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Centex Corporation Firm Analysis - Essay Example

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The risk of owning land is substantial for all homebuilders, because market value of land and housing are continually declining as a result of the industry downturn. The industry downturn has resulted in significant impairments and write-offs in land holdings…
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Centex Corporation Firm Analysis
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The risk of owning land is substantial for all homebuilders, because market value of land and housing are continually declining as a result of the industry downturn. The industry downturn has resulted in significant impairments and write-offs in land holdings. The current downturn also has significantly increased competition among homebuilders, as evidenced by price reductions, increases in discounts and sales commissions to stimulate sales. Therefore, competition reduces number of property (homes) sales closings and reduces margins that lead to decrease in revenues on home sales.

The key strategic issues & problems with Centex Corporation can be estimated with respect to the customer's perspective and industry perspective.Customer's perspective:Decrease in the customer's affordability for initiating buying inventory. Customers were in a mood to lay off the inventory to overcome the mortgage demands. The high inventory costs to bear with have depleted the market from selling. Thus, there were very few takers for the inventory and lots of unsold inventory was left with no takers.

The decrease in buying and selling was due to low confidence levels of the customers who were affected by the adverse market conditions. Due to the financial markets turmoil, customers are ambiguous to venture out to buy new properties. Many prospective customers who are willing to buy new homes were made to shelve their ideas as they were unable to dispose their existing properties. Due to severe mortgage lending crunch and financial institutions tightening the screws to lend loans has created difficult times for customers to take loans.

The above depicted issues with respect to customers have affected Centex's housing. Revenues of centex decreased primarily due to decreases in units closed, and the revenues are largely offset by increases in discounts and lower prices experienced. The total closing numbers on sales decreased by 18 percent and total revenue decreased by 32 percent compare to 2007 and 2006 (builder 100).High competitions in the market as customers were trying to sell off their old inventory due to mortgage debt pressures.

Customers were willing to wait expecting that the home prices may still come down. This waiting game buy prospective buyers made the homebuilder to lose out valuable time in repaying the investments costs to the financial and mortgage institutions. Builder's prospective:Unprecedented demand crunch due to lack of buyers and due to lack of considerable rates to the homes made Centex to reduce the prices and offer discounts to sell off their ventures. Thus the investment costs were hard to retrieve.

Centex forecasted to sell all the homes build in this crunch time were surprised to react to their low sales volumes with many build up spaces vacant. The sales incentives have gone up and the customers' rejection levels at various stages of closing the deals have gone up creating a gloomy environment to make a profitable business proportions.Centex mainly used its discretionary cash flow to buy additional land during past boom. Since then, the market value of land and housing has been continually declining, and Centex has to reluctantly sell homes at a loss or at prices that generate lower margins.

As a result of the market value risk, the impairment charges are primarily contributed to the decrease in homebuilding operating margins. $1,792.4 million of land-related impairments in the year ended March 31, 2008 represents 21.7% of total revenue for the Year Ended March 31, 2008 (annual report). Centex Corporation also engaged in mortgage financial services. Decrease in mortgage lending due to significant market disruptions. Deep financial crisis in market with regard to financial services and mortgage lending has led to uphold the mortgage lending process.

Centex were unable to retrieve the lending amounts from the customers. The lending amounts which were supposed to be retrieved has piled up into huge losses and according to the prevailing situation in US markets it is certain that the lending amounts retrieval will be tough to cope.Reference:http://www.builderonline.com/builder100/2007.aspxhttp://ww3.ics.adp.com/streetlink_data/dirCTX/annual/HTML2/centex_ar2008_0027.htm2008 annual report

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