The housing market continues to wear on homebuilders and housing stocks. Sales of existing homes are flat or down. Sales of new homes are headed down now that federal tax credits have lapsed. To top it off, at least one major home builder is having its books looked at by the Securities and Exchange Commission.
KB Home (NYSE: KBH) disclosed last October that it was being investigated by the SEC, but didn’t say why. Now, the homebuilder has revealed that the federal commission has requested information about KB’s impairment charges and joint-venture investments. KB was certainly not alone in how it did its accounting, so it is likely that other homebuilders such as Toll Brothers, Inc. (NYSE:TOL), Lennar Corp. (NYSE: LEN), and PulteGroup Inc. (NYSE: PHM
) could also feel some fallout from the investigation at KB Home. (Lennar earnings were just released this week)
The Wall Street Journal reports that the 12 largest US builders wrote down $30.6 billion between 2006 and 2009, mostly on falling land values. KB Home took an impairment charge of $2.6 billion in those years, although the company said it did not take any write downs in its most recent quarter.
At issue is whether or not the builders presented their results accurately and fairly. If, for example, a homebuilder wrote down excessive amounts on land value, that would reduce future expenses and artificially strengthen a company’s outlook. Likewise, taking an under-impairment on land may inaccurately bolster a builder’s balance sheet.
Joint ventures keep high-priced land off the builders’ balance sheets, helping the companies to manage risk, but keeping the actual amount of risk from being known to investors. The WSJ notes that KB was not a large participant in joint-ventures and did not write down values to the same degree as other builders.
Even as the SEC investigation into KB Home proceeds, prices for existing homes look to be falling slightly again and there is barely any demand for homes, new or existing. How homebuilders are going to cope with the twins of disinflation and deflation is hard to see.
Lumber futures have fallen below $200/thousand board feet, off nearly 40% since April. Faith in a continuing US economic recovery in the second half of 2010 is falling fast.
Amazingly, homebuilders’ share prices are holding their ground and the SPDR Series Trust SPDR Homebuilders ETF (NYSE: XHB) is up 1% so far today. Hope springs eternal.
