Tuesday, July 10, 2007

"Toxic Buildup"

From CNBC (also video):

Toxic buildup in slumping housing market

How do you deal with excessive supply? Add more supply! Sounds like a head scratcher, but that’s exactly what home builders are doing.
Though homes don’t sell, home builders are building fast in some places.

California's Central Valley is once the hottest housing pocket of the country, counting for one in every 25 homes built nationwide. Now it’s going through a painful contraction after the tremendous growth busted. Yet Standard Pacific Homes is piling up Spec homes in the town of Manteca.

Spec homes are single-family houses built by home builders in anticipation of finding buyers. In other words, they are built on the belief there will be enough market demand, not quite the situation we have right now. In fact, in the Standard Pacific development here in Manteca, we only found one “sold” sign.

You might wonder why home builders would dig larger holes for themselves...Ara Hovnanian, CEO of home builder Hovnanian Enterprise said recently that building Spec homes is about the only way to liquidate land these days. "It's easier to sell land by popping a house on it than it is to just sell land because there are just not many buyers out there," he said.

When no one buys the homes, home builders slash prices.
From the Central Valley Business Times:
Auctioneer gavels came down on 6,960 homes across California in the first six months of the year, according to ForeclosureRadar....

[Adjusting for population] Yuba, Sacramento and San Joaquin counties ranked 2nd, 3rd and 4th highest respectively....

Foreclosures now represent 16 percent of all new and resale home sales in the state, according to the company’s figures. “Lenders are building a significant REO inventory. Since Jan. 1, 2007, a total of 29,696 California properties have been returned to the lender for an astonishing total loan value of $12 billion,” says Sean O'Toole, ForeclosureRadar founder and principal. “This is unprecedented.”


Diggin Deeper said...

The build up in unsaleable inventory is unprecedented.

"It's easier to sell land by popping a house on it than it is to just sell land because there are just not many buyers out there,"

Did this guy really say this on CNBC? Do the math Ara. If the land won't sell, and there are too few buyers to begin with, just increase your cost basis by a factor of two or three and then try to explain to your shareholders how this is wise resource management, and your losses are just temporary.

Ara, fire sell the land, take your losses, and hunker down until the market turns. Pick up your toys and move to a market that will support your company during these tough times.

If this kind of thinking is the norm throughout the homebuilding industry, we haven't seen anything, yet, with regard to home price dumping.

Homes don't just disappear when they're not sold. If they don't become a homeowner's problem, they'll become one for the neighborhood, city, and county.

Once again, I smell fire....

Chuck Ponzi said...


Remember that in Cali, even at 40% off, they're making a bundle of money, it doesn't seem that crazy of a tactic anymore.

Sure, they overpaid for land, but it's the variable costs they need to cover, not the fixed costs. Those are sunk and gone. Right now, they're more concerned about cash flow than book profitability. That way they'll survive to see another bubble.

Chuck Ponzi

smf said...

You have to remember this:

By the time a builder is ready to build, they have already spent many years and $$$ to get the project to that stage.

The process to get anything built can be very long and expensive.

So, if a builder decides to stop a project, their time and money investment becomes an immediate loss. (Empty land produces no revenue)

A calculation can be made that continuing the project could at least produce some returns, as opposed to abandoning the project entirely.

Diggin Deeper said...


I'll buy some of that, but if your ghost buyer theory is correct, what makes the Hovanians, Shea, and KB's cashflow any better if there's too few buyers to begin with? As long as they keep adding inventory to a market that can't consume it, aren't they adding overhead that is basically unsaleable? Are there litigious liabilities hanging over their head if they don't complete a project to some level?

I certainly don't have a fix on this and trust your comments here. It just doesn't sound financially sound to just keep building unless there's some underlying reason to do so.

smf said...

"It just doesn't sound financially sound to just keep building unless there's some underlying reason to do so."

Of course it makes no logical sense. But these builders get no revenue when they stop building, as example.

Then, by the time they are ready to build, there's a chance a good chunk of money has already been sunk on the project. And by abandoning it, you already take a loss.

Some areas give you a deadline from purchasing the land to finally building on it.

The permits and paperwork also have deadlines of about 1 year from approval before you have to resubmit everything to get permission again.

So, if you have a project that is ready to start construction, and you put off building it for whatever reasons, you will be charged again for the required paperwork.

At the same time, the building codes could have changed, causing further financial drain with new requirements.

(Have seen this plenty of time at work)

I have seen residential projects that go thru years before construction start.

And as I said, once you stop the project altogether, that money that was spent is GONE.

It is a very tough call to make

B. Durbin said...

Hmm. Given that I have very specific ideas about what I want from a house, I would certainly be happy to buy a piece of land without a house on it, especially if they'd already gotten the utilities ready to go. (To the property line and ready for the final stretch, I mean.)

Of course, that would mean my house wouldn't look like the rest of the cookie-cutter crap. For one thing, it would be attractive from all sides, not just the front— and for another, it would have heat-reducing elements such as thick walls and eaves. And given lots sizes, I'd have to buy two parcels just to get a decent spread for fruit trees.

And the idea of me buying anything at this point is just a dream. But hey.

Cmyst said...

I know what you're saying, b.durbin

I've been eyeballing a lot of lots for sale lately. You can still find them here and there, fairly large lots in areas like Orangevale or Fair Oaks. Absolutely no one is building what I want. Some builders are now building "green" houses that are supposed to reduce your energy consumption by up to 60%, and that is very appealing. However, the design of those houses is still cookie-cutter and the lots are still way too small.
I'm beginning to feel that if I only buy one more time, I want it to be exactly what I want.