Sunday, May 1, 2011

Homebuilder Meritage falls back into red

After completing its first profitable year since the housing slump began, Meritage Homes Corp. has slipped back into the red.

The Scottsdale-based company, Arizona's only home-grown and publicly traded homebuilder, reported Thursday a net loss of $6.7 million in the first quarter.

Steven Hilton, Meritage Homes chairman and chief executive, said the major difference from a year earlier, when the company reported net earnings of $2.7 million, was the absence of a federal tax credit for homebuyers like the one that expired in April 2010.

The company's first-quarter gross revenue from home closings was $177.5 million, compared with $200.6 million in the first quarter of 2010, a decline of 12 percent.

"The market has obviously softened since the federal homebuyer tax credit expired in April last year, as reflected in total U.S. home sales as well as our own sales and closings," Hilton said in the company's quarterly earnings report.

Elimination of the additional tax incentive had a number of effects, he said.

It reduced the volume of new-home orders, making it necessary for Meritage Homes to offer more buyer incentives, thus lowering the profit margin on each house.

A reduction in volume also increases the construction cost of each home by making it more difficult to leverage economies of scale, Hilton said.

Homebuilders track and report three key sales statistics: orders, cancellation rate and closings.

Orders represent the number of new-build contracts signed by prospective homebuyers. A certain percentage of them result in cancellations, while the majority of orders lead to closings, the actually completed sales.

Meritage Homes reported 840 net orders in the first quarter, a cancellation rate of 17 percent and 678 closings. In the same quarter of 2010, it had 1,064 orders, a cancellation rate of 18 percent and 808 closings.

The gross profit margin on home closings was 17.1 percent in the first quarter, compared with 18.9 percent a year earlier, the earnings report said.

Hilton pointed to several positive developments in the first quarter, some involving buying trends and others related to company initiatives.

One positive trend that Hilton noted was a gradual increase in sales contracts signed since the tax credit expired.

The company's sales volume has increased every quarter since the end of April 2010, which seems to indicate that demand for new homes is on the rise.

Economists say that when a significant buyer incentive is offered with a set expiration date, such as last year's income-tax credit of up to $8,000 for new homebuyers, it has a tendency to wipe out pent-up demand.

In other words, many consumers rush to buy before an incentive disappears and few are motivated to buy just after an incentive is taken away.

Positive developments within the company in the first quarter included expansion into the Raleigh-Durham area of North Carolina, which Hilton said is a relatively robust new-home market.

Meritage Homes continued to position itself as a leader in the design and construction of energy-efficient homes, he said.

New initiatives in the first quarter included the introduction of an energy-neutral, "net-zero" production home, which produces as much energy as it uses.

by J. Craig Anderson The Arizona Republic Apr. 29, 2011 12:00 AM

Homebuilder Meritage falls back into red

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