by Calculated Risk on 5/01/2008 02:54:00 PM

On cancellation rates:

"Our cancellation rate continues to fall at 29%, it's the lowest in over a year."

It makes sense that cancellation rates are now falling. It takes about 6 months to build a new home, so anyone who bought after the August credit crisis was probably aware of the tighter lending standards and falling house prices, and made their plans accordingly. Still some buyers have probably been unable to sell their existing homes, and the cancellation rate remains high by historical standards.

Each builder has their own downpayment and cancellation policies. Some builders require much higher downpayments and therefore have lower cancellation rates. For Centex, a cancellation rate in the low 20s was normal during good times, and the cancellation rate increased to the mid to high 30s for most of the last couple of years.

Cancellation rates are important when analyzing the New Home data from the Census Bureau. What matters is the change in cancellation rates, not the absolute level. Falling cancellation rates mean the Census Bureau is probably underestimating sales, and underestimating the decline in inventory.

On land:

Analyst: I was wondering kind of bigger picture as you guys go to the asset-light model, and you think about that, in the near term, you're going to be buying more finished lots. How long is it going to take you to take those lots and make them buildable? Is there a delay to get final permitting on this stuff? I guess with that, when you think longer term who is going to be owning the land that's going to be delivering the land to you and what kind of returns are they going to require on that land, and do you think that's a sustainable model in, let's say, 50, 70, 80% of your markets, something like that?

Centex: Those are good questions, and they don't have finite answers right at the moment. The land has not corrected yet. The land is largely in the hands of private developers, and those private developers have bank borrowings against that land, and we're finding now that the land and the lots are going back to banks. There's thousands and thousands of developed lots in virtually every market with the highest being Atlanta at about 145,000 vacant developed lots. Phoenix has nearly 90,000, or 60,000. Even Dallas/Fort Worth has as many as 90,000 vacant developed lots. So the supply will be there for sometime to come. We believe it needs to go back to the banks. We're already beginning to work with banks on securing some land positions for the future, but of course that's going to be a process that takes some time, and we expect the latter half of this year.
emphasis added

Centex believes these private developers are defaulting - "land and the lots are going back to banks" - and it will take some time for the banks to price the land correctly (and recognize their losses). It is interesting that Centex is going to an asset-light model - remember that nonsense about the builders being "land banks" a few years ago?

How times have changed!

Centex believes most of the price declines are behind them (for new homes), but they are still worried about tighter lending standards:

What's really unknown is the sales prices. While we're not trying to compete and don't try to compete with foreclosures, the credit markets are continuing to tighten. Credit underwriting standards are continuing to tighten. So as we focus on what's necessary to qualify our buyers, there may still continue to be pressure on prices from just the credit side. Again, I think we believe most of that is behind us. And much less in front of us.

Overall this was a relatively positive conference call. Although they clearly stated "There are no markets improving", their markets aren't getting significantly worse - and they are making progress working down their inventory.