Friday, October 13, 2006

The Sound of Silence

From the Modesto Bee:

Permit Me
Building hits the wall as window closes


Clamorous construction sounds are fading in the Northern San Joaquin Valley as the once booming building industry slows. Half as many new home building permits were issued this summer compared with the summer of 2005 in Stanislaus, San Joaquin and Merced counties. And the region is on pace to build far fewer homes in 2006 than it did in 2003, 2004 or 2005, according to data gathered by the Construction Industry Research Board, a nonprofit research center based in Burbank.

In Stanislaus County, for instance, fewer than 3,000 single-family home building permits will be issued this year if the current trend continues. By comparison, nearly 4,500 permits were issued last year. The drop-off is even greater in Modesto, where 16 building permits were issued this September compared with 60 in September 2005.

"We look to be in the middle of a correction," said Steve Madison, executive director of the Building Industry Association of Central California. "Obviously, we would love to be selling more houses..."

...[S]ome builders have discarded construction plans for additional Northern San Joaquin Valley developments, according to Greg Paquin of The Gregory Group real estate information and consulting firm. "Builders are giving up (land purchase) options and contracts, leaving money on the table. That's happening all over California," said Paquin, noting that land is being returned to farmers and property brokers. "Builders are re-evaluating their plans." Paquin said the development slowdown is being accompanied by lowered prices in existing subdivisions.

43 comments:

tom stone said...

hmmm,i guess the market is rebalancing.remember that word,it will appear on the test.rebalancing...not correcting,nonono.not crashing nonono.rebalancing,yes.ummmhmm rebalancing.i can even say it after having tee martoonis and a xanax.rebalancing.so there.

drwende said...

Bring on the bulldozers!

Anonymous said...

balderdash!

Nay sayers, nittering nabobs of negativism, doom prophesizing chicken sodomizers, nihilistic anarchistic liberal prophets of doom, disingenious laboring philistines all,

we've had a slight correction, which now has been righted, and now it is to the stars for more sales and better and better and more improvement and increased acceleration of the Real Estate Market!

Buy today, or you will be left out of this boom! Refinance now, to the hilt, and buy more property! Now is not the time to wait, waiters get left behind and only those who act now will profit!

The best is yet to come! And you can take that to the Bank!

Anonymous said...

JR, thats why Jack might not have that house to give you... you see, when prices are below costs plus a reasonable profit, builders stop building.

Jack will probably take all his toys home, close up shop and buy one of those good deals in Tahoe, while you renters party with the garage doors open.

When builders stop building, inventory (which is currenty plateued) might start dropping until we get to a (dare I say it? ) SOFT LANDING.

(I put in in caps so you all would believe me!)

sighing out, getting a beer.

JR said...

The MLS stats show that there are 6,000 vacant homes for sale in the metro area right now. Out of 17,000 listings, 6,000 are vacant homes. 90% of the homes in the Estates at Lincoln Crossing are vacant! I don't think there is any danger the these homes will suddenly all sell, unless JTS goes to auction and the FB's let theirs go to foreclosure. And if they do that, then lots of people might buy great deals and have one huge of party.

If no builder starts another home for 12 months, there is no way to use up all the vacant inventory. About 20,000 people will move into Sacramento in 2007, and at 4 per home, they need 5,000 homes. That won't even fill the existing vacant ones.

Unfortunately, all these builders have credit lines, employees, sunk inventory in lots, and big bills to pay. Of course, some of them might nothball everything, fire everyone and go play in Tahoe (....are all the employees listening?) I think most of them will continue to build a few homes each month, keep reducing costs and sell for less with ever greater incentives. That way they can feed their employees, bank lines and stockholders enough to keep the wolves away. They can come back to fight another day....well, probably another decade.

Anonymous said...

Hey, we can all party like it is 1999....

Anonymous said...

I'm a superintendent for a large residential builder in the Bay Area and Sac markets. On monday we laid off 1/2 of our hourly workforce. If things don't improve, cuts will become even more severe. I think I have 6 more months- tops. I am saving as much money as I possibly can- I know in my heart I will never make 100K+ a year again. I laid off a guy monday who made 23.00/hour. He's a Mexican who bought a house in Modesto for 345K, a bargain he thought- lots cheaper than a house in his native San Jose. Now here's a guy with no real skills (he's what we call a "detailer" the guy that touches up and tunes up the house right before you do your walkthrough). He's got a 30 year mortgage with a payment of over 2k per month. What is HE going to do?
This shit sucks ASS! Why were so many people who had NO BUSINESS "buying" homes allowed to do so? It looks to me like this is gonna snowball- heres another anecdotal case of a guy getting laid off due to a housing inventory glut- a glut he's gonna exacerbate by adding ANOTHER house to the pile of unsold stucco boxes. He'll soon be walking away from that house, like THOUSANDS of others are doing right NOW.

Mebbe I'm getting caught up in all this doomerism, I dunno, because all the big players in EDH (Pulte, Toll, Elliot) etc are building inventory RIGHT now like crazy- there are mass grading operations all over the county, if the slow down is that bad, why are so many builders still cranking them out????

RMB said...

The big builders have a HUGE profit margin to deal with. I've heard KB could make 150K+ on a 400K home. So of course they are going to still build. They can make money all the way down to 260K on the same house by selling to the knife catchers and still cover their overhead. The question will be when all the foreclosure show up how fast will the price drop. You are seeing stickiness now, but I don't think it will last much after the 1st of the year. People will want to stay in their debtboxes through the holidays, but then the gloves are off and it's fair game time.

Bakersfield Bubble said...

The big builders have a HUGE profit margin to deal with.

_________________________

You might want to review the 10K's and 10Q's filed by the HB's - then come back and tell us about those HUGE margins again!


crispy&cole

JR said...

Anonymous Super, 6:59,

You hit the nail on the head (so to speak) with ....

"...This shit sucks ASS! Why were so many people who had NO BUSINESS "buying" homes allowed to do so? "

The whole reason this bubble is so dangerous is because it is a credit bubble. Anon 4:48 is sipping his beer tonight thinking life is hunky-dory. He and many other people are not getting it yet.

Your story puts it right out there for everyone to see, plain and simple. Thank you for speaking up.

Anonymous said...

Yes, we (the builders) have some wiggle room (margins)

We build for under $90.00/sq. ft.
We sell for over $180.00 per sq/ft.

The $90.00 figure does not include lot/land cost, but as an example, 12,000 - 15,000 sq/ft lots in EDH pencil out to 350K each (Including streets/offsite/sewer/water power).The small custom guys are pumping out spec mansions like theres no tomorrow in EDH!! Custom lots are listed at 450-500k in Serrano

So for example Toll brothers is building for around 90.00 per square foot and selling for over 200 (per their sales literature they are selling their 5100 sq ft house for just over 1 million dollars). 300k for lot cost + ~450k for hard const costs = ~250k margin IF they get 1million. They could sell for 800K and still beat the stock market or a CD! But they have to sell- and there doesnt seem to be a whole lotta people able to qualify for the super jumbos these days...

They claim to have sold out their first release- but you never really know if its sold for sure until COE!.

Anonymous said...

Net margins for several HB's I have reviewed, not made up numbers or "scenarios" - show 9-10% right now. Not 30-40%. Wait until the right downs and "one time" charges - then we should be near zero.



crispy&cole

Anonymous said...

Your scenario leaves out many expenses:

debt service
sales costs
advertising
administration/OH
carry costs
etc...



crispy&cole

Anonymous said...

Builders, particularly small ones take out costs during the draw process...some builders will live off only these draws and hope, just hope, they break even in the end...

some builders and developers have to keep building and developing just to stay afloat...

hard to judge how much these guys makes, except those that are public corportaions...

If the banks or lending institutions will give them money, some builders/developers could care less about how much they make in the end as long as they can pocket change along the way and hopefully break even....or else it's "so sorry cholly to the banks"...

Anonymous said...

jr - the average number of persons per home is closer to 2.5 (per the census & dept of finance numbers), not 4. But will 20,000 people still be moving into Sacramento as unemployment rates rise?

re: stickiness of prices. There is no question that some builders have been making extraordinary profits in the current boom; however, that is because they bought land before it went up in price. The real question is if the underlying cost of land will decrease as a result of the upcoming extended "buyer's market". That depends on how many vacant land owners need to sell.

Anonymous said...

balderdash

Is obviously highly leveraged bay area flipper who has ass in a sling.

It's ok BALDERDASH your loss will be somebody else's gain isn' that nice of you.

Anonymous said...

I just spoke to the guy who's position at our construction company will be eliminated mid november (looks bad to lay people off in december I guess...) Anyway, he "bought" a 368K POS in Modesto with no money down with a 1st and a second where they kicked him down $12,000 for "upgrades" through escrow. (Carpet, paint remodel). Anyway, this IDIOT and theres lots of them around like this) is taking out a HELOC that he intends to use to PAY HIS MORTGAGE PAYMENTS "if he has to" OMFG this gonna be bad...

I think ALL b lender mortgage brokers should be arrested now and charged with FRAUD- conpsiracy, wire fraud, money laundering etc.- these fuckers are CRIMINALS

And to anon 12:10am; I know you find this hard to believe; but our gross margins are still quite large, you're correct that I didnt list the overhead, but the overhead is easily covered by our near 50% margins... (Large builders take advantage of what economists call "economies of scale" look it up...) And We're dealing with that "overhead" right now, executive team has flat out said "make the subs eat it" (all the extra stuff we used to do or pay change orders for like drywall paint touchup, cleanings etc).

Real wages for the trades have been kept at 1980's levels- trades make less money today than they made in 1980- thanks to the massive influx of mexican slave labor. Drywall hangars make 10 cents per square foot IN TODAYS CENTS MIND YOU! In 1978 they made 12 cents per foot! THats a HUGE reduction when you adjust for inflation!

Anonymous said...

Gross margins and Net margins are two different things. I think that is where we are missing each other. I don't care about gross - the net is all you get to take home at the end of the day.


crsipy

Anonymous said...

anon builder-

Do you have any insight into the Bakersfield market?

crispy

Anonymous said...

anon builder-

I remember doing financials (audits & reviews) of builders (small and large) in the early and mid 90's, they would continually want to discuss how great their gross margins were to their banker's.

In fact they would try to move as many expenses "below the line" so they could show how strong they were. Meanwhile a few lines down the income statment they usually showed a net loss. So I think the gross margin can be a bit misleading.

My intial reponse was not meant as an insult, I was just trying to sort out where we disagreed.

Anonymous said...

I agree, our gross margins don't tell the whole story and yes in the final analysis they are meaningless, but the point I am trying to make is that due to the obscene run up in prices, we have room to lower our prices signifigantly and still make (some) money. That being said, we still have to actually sell some of these POS foam boxes! We have not sold a single property in 3 weeks- company wide. Sacramento,east bay, soouth bay or peninsula! We averaged 3-4 a week last year @ 1million+ a piece. The sales report for the week ending 10-15 comes out monday morning via email-I suspect that it could be week 4 with NO (Zero, 0)sales.

Anonymous said...

Bakersfield? I have no direct knowledge of that market, but my framer picked up a contract for a tract in Visalia a couple months ago- I bet the foreman on my job that their new Visalia job would not go as they assumed. I was right- they were counting on huge releases where they could bang out scores of homes, looks like they are only getting the models and then the builder (which ryhmes with rain and bard!)is stopping. Interesting to note that a large Sac area framer is taking work in VISALIA eh? Thats a long haul...

chuck said...

Excellent Job, on this and the other "Ben Jones" type blogs...

one notices that after these Blogs had posted the information regarding the "Pot Houses" and their floozy woozy full value Mortgages the Bee finally picked up the story last week...

What is sad, that one must search through these Blogs to find the truth...because one knows the Liars in the Real Estate Industry will not tell you the Truth, and sure as hell the Bee will not, and particularly not the Business Journal, whose only function seems to be to give readers "the business"....and Comstocks seems to be run by business whores...

Thank God for you guys and the Sacramento News and Review

Anonymous said...

Chuck,

Truth is coming through the blogs, it is the only means out there that can stop the real estate industry from further causing our Country's economic demise. If the majority of our society thinks that our economy can be supported by home sales and making loans we are in big trouble. However, I feel that our society does not think that way and that is why the down housing market is going to beome a train wreck, six alarm fire, and an earthquake all at once. Chuck you are right on the money.

If people are buying investment property now they will pay a heavy price.

Happy Renter said...

http://www.sacbee.com/142/story/39138.html

while sipping my beer... said...

...wow, would you guys stop picking on JR! just kidding. Give that guy a house!

Appreciate the input on builder margins, most of the blogger audience thinks its all profit. You never read about the developers and builders that blow it. Its a high risk game even when things are good.

As the timeline for developing land in CA can exceed 10 years now, lots of expense will move "below the line". Interest, fees, and staff time are exceeded the cost of 2x4's and drywall.

Toll Bros isn't any success story in El Dorado Hills. They bailed on their next project. Apparently, the margin you think they're making isn't happening, otherwise, why leave?

Anonymous said...

I'm curious as to how a smaller builder like Monley Cronin is doing currently. I think they went all in (or at least made a big gamble) with Springlake in Woodland. I think they have 16 custom homes built and a handful of custom lots. The homes are asking $700+ and last check (as of Sept 14), 4 were sold. They are by far building the most custom homes over there.

Anonymous said...

What causes high prices in housing - yes, some builders have been doing extrarodinarily well as of late - but that is primarily to their good luck in buying land before the recent run up in prices.

But there are two underlying problems:

1) A very slow and unproductive planning process. As "while sipping" points out it takes 10 years plus to bring a project to the point of being developed. This artificially causes supply to be suppressed. From the experience I have had working with the process, this long and laborious process adds little to nothing to local governments making good decisions. And once decisions get made, you can bet on a lawsuit or two to challenge those decisions.

2) Incredibly poor regional planning. Take SF for example. During the evening, SF has a population of about 800,000. During the day it is triple that. There is no economic reason for all those jobs to be in SF, except that SF decided to build skyscrapers to satisfy the political donors and/or egos in the 1960s and 1970s. Companies moved in and now it is difficult to relocate. To accomodate this poor planning, we build bridges, highways, rapid transit systems, etc. This all eventually gets factored one way or another into the price of housing.

The price of housing will fall in real terms over the next few years. How severe will depend on the underlying rate of inflation and whether the feds begin to insist of lending standards that exclude many of the funny loans made of late. But the price of housing will still be much higher in CA than it needs to be due to the problems I mentioned above. There is plenty of land - one only needs to get into a small plane to see that - the amount that can and should be developed is restricted by a broken political process.

tom stone said...

anonymous builder,thanks for the post.one of my friends is a construction supervisor for a large contractor(mostly public works) and when we were talking friday night,he told me that the home his daughter bought used 14 gauge romex,and thw switches were improperly installed.this is a brand new home by cobblestone homes,and he commented that the quality of workmanship was substandard throughout.i have also noticed the apparent poor quality of homes bulit in the last 2 years,can you comment on this? BTW,he knows his daughter is an FB,and will be putting an in law in his home for her to live in.oh, as far as money,i'm a loan broker,and geting a loan next year will be real different,whether it is for construction,or purchase.i expect to see big changes in policy by early february.

Anonymous said...

San Francisco, like Portland and Seattle have always been major regional hubs for all types of business'...At times to certain degrees all have had major world headquarters in their Cities...

The CBD of Portland, Seattle and SF are Historical Employers of great local and regional business', it goes back over a Century...

Sacramento have never had anything to rival those Cities, and is basically a "State" town with some private business now picking up on the Auburn Folsom corridor based on firms coming in from outside and shedding bright engineers/entrepreneurs (Intel, Santa Clara)...

There is debate on whether SF will continue as a World Business Center, but it is comparable to Paris or Rome...Sacramento is not...

One must recognize the difference or it will drive you to drink or give you a massive inferiority complex (Kings backers)

Sacramento has suffered from poor planning, Stucco box crap and Asphalt from Davis to Cameron Park because of GREED and the insanity of building on valuable Valley Farmland...GREED and Stupidity of local Governments based on the insanity of Developers has led to a massive suburban slum in Sacramento strung out along I50 and I80...

Anonymous said...

I have noticed a lot less traffic in Sacramento lately. I think their are lots of people moving to other states. It seems everytime I talk to someone they know somebody who has moved or been transfered to Texas.

Anonymous said...

I think Sacramento population is decreasing in the sense that people that have professional occupations are leaving town. It appears that a criminal element is moving here from the bay areas and other parts of California, hence the POT HOUSES IN ELKGOVE. It appears Sacramento high cost of living is driving professional workers to leave. These people are being replaced by low income welfare recipients and obvioulsy criminals. Sacramento violent crime rate is skyrocketing. THINGS ARE GETTING BAD IN THE RIVER CITY.

Anonymous said...

>> Sacramento violent crime rate is skyrocketing. <<

Do you have any references that you can point to? Not flaming, just looking for some credible references.

Anonymous said...

>> I have noticed a lot less traffic in Sacramento lately. <<

Have you been up to Roseville lately? The traffic seems to be getting a lot thicker around here.

Happy Renter said...

"daughter bought used 14 gauge romex,and thw switches were improperly installed.this is a brand new home by cobblestone homes,and he commented that the quality of workmanship was substandard throughout." (Tom stone)
I grew up working construction. I knew things were going down hill when I saw a tape measure marked with the fractions labeled( It said 1/16" on the tape.) If you can't read a tape measure, without the fractions of an inch labeled, you shouldn't be in construction.

Anonymous said...

Violent Crime Heads Up in 2005
Written for the web by C. Johnson, Internet News Producer


Video Mark Hedlund's Report
Karen Massie's Report
Deborah Hoffman's Report




Related Links FBI Crime Statistics



E-mail Story Print Story





Violent Crime Heads Up in 2005
Written for the web by C. Johnson, Internet News Producer


Sacramento experienced an 11 percent upswing in violent crime in 2005 compared to 2004, according to preliminary crime statistics released Monday by the FBI.

2006 will be worse.

Anonymous said...

Here is a preview of 2006. We only have two and half months left it looks like another record year for violent crime in Sacramento.

Police chief: 'We are outraged'

As the city homicide rate skyrockets and Sacramento heads for one of its deadliest years in the last two decades, Police Chief Albert Najera is feeling the heat.
On Tuesday night, the Sacramento City Council convened a rare special meeting and called in Najera for some answers. Mayor Heather Fargo said she also wanted to send a message.

"I want to make it clear this level of violence is not tolerable," Fargo said in an interview before the meeting.

Najera told the council violent crime in the city was his department's highest priority and they were "willing and able" to address the issue.


"What I need to tell you is we, as an organization, we are outraged and we are concerned," Najera said. "...Our young people are killing themselves on the streets and we've got to stop that."

Sacramento's statistics are sobering, with 45 homicides so far this year. There have been five killings in the past week, with a sixth under investigation. As it stands, the city's murder rate is up almost 40 percent from last year.

Published 8:03 pm PDT Tuesday, August 15, 2006

I bet if I watch the 10:OO pm news I will see another homocide in the River City.

Criminals are flooding Sacramento from the Bay Area.

Anonymous said...

I am sure that Roseville is havinfg less traffic due to all the Sacramento residents moving there to escape the violence of Sacramento. I hear that housing tracts in Roseville with $500,000 homes have several rental houses per a block, with multiple families living in each. That is great, Roseville will have high crime too SOON!!!!!!

Anonymous said...

I meant Roseville is having more traffic.

Anonymous said...

Tom - can't comment specifically on construction - sounds like your local building department is incompetent.

In my book, incompetency in government is the equivalent of corruption. (I'm being generous and assuming it isn't actual payoffs - my sister dated a guy in CalTrans who used to talk about the corruption in letting contracts). It is absolutely appaling that a house today can be allowed to be built below standard.

Anonymous said...

Is the crime in the Bay Area going down?

This crime stuff is pretty worrisome. But that's the risk with a deep recession...it drives people to desperation.

Monday - sipping coffee said...

JR
I believe they're building at a lesser rate this year not, less than 10,000 I hear. The cancellation rate dropped to 20% this summer (according to Sac Landing)

Sacramento Landing also reported about 900+ finished new homes in inventory a week or so ago ("20% of 4,598").

Carmichael likely has a high vacant rate due to higher income - ability to purchase another while selling current home.

If the Sac numbers were divided by zip code, you would see different.

SO what does this mean? Don't really know unless we compare it to something. How about this. MLS inventory is 17,000-18,000 vs. new home inventory of 900+. Makes new home inventory not really a problem anymore.

OK you say, there's 4,500 plus in builder inventory if you count finished lots ready to build on. Might take 6-12 months to get this inventory to market and there is an absorption rate larger than that.

For those of you complaining about growth, here's some alternatives...

1. Keep it in your pants.
2. Control the borders.
3. Do your own work.

Since we've choosen not to do any of the above, any other suggestions?

Anonymous said...

"tom stone said....one of my friends ...14 gauge romex...improperly installed....cobblestone homes..."

14 gauge is standard to switches, have your friend concentrate on making levies and bridges safe, please.

I happened upon a Cobblestone project during the Home Tour Sunday, pretty nice.