California Builders ‘Feeling The Blow’
A pair of reports on California homebuilders. The Press Democrat, “Feeling the blow from the housing market’s downturn, Sonoma County’s largest home builder, Christopherson Homes is laying off 18 percent of its employees over the next three to six months, company officials said Thursday. ‘We hope this downturn will be short-lived but we will continue to make adjustments deemed necessary,’ said George Casey, the company’s CEO.”
“Five years ago, the company opened a division in Roseville to expand into the Sacramento market as home building boomed in the Central Valley. But a strong, eight-year run of sales peaked last year, hitting first in Sacramento and then in Sonoma County and the market has been coming back down. Christopherson has slowed housing starts in response.”
“‘Climbing interest rates, increases in energy costs and longstanding affordability issues in California’s metropolitan areas are all factors that have combined to slow the market down. Christopherson Homes is not immune from macroeconomic trends,’ Casey said.”
“Home builders across California are starting fewer homes and pushing to sell those both under construction and completed. The aim is to reduce inventories of unsold homes so construction can meet current demand, according to the California Building Industry Association.”
The Victorville Daily Press. “In response to a slowdown in home sales, builders in the High Desert are reacting in different ways, some predictable, others not. Dallas-based Centex Homes, after watching its stock price fall from the mid-$70 range to the $50 range, has sold land, with one 23-acre parcel near Luna Road going to a private developer.”
“KB Home laid off 25 of its 275 employees at its Pomona office in June. Other builders, according to contractors and agents, are scaling down their floor plans, causing subcontractors to worry about whether they will have to make layoffs themselves.”
“Local builder Frontier Homes has decided to make a commitment to do none of the above. In a meeting this week with about 60 subcontractors, CEO James Previti asked them to join him in streamlining operations so they can all offer affordable homes and stay in business.”
“Previti said he wanted to keep his sights on Frontier’s main goal: affordability. ‘Prices have pushed more and more people out of the marketplace,’ he said.”
“‘I can afford to work on a little less profit margin too,’ (subcontractor) Randy Becker said. ‘I’ve had steak and potatoes, but maybe it’s time to eat hamburgers sometimes and stay in business.’”
I understand RL Browns latest report covers construction job losses in Phoenix, and suggests that will further crimp housing demand.
Here is something from Jon Lansner at OCR:
‘What you find is the ZIPs with year-over-year sales growth are far more likely to have cheaper homes, the blue bubbles. (That half blue circle at the top is a graphical ‘fudge’ — it’s a ZIP in Garden Grove where volume’s actually up 146%!) Does this all signal some problems at the top shelf of the market?’
What you find is the ZIPs with year-over-year sales growth are far more likely to have cheaper homes…
Just goes to show that the last of the GFs are the poor, uneducated ones and those grasping at the last vestiges of affordability.
I’ve had steak and potatoes, but maybe it’s time to eat hamburgers sometimes and stay in business.’”
______________________________________________
How about Top Ramen in six months!!
Even though it’s a cyclical business, most subs don’t know the meaning of the word ’savings.’ I know quite a few and they all seem to live hand-to-mouth. When times are rich, they load up on bigger trucks and take vacations. Just another reason over-building causes problems; longer periods with no work for these folks.
Yeah, thats all the contractors I know too. Trucks, Hot Rods, Boats and broke when no work.
The biggest homes currently under construction on the golf course in town are 90% builders/realtors. They are counting on the good times last for a few more years. One house is going to cost around $4 million (She ownesBarbara Smith Homes). Who needs a house that large in this town??
Hey Crispy,
I went to that Creepy & Crawley website and noted they have a news story about an increase of population to 2 million, granted it was written in 2005, but dang. The U.S. census bureau has Kern County pegged at 750,000, where are another 1.25 million people going to come from. I’m I mssing something here.
Their math is always off. This clown - Crisp- was in the newspaper a few months back proclaiming “25% apprecation for the next several years.” This has to be illegal. Where is the f’n Code of Ethics??
Yeah I noticed the resumes of realtors at that place show the high educational background of their realtor team. They are qualified to spin realestate or twirl signs.
They are going to move in with relatives in Weedpatch, Arvin, or Pumpkin Center. Plenty of room for them. Or, go the metropolis of Shafter by the swamp. Look out for West Niles. Dove season on September 1. Can’t wait for lunch after the opener at the Pyrenees.Hope it cools off to 100F.
“maybe it’s time to eat hamburgers”
No, it’s time to eat crow…
The builders are still not hungry enough. Had one of the guys who gave me an estimate for upgrades to the house call me up and tell me he is going on vacation for 2 weeks.
Of course its his time, but I wondered about grabbing cash while you still had a chance to. This guy probably thinks he can go for 2 weeks and the world will wait for him. Good show…
Top Ramen (and pizza) got me through college
in 2005 RE employment was 9.8% of total
I’m betting less than 8% in 1989 - rmember the midwest barely entered the Regan bubble and the entire oil patch was already dead by 1987
that reminds me in the 80’s bubble investors fled in 1987-88 becuse the depreciation was changed in 87 ?
it is different this time !
“KB Home laid off 25 of its 275 employees at its Pomona office in June. Other builders, according to contractors and agents, are scaling down their floor plans, causing subcontractors to worry about whether they will have to make layoffs themselves.”
The ripple effect in action here. Anyone thinking this whole housing market correction is going to stabilize any time soon is dreaming. The winds of this storm are just picking up steam.
dreamning, INDEED.
anyone shorting the apartment REITs?
Rising US rents priced into lofty landlord shares
It is a terrible time to short apartment REITs. Apartment buyers are disappearing, as rates have risen. Sellers and their brokers are much more likely to talk about price flex now than six months ago. The REITs are lower leverage, so they can take advantage of the market tilting toward the buy-side. Also, the runup in their share prices gives them cap leverage, in that the expected return on the stock gets pushed lower compared to the rising cap rates in the RE market.
I’m curious about the impact of “shadow rentals” however. As I posted on my blog the other day, the homeowner vacancy rate just hit an all time (Data goes back to the 50s) high of 2.2%. Lots of FBs who can’t sell are going to be flooding the market with rentals just to curb cash flow losses with something, anything, in terms of rental income. Then you’ve got your re-conversions. All these apartment complex to condo conversions are reverting back to apartments. Lots of supply got taken out temporarily by those in 2005 and early 2006. But now, it’s all geting dumped back on the market. Hence, the “tight” rental market (to me, anyway) seems poised to loosen up (though I certainly won’t argue with you that right now, it’s tight).
Just my two cents, anyway.
Shadow rentals will be less of an effect than you think. They will be unorganized, and in most cases, in a very poor position to compete with rentals which, in most cases will be owned with a significantly lower basis (the owners will push rents, or go into foreclosure). Those that go back to the bank, will not be rented, but sold at fire-sale prices.
Shadow rentals will be a small effect, especially when you consider how many rental units were NOT built over the past few years.
I’ve been walking around downtown looking into RE sales offices. The female (20 somethings) all bat their eyes at your praying to come in. I’ve had a number of them write their personal cell phone numbers on their business cards without solicitaion on my part. While this may be my good looks, it says a lot!
“you praying”
It says they are considering going back to former profession - stripper/prostitute/porn star!
Looks like a buyer’s market for RE babes. Go out and get some good deals. Your dollars can go further these days.
A couple of days ago I went to see the last townhouse models in Ladera Ranch. Orange County (briar rose community.) They had put an ad in the LA Times advertising upgrades, no HOA dues for a year and no closing costs. I found one I’d love to buy for about 350, not the 608 they were asking. Still, I gave out my information and got a call from the sales lady yesterday. Seems prior homeowners threw a fit at the no HOA dues (it is almost $400 buck a month) and they were going to recind that offer unless we put in a reservation this weekend.
A little poking around on zip realty– we could buy a different townhouse in Ladera for about 100k less, similar size and location or we could get a SFR for that price.
I don’t know where the builders are going to find buyers if they keep the prices high. And they still have 1 more phase…
“Seems prior homeowners threw a fit at the no HOA dues (it is almost $400 buck a month) and they were going to recind that offer unless we put in a reservation this weekend.”
It’s the old “take-away close”. The prior owners probaly didn’t say anything about it. They just made it up to make you think it’s such a great deal prior buyers are pissed about it. The prior buyers would probaly love to see you get free HOA fees in order to keep the comps up(unless their just stupid).
It’s a sucker ploy. “Act now” on this fleeting offer.
In any event, the HOA dues are worth a total of less than 1% of the asking price and 1.4% of the The Hopper’s offering price — hardly an amount to make or break a deal like this.
Several readers sent in this article from San Francisco:
‘The market may be softening like an overripe peach, but in the wake of rising interest rates and exorbitant prices, the fact that there are still new buyers out there at all is nothing short of astounding. So if people are still buying, where is the money coming from? There are two primary answers to this question.’
‘The first answer is good ol’ Ma and Pa. The second answer about where the money is coming from..Nowhere. According to the NAR, last year nearly 43 percent of first-time homebuyers took out zero-down-payment loans. In the West, that number topped 50 percent. In a climate of rising interest rates and tightening lending standards, this can’t go on.’
“Nowhere.”
More like “we don’t know yet.” The answer will come when many of these 100% financed buyers of homes they cannot afford go bankrupt, at which point the shortfall will be assigned to whichever parties are asked to shoulder the loss.
Ben,
thanks for all the hard work. This is a great site!!!
Yes, things are getting slow here in the SF Bay Area. Inventory has been moving up consistently the last 5 months. Don’t think the sellers can hold out much longer.
“Even in my own narrow circle of struggling young families, I’ve known a half dozen to finally bite the bullet in the past six months and buy their first Bay Area home. These are not doctors, lawyers and chief technology officers but ordinary folk whose incomes as filmmakers, carpenters and herbal therapists don’t cover much more than day care and burritos.”
I can barely afford day care and burritos, but look at my $1 million home!!
Peer pressure usually hurts people, not help. How many people try drugs due to peer pressure? Quite a few.
A coworker just bought a 1/1 condo at the Aqua towers in Long Beach (aqualb.com) for somewhere around $350k. Her parents helped her get in. She’s making $48k/yr base, with $35k/yr overtime potential (if she actually takes the OT). I haven’t even run the numbers, but I don’t see how she can do it without continuing assistance from the ‘rents. She only has to walk a block to work, but that can’t be the only reason *why* she purchased. Maybe to “start building that equity.” Thankfully, I haven’t heard her say anything about appreciation, so maybe the downturn won’t be such a big deal for her (until, that is, she wants to sell and move to something bigger).
That seems pretty average for an income/price ratio around here.
Friends with $50k/year jobs are buying houses in the 400s, and couples with two 50k/year jobs are buying houses in the 500s and 600s.
That nowhere statement is interesting I just received in an email a program that will let you finance 100% with a 580 Fico. Not that it’s groundbreaking or anything but it’s from a lender that traditionally didn’t offer it. So much for tightening. I read an article either in MSM or industry press a while ago that the reason these loans were being offered was because people could afford the payments but they couldn’t afford to save for the down payment. I know, I know, save me the bombardment of common sense on that one.
But after reading that interview above with the industry insiders about mortgage banker positioning, wages not going up, interest rates going up, the negative saving rate and the overall economy as a whole. It makes you wonder just how far the prices would fall if you removed the 0,5,10, percent down programs and required a 20% down. Then you really have to wonder about the liklihood of that happening. If you reverted back to 20% full underwriting you would probably see prices on houses fall back to the 1970 price model. How likely is that too happen?? You really have to wonder. Don’t slam me about being a broker and worried about my fees and the usual yadda yadda it was just a lightbulb moment as they called it.
I’d never slam you - I appreciate your insight. Sometimes I might disagree with you on a point or two, but that’s just healthy debate.
I agree we won’t revert back to 20% full underwriting, but I do think that we might start to see some down payment requirement (even if it’s only 5% or 10%) and stricter underwriting standards in the not-to-distant future if we see rising defaults and falling prices (to the point where banks are realizing losses of at least 5%).
I read the threads discussing your take on notices of default. I think that the disagreement is really based on a point of time reference. My take (on the comments by you and others) was that you were saying that the number of NoDs is not significant at this time, while the others were looking at the trend as a leading indicator of future problems. In which case, I tend to agree with both (that the number of NoDs at this time is not high enough to have any significant effect on prices, but that the trend is showing that these NoDs are rising and will have a significant effect before too long - I’d estimate probably 6-9 months). I hope I didn’t misinterpret anyone’s comments. In any event, I do appreciate your insider’s knowledge.
“I agree we won’t revert back to 20% full underwriting…”
Um, why would you think this?
Because I don’t think that the govt will mandate it, and I think that as long as there is an MBS market, the lenders will find ways to make loans without going back to those standards. And, if lenders did impose those standards, the prices of houses would fall so far that the homeowners, lenders, realtors, etc. would scream, and the govt would institute another program to offer loans with lower down payments (or lend an amount for the down payment, or whatever else the govt can think of) to get the market back again. They’ve done it in the past (HUD, FHA, Fannie, Freddie, etc.) and they’ll do it again. The result is that borrowers won’t be subject to the full 20% down payment and full underwriting requirements of the somewhat distant past.
I’m not saying that 20% down payments with full underwriting requirements isn’t a good idea (I think it is). I just think that the genie is out of the bottle and, from a practical standpoint, there isn’t a politically palatable way to put the genie back. That’s my two cents anyway.
Good point, “genie out of the bottle” is the perfect way to describe it. How do you get it back in ?
The 0%(VA) 3%,5%(FHA,FANNIE) 10% (FREDDIE) have been around since dirt practically. They have loan limits so as the market goes down so will those limits. There will be no wholesale changes there unless their current accounting fiasco puts them out of business. As prices fall those products will be used more compared to practically zero useage now.
If you tighten lending on whats left to lend on you kill the mid-high end market, put a lot of rich folks hopelessly upside down encouraging them to walk away and banks left holding the bag on billions of dollars of bad debt and a lot of folks go out of business compounding the problem. So realistically you can’t tighten.
So does that mean what’s coming is a very fluid market consisting of cheap housing and loose lending?. Especially with MBS participation and their risk based pricing system.
California is in trouble.
When I bought my first two homes, 88 &90, rule the was 10% down for an adj. mortgage, 20% if you wanted a fixed, nothing else was offered.
when prices are falling 10%/yr, who’s going to loan money without a nice cushion?
Agreed dwr . The lenders will go into a tight money market because they won’t be able to sell the loans in secondary market unless they have a cushion to allow for falling prices .
The same people loaning it now — people who are lending other people’s money, making commissions of $20,000 per loan (or if in top management, exercising millions in stock options).
It’s not their money — it comes from mortgage-backed securities sold to the Chinese government, or to Japanese investors (e.g., insurance companies) desperate for interest payments. And they’re lending other people’s money, too. The source of the money is the Asian savers. They’ve lost the money, but as long as their governments and/or insurance companies can hide or deny the losses, it’ll keep going on.
580 FICO? I guess I am just thick in the head, but I am surprised that they did not get lauged at. I guess I am really out of touch with this “new economy”.
I don’t know what we’ll see with respect to “required down payment”, but if you see significant defaults on loans that cause the piggie-back loans to be significant losers, you might see risk premiums on such loans rise to a point where it is simply not a financial possibility for borrowers.
In extreme cases, in a market where home prices are falling, and foreclosures are up, there may simply not be lenders willing to lend that marginal 20%. Marginal 10%? Maybe, but it is possible that there is a time where the future is so uncertain that second mortgages are simply not available in the market (necessitating 20% down payments again for a period of time).
That’s my take as well. I suspect that those who bought MBSs that wer securitized from those 20% seconds have no meaningful grasp of their exposure. Pooling risks helps but when they’re draining the pool, it’s a bad time to dive from the 5 meter platform.
I’ll bet those who bought those MBSs were quite aware of their exposure, though they’ll claim they weren’t when the chickens come home to roost. I’ll bet the when the smoke finally clears, we’ll find that a significant fraction of those particular MBSs, which were probably sold with very high yields, went into the hands of hedge funds investing other people’s money. As you probably know, the standard hedge fund deal is that the managers get 2% a year of the principal, 20% of any profits — and 0% of the losses. And they’re unregulated and don’t have to report in detail how they’re investing the money. Can you imagine a compensation system more designed to encourage swinging for the fences?
Don’t miss the last paragraph in Carol Lloyd’s typically weenie-ish SF Chronicle article:
“In the long term, even with softening prices, many potential buyers without parental units to lean on will in the end choose not to buy at all. This may restore some sanity to the marketplace — or it may exacerbate the stratification within our society between the landed middle class and the tenant middle class.”
Lloyd has a track record of really getting off on that final distinction: the “landed” middle-class vs. the “tenant” middle-class. She should think a little harder before using phrases plucked straight out of feudalism. Many people whom she seems to consider “landed” are really scarily leveraged “tenants” paying their lives away to their banks/mortgage lenders. It’s called being an indentured servant, Carol, and methinks think you rank among them (for those who don’t know, Carol Lloyd rather famously overbought a place in SF using idiotic financing in 2005).
An interesting subject. The transfer of money from the 70-80s types to the youngers that is going on. I spent a long and tedious flight next to a grandmother (70s) who bragged on how they were giving money to their childern and grandchildren for all sorts of things. Especially to ensure they could buy in the “good neighborhoods” of San Diego.
I did, of course, remain polite to this enabler of future disasters, but I could not stop thinking about how she was damaging at least 2 generations of people by not giving them the benefit of working their way up by the sweat of their brow. How does one learn to handle money, the value of their own time and effort if someone like this is always there behind you with and endless pile of money to pave over the mistakes?
Read about Ugly flip house, 136 dom - hope he loses his ass.
I get the sense that this leg down in interest rates will entice a few future FBs so they can catch the falling knife and give us the first dead cat bounce. Might see a little uptick in Aug sales…
Nope…..sentiment has changed. Even if the Fed cut rates next week, no more “bounces”. It’s all downhill from here, with different paces plunge.
Hey nvmtgbrkr, Have you seen any numbers from the lake? (Incline Village)
The last year and a half people were in a panic to buy a house before rates went up to much. A pause should illiminate this scare tactic that the builders realtors and mortgage companies used so effectively to scare people into overpaying and overleveraging.
It seems that the Fed doesn’t really have any control over mortgage rates, as they are pegged to the 10-year Treasury. So, just as mortgage rates did not react to most of the Fed increases, I’m not sure that mortgage rates will react to any initial Fed decreases.
For some time now the following has been happening: whenever the market believes the Fed is about to stop, the 10-year yield drops. So I would say that in the short term there is a good positive correlation between the Fed and the 30 year mortgage rates. Long term nobody knows. Bears argue that FCBs and oil money will bail out from treasuries if the Feds do not increase rates to protect the dollar; therefore financing and the real state market would be toast regardless of what the Feds do.
Sorry if this was posted before
http://www.msnbc.msn.com/id/14172172/
The california median price chart is starting to look like a Swiss Alp or something (Adobe)
http://tinyurl.com/kx2v8
Yodelayheehoo!
Could that graph get any steeper? There’s a long way to go down. And, I like the fact that it includes a long enough time frame to see how the last bubble played out and how this one simply dwarfs it.
Seven years later in ‘96 there were 56k foreclosures in a single quarter & price declines (as you have noted). The decline will be much faster and much worse IMO, for obvious reasons.
Cali certainly looks like it’s going down the toilet. Even the Northeast is starting to crack now..
BubbleTrack.blogspot.com
The NAR used to do some decent research up until lately. Check out the chart on page 61.
http://tinyurl.com/gxyhr
Now they won’t even talk about rising foreclosures. Actually we are on a permanently high plateau, of foreclosures that is. Lately the NAR are just a spin machine. We should call it “the centrifuge” where all the rosy prognostications get spun out in ever more nauseating abundance.
Per the MLS, active listings for the East Bay Area stand at 13,806 as of today. This is for SFH, condos/townhomes. Back in April the number was approximately 8,100. That’s a 71% increase in less than 4 months! Another thing I notice is how many of the listings report the home as being vacant, or being owned by a realtor. I don’t take the time to do an accurate count, but I can say with confidence that it is a fairly significant number. Much higher than I would have expected. In other words, there is no “shortage of housing.”
Ca Guy….Anecdotally, Three houses in a row across the street from me in my 15 year old Antioch, Ca. neighborhood sit empty…two with knee high weeds in front, the other recently vacated and “for lease”….another on my side of the street empty and “for rent”….
Common guys, keep building. I’ll be buying next year and need a pool of houses to buy from!
common = come on
Builder analyst issues a tsunami warning…
——————————————————————————-
Second-quarter reckoning for home builders
Housing downturn setting in for investors and companies, analyst says
By John Spence, MarketWatch
Last Update: 3:56 PM ET Aug 4, 2006
BOSTON (MarketWatch) — An ugly second quarter for home-builder earnings has killed any lingering doubts the U.S. housing market is facing a steep pullback as the bad news came like a “tidal wave” this reporting season, according to Susquehanna Financial Group analyst Stephen East.
“We believe participants in this sector will look back and say this was the quarter that reality set in for both investors and management teams,” East said in a Friday research note.
“Widespread land option write-offs, some land write-downs, plummeting order rates and gross margins, skyrocketing cancellation rates and newfound stinginess with cash flow highlighted this quarter’s earnings pronouncements,” he added.
http://tinyurl.com/oopg4
Looks like the home builders are going over the Niagara Falls in a barrel.
The Victorville Daily Press. “In response to a slowdown in home sales, builders in the High Desert are reacting in different ways, some predictable, others not.
My mom lives in Victorville and it is going to be free fall - it is entry level at 300k??????? How many mexicans can live in one house?
I think the builders can still build houses. The contractors will be so desperate for work the builders can maintain their margins with significantly lower prices. All this means that people who paid 600,000 for a house (and have hocked their entire family tree for the next 50 years) will see the same house selling for 300,000 down the street.
Most unfortunate. I can’t say I have much sympathy. I can’t wait to tear the eviction notice of my 60% off McMansion in Victorville.
This in my neck of the woods (Sonoma Co). Christopherson Homes are renting a few billboards along the 101 freeway. They cover the full range of housing here. From 1109 to 3286 sqft — $400K+ to $850K+. Their website has a total of 19 (12 North Bay + 7 Sacramento) quick move-in homes. I should continue to check to see if this number increases.
http://www.christophersonhomes.com/quickmoveinnb.asp
Victorville, and surrounding area is going to become the next LA area section 8 housing. Someone will be lucky to sell their overpriced McShitbox for 300K, and ONLY be 300K upsidedown. I think it will get a lot worse for some of those recent lucky ‘homedebtors’.
just got back from a tour thru california girdling the sierra Nevada mountains. The RE Bubble mania is still in high gear even in some of the small mountain/desert vacation spots. Big billboard signs pushing new home sales are very prominent in every town/community i passed thru.
1.Area along route 41 from north of fresno to Oakhurst seems to be dominated by one Player; Century 21 Ditton realty.
2 Bishop area: Bishop and nearby communities are pricing homes from $300.000-1,000,000. Aspendell is a tiny mountain community 15 miles west of bishop along rte 168 at about 8000 ft elevation and features homes for sale at about a million.
Note: they never mention that Bishop has a large impoverished pupulation of Paiute Indians living in ragged homes/trailers on ragged lots. Tons of outdoor recreational opportunities in Bishop Area but few high-paying jobs.
3, Lone pine- A tiny but well-kept town and a favorite walking tour for east-side Sierra trippers. Cal equity locusts have been busy snatching up Homes here:one tiny fixer was purchased for $119,000. Decent sized(3 bd/2b spruced up homes on ample lots in LP and immediate vicinity seem to go for about $250,000. Another 700 sq ft fixer just off the center of town is listed for $175,000. Note: all of Lone Pine’s 1 dozen or so Motels had Vacancies - this on august weekend. Consumer spending slowdown may be hitting tourist regions.