wars for new homes were common.

Larry Murphy, president of research firm SalesTraq, said many people knew a market correction was coming.

"If you look at who has really been raising the prices the most, it was led by Pulte and Del Webb," Smith said. "Most don't have to drop prices because they didn't overshoot the mark. Lots of builders have had slow and steady increases in prices and they are still raising prices."

Murphy said Pulte Homes and its Del Webb division aren't the only builders that have lowered prices in the past couple months.

"It's a major correction and its significant, but at the same time you have to put it in perspective," he said.

He said DR Horton and Richmond American have both lowered prices slightly in a couple of their communities.

Also pointed to as one of the reasons Pulte Homes' sales became sluggish, and affecting the local housing market as a whole, is the resale market, which has experienced a huge jump in the number of homes for sale. There were almost 15,000 resale single-family homes for sale in August compared with 8,654 in April, according to the Greater Las Vegas Association of Realtors. Local industry experts said that number reached as high as 16,000 in September, although exact numbers were not immediately available.

Palmer said a bubble had not burst in Las Vegas home pricing, and that the lowering of prices is just an adjustment to market pricing and demand.

"We think the Southern Nevada housing market remains solid and promising," she said. "We're recognizing that the local housing market has shifted, but if you look at the macroeconomics we (Las Vegas) continue to grow."