‘California Builders Delay Plans And Cut Prices’
The construction slowdown is in the news in California. “The Inland region’s economy slowed faster than that of any area in the state over the past six months, an economist who studies the area said. Economist Keitaro Matsuda in San Francisco, said local job growth had slowed mostly because of the cooling housing market. ‘Before, the Inland Empire had this tailwind from the housing market,’ he said.”
The Santa Rosa Press Democrat. “The construction industry, a major economic engine in Sonoma County, is scaling back home building as the housing market loses steam. Housing starts fell to a 10-year low in Sonoma County through the first half of this year as builders delay construction plans and cut prices.”
“The slowdown this spring and summer marks a dramatic turnaround from last fall, when builders were constructing new homes at the fastest pace in six years. ‘The velocity of sales has slowed. We haven’t put a new foundation in the ground for a couple of months,’ said George Casey, CEO of Christopherson Homes, the county’s largest home builders.”
“Overall, local construction companies have eliminated 600 jobs since the building boom peaked last October. Analysts warn there could be more job cuts ahead in the construction sector, which directly supports 14,500 jobs, or 7 percent of Sonoma County’s work force.”
“Permit drops have led to construction job losses in every housing downturn, said Ryan Ratcliff, an economist with the UCLA Anderson Forecast. ‘Usually you see permits turn and then six to nine months later you see construction employment start to turn,’ Ratcliff said.”
“In Sonoma County, construction activity began to sink three months ago. Builders pulled 841 permits to put up homes and apartments in the first six months, down 46 percent from a year ago. It was the weakest six-month pace since 1996.”
The LA Daily News. “The home-building sector received a pounding in the second quarter. And the hammering is going to continue in this quarter, too. ‘If bad news came in torrents in the first quarter, the second quarter was a tidal wave,’ analyst Steven 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.’”
“Some of this visited Calabasas-based The Ryland Group. Orders plunged 39.4 percent to 3,023 units from the like period in 2005, the second-biggest decline for the sector. Ryland CEO Chad Dreier said that selling homes is now a challenge in nearly every market. ‘While we knew that eventually there would be a slowdown in housing, this downturn happened quicker than expected,’ he said.”
“Sales declines are bigger in California. Weakness in the resale market is not going to help the new home market get out of its funk, either. ‘In the months ahead we can expect to see continued volatility in the market as many homebuyers remain on the sidelines to ensure they won’t be buying homes that could be in the middle of a downward turn in valuation,’ Hanley Wood Market Intelligence said.”
“Finally: E-mail from Happy Renter offers this observation on the observation of Jay Brinkmann, of the Mortgage Bankers Association, about the spike in foreclosure activity during the second quarter. Brinkmann: ‘There is nothing in economic fundamentals in household creation or job creation that is looking toward any kind of meltdown in housing prices. I think we are just getting back to a more normal market.’”
“Happy Renter: ‘Oh, yes! There is! Most people’s incomes aren’t going up, yet everything else that is necessary (food, gas, housing, medical) is going up.’”
As prices in California tank, what will happen to the state budget that relies heavily on property taxes?
From the first link:
‘The state ended its fiscal year in June with an extra $2.8 billion in the budget, the state’s second consecutive surplus. The previous fiscal year that ended in the summer of 2005 saw a $5.9 billion surplus. But Matsuda warned the surpluses might give the state government less incentive to overhaul the budget to avoid another crisis like that of 2001.’
‘He said in the report that without major budget changes and more cautious spending, ‘the next recession — which unfortunately will come eventually — is likely to put the state in the same predicament it found itself in a few years ago.’
June 2006:
“State negotiators and California’s largest state government employees union averted a possible strike by tentatively agreeing Saturday to a contract that will raise the workers’ wages by an average of 7.5 percent to 9.8 percent over the next two years.”
http://www.sacbee.com/content/politics/story/14269109p-15080272c.html
A little birdy tells me that California finances will look like a train wreck very soon.
..also, I have been reading little snips on possible ill advised investments in RE schemes for CalPers. I wonder to what extent the fund will be diminished after this unwinds?
Of the 50 states public employee pension programs, CALPers is in the top 2.
The only thing that will really torpedo the CALPers is the inherent unsustainability of pensions given the state of US demographics right now.
They can sell more Bonds, haha.
California tax free bonds for everyone!!!!
Ben, the State of California -spent or encumbered- $113 bn last year and took in $92 bn. Surplus is a very flexible term in Kalifornia.
“The Inland region’s economy slowed faster than that of any area in the state over the past six months,
- 40% of the new jobs were created by this madness.
‘Usually you see permits turn and then six to nine months later you see construction employment start to turn,’ Ratcliff said.”
- This must be the time that the public FINALLY realizes the jig is up.
The race is on. Can we finish 2006 before the recession is official and/or undeniable? The MSM is getting more alarming every week.
How about a proposition amendment that would keep property taxes from DECLINING more than a given percentage per year?
CA relies less on property taxes than other states due to Prop 13 limiting rates. CA relies disproportionately on sales taxes.
Actually, the state relies mostly on income taxes, whereas the cities & counties on retail sales taxes.
Not just property taxes — income taxes, retail sales taxes, etc. will all take major hits. There won’t be any way out this time short of massive government job cuts.
The builders have a plan:
‘Housing development took an odd turn in the first half of the year. Developers did something they rarely do in Orange County. They focused on apartments and condos instead of houses. The shift away from houses is unusual for Orange County, said Ben Bartolotto, research director with Construction Industry. It shows that developers today are responding to the high cost of land.’
‘To stay in business in Sonoma County, builders increasingly must find ways to put more homes on less land. The latest project by Santa Rosa builder Cobblestone Homes is an example of the urban housing going up in more cities across the county. At 13 homes per acre, the project has a greater density than a more traditional subdivision with four to five homes per acre.’
I live in Carlsbad, north San Diego county. Yesterday, I drove through Aviara, La Costa, San Elijo Hills and then Lake San Marcos looking for “sold” or “sale pending”…signs. What I saw was absolutely unbelievable! Hundreds of for sale signs and not ONE sold sign! I also noticed the open houses of coarse. Same story- you just drive by and think to yourself: Man that realtor must be bored! I personally know five people who are in bad financial shape because of exotic loans and CANNOT sell their houses here in so Cal. They can’t even get a person to look at their house. California is cooked! I wish I could fast forward to 2007. What an ugly year that’s gonna be!
Along Rancho Sante Fe you now see those “www.dumpingcondos.com - Auction” signs. I counted the numbers of homes I could see for sale on my route to the 78 to work on an average day and stopped after about 40 in 15 minutes.
“What I saw was absolutely unbelievable! Hundreds of for sale signs and not ONE sold sign!”
Surely you jest! Because there is no mention whatever of any inventory glut in the Homes section of the Sunday SD Onion-Tribune; instead, the lead article focuses on the omnipresent San Diego housing SHORTAGE. (Never mind those silly articles you saw within the past six months which presented hard statistical evidence that more people have recently left San Diego than moved here, or the fact that housing inventory, including newly built homes and current construction underway, is probably at an all time high relative to the population size…).
——————————————————————————————-
A growing dilemma
Land-use planners discuss ways to handle county’s burgeoning population
By Lori Weisberg
STAFF WRITER
August 6, 2006
As San Diego County’s population continues growing and land to house its residents diminishes, urban planners struggle with ways to make an increasingly difficult equation pencil out.
Smart growth – building up and close in – has been the mantra for years among land-use professionals, and the development industry is now responding, more out of financial necessity than because of planners’ persuasiveness.
http://www.signonsandiego.com/uniontrib/20060806/news_lz1h06planner.html
It sounds like these “planners” won’t stop until they have made San Diego totally unlivable. I can’t believe that they want to reduce the ratio of parks to people and rip out houses to build condos.
We’ve been noticing here in the OC (Irvine) the trend towards taller developments. Virtually all of the new apt /condo complexes are 4+ stories. Vaguely reminiscent of Soviet-era housing, but in earth-tones.
13 houses on an Acre ? My last house was on a third of an acre and even that put me closer to my neighbors than I would have liked !These guys are building the tenaments of the future.
Owning those homes has the benefits of condo/apartment without sharing the same walls. You can hear everthing your neighbors say and get free 2nd hand smoke.
The way planners calculate density makes this even worse 13 du per acre includes their wide streets and sidewalks. They need those wide streets because there isn’t enough driveway for people to park their cars. Because there are so many house so close perversely there still isn’t enough parking because of so many driveway cuts and fire hydrants, sidewalk buffers, etc.
The way planners figure 13 du per acre is 2600 sq ft lots. IOW, don’t bend over in your own shower!
(Most people’s incomes aren’t going up, yet everything else that is necessary (food, gas, housing, medical) is going up.’”)
and their purshasing power in terms of homes has declined by at least 50%. it’ll be tough to weather a downturn with a negative savings rate.
Add to that toughness:
It will be difficult for California to attract any new jobs until home prices drop. Right now, we’re seeing business trying to cash out of the state for the land value (e.g., six flags).
It amazes me how the majority of this states residents cannot understand that wages are required to support housing prices!
Every time homes have gone up to 8X times the median salary, they drop back here to 6X. With homes at 10X the median salary, suicide loans, middle class jobs leaving the state, and layoffs (at least in my industry)…
We’re in for a world of hurt. And bond buyers have lost their appitite for 80/20 backed loans with false appraisals. More and more lending institutions are finding the appraisals contested and the bond buyers forcing “buybacks.”
Traditionally, people eat into their savings to “ride out” a recession. Not this time. Forget another HELOC… soon the lenders will actually stick to reasonable appraisals to appease the bond buyers.
I cannot wait until the dinner party switches back to “how will I ever save a 20% down payment.”
Not to mention I cannot walk 50 feet at work without bumping into someone with an investment property…
Or all of the “unintentional flippers.” We have people who are to retire soon who bought into Idaho, New Mexico, or other “low cost” areas yet still hold their CA residence until whatever future date was selected for retirement. So this will cause multiple markets to take a haircut. Some are getting smart and selling their CA homes “cheap” (relative to the 2005 market) while others will find they have to postpone retirement and will thus sell the “retirement home.”
I’m very curious what the coworker with 5 flips is going to do… Hopefully shut up about how much money he’s made in real estate. While I hope he gets out ok… Reality might hurt.
Neil
Awareness of what the future holds for California after this part of the cycle is quite high in Sacramento.
They are doing what they can (which is not much) within their purview to slow/prevent the next phase of reattaining housing affordability.
Can’t say much more than that.
“I’m very curious what the coworker with 5 flips is going to do…”
I can’t wait for some industry insider to leak the evidence on how many US real estate investors own 5 houses. The feigned shock among real estate industry representatives and regulators will be priceless!
If housing prices in California have gone up, let’s say 200%, since 2002 (give or take some percentage points based on a specific local, the exact amount isn’t the point to be examined). Have construction cost really gone up 200% in that time period also?
Have construction costs for commercial buildings gone up by the same rate?
Have houses gotten bigger? …fancier? Are lots bigger now (I don’t think so).
I suspect home builders can make money (maybe not the same bag fulls) from selling houses if they could just get people to buy.
Help me out here…
JD, builders in California could make money with new housing prices a third of what they are now.
Not so…builders might average a 10% profit for each house based on the initial land purchase. Of course, as prices rise in subsequent phases of development, they stand to make more money. However, if the builder bought its lots from the Irvine Company, its land sales contract regulates the builders profit to a fixed spread. It’s the land developer that makes the money…many “paper” lots in Southern California have exceeded $500,000 per lot.
JD — that is the point I try to make to my wife, who understands the bubble but is antsy to buy back in. Builders in most areas have (1) experienced higher materials and labor costs in the short term than they were accustomed to; (2) built a ton of profit into their homes, probably far more than in any previous time, taken nationwide. Now materials and labor are decreasing AND the builders can reduce their profit margin a lot ino order to keep building and keep their valued subs employed. To me, this spells a massacre for people who bought during the past 2-3 years, particularly in neighborhoods that are still under construction. New home price cuts will lead the way and used-home cuts will follow — down and down and down. Once the gloves are off in the MSM, I think builders will drop the pretense of trying to protect recent buyers’ prices and wage an all-out price war. They do it with cars all the time; no reason not to with houses.
Chip, I completely understand your wife’s desire to buy back in. I sold out at the top, and I am glad I am not having to pay Florida’s tax, insurance and energy increases, but in many ways I wish I still had the house and I have to admit, I think renting sucks, although it is the right thing to do at this time. I hate the instability of it. I rented the cheapest dump I could find that was still in a relatively safe area, so as to hang on to my hard won savings. While most of my neighbors are basically OK, there are a few low-lifes here and domestic disputes are not uncommon. I am beginning to get a real education on why there is a jump in suicide among children and high-schoolers these days. Not to mention that you have to put up with the method of pest control the apartment complex has contracted for. I nearly had a heart attack one day when I came home to find some joker from the pest control company with his little tank strapped to his sagging beer belly, squirting toxic crap all over my kitchen.
So, I want to buy back in as soon as the time is right, and I was very disheartened to read Charles Hugh Smith’s essay with graphs illustrating that the bottom probably won’t be reached until about 2014. I just hope that his calculations will be off and that we will see bottom a lot sooner because of the internet effect.
Hm, I think you should be looking for a nicer rental wherever in Florida you are. I know they exist. But the picture you paint of your place sure ain’t pretty. Look for a nice townhome or SFR that has been owned by the same owner for a long time (say, >15 years).
buy back in ? roflow
xmas eve 2007 might even be early
lumber has gone from $ 460 down to 276 in thelast year
The FHA is trying to “help people to buy”, with a new bill that just cleared Congress to let the FHA offer 100% financed mortgage deals. Didn’t the FHA used to require a 3% downpayment?
Traditional lending standards, which required buyers demonstrate credit-worthiness by saving up for a downpayment before qualifying for a loan, have been gutted by the government and the lending industry. It is so completely obvious that the adverse selection problems created by these zero-money-down programs will end badly, with the costs shared by anyone foolish enough to be financially responsible, that it makes me want to tear my hair out. Stupid, stupid, stupid…
———————————————————————————————
NATION’S HOUSING
KENNETH HARNEY
House approves bill giving FHA new lease on life
August 6, 2006
WASHINGTON – Moderate-income home buyers got a big boost from Congress at the end of July, when the House voted 415-7 to approve a bill revitalizing the federal government’s biggest mortgage program – the Federal Housing Administration (FHA).
The bill, which now awaits Senate action, would allow the FHA to offer zero-down-payment loans for the first time, increase permissible mortgage amounts substantially in high-cost markets, and provide low-interest rates and consumer protections that are rarely available from “subprime” mortgage lenders.
http://www.signonsandiego.com/uniontrib/20060806/news_1h06harney.html
GS brace yourself, are you sitting down?. I agree with you 100%. Welcome to Phase 1 of the bailout. The PPT is showing up in the housing industry. This is a very bad idea. FHA is going subprime subprime. Here’s something you missed that is very telling:
“The bill would authorize the agency to charge lower insurance premiums to applicants with lower risks of default – a standard operating procedure in the private marketplace. By the same token, borrowers presenting high risks – low credit scores and histories of prior defaults – could be charged higher premiums than they are today.”
What that basically means is foreclosure carries no penalty. Anyone and I mean anyone will be able to buy now. They are trying to cap the plunge. When you open the door like that people become way more willing to catch a falling knife. This is very interesting and deserves a thread by itself. I’ll have to watch this very closely and see what the senate does.
“What that basically means is foreclosure carries no penalty.”
I read that, but I don’t get how you moved from “The bill would authorize the agency to charge lower insurance premiums to applicants with lower risks of default” to “foreclosure carries no penalty.” Maybe I don’t understand how FHA insurance works; does it mean that if I get in on an FHA loan, then I never have to worry about giving up my home, regardless of my ability to make payments? If so, please tell me what I need to do to qualify, and fast…
If only you knew how close to the truth that was.
“WASHINGTON – Moderate-income home buyers got a big boost from Congress at the end of July, when the House voted 415-7 to approve a bill revitalizing the federal government’s biggest mortgage program – the Federal Housing Administration”
I get the sense that this is a political ploy by the Bush Administration to boost it’s standing among Minority voters. Moderate-income sounds like recent immigrants,e.g Hispanics, who are most in need of government assistance in obtaining Mortgage loans.
This measures sounds just like a complete SOP,giveaway,election-year ploy aimed at traditional Democratic constituencies such as Hispanic Immigrants, and other low=moderate income groups.
It is a political ploy. But there is more to it than that. It’s called solidifying the foundation. Here’s the thing right now H.U.D. at least in my area has 0 inventory and has been sitting on zero for quite awhile. They made a nice little profit getting to zero btw. But here’s the thing they had been churning that inventory for quite awhile sell it buy it back sell it buy it back. One of the things that was giving the Los Angeles market it’s base ie: if the ghetto(H.U.D. properties fall in this description) is selling for this then the next level must sell for that. I know this is not clear but it’s hard to explain this particular ponzi scheme to the laymen. But if that passes the senate the bears lose.
CA makes the builders pay for a lot of city improvments, they pass this along in the cost of a home. Otherwise the builder adds Mello Roos taxes. These are very unpopular taxes but it decreases the cost of the home quite a bit. Moorpark had some of these for sale. Maybe Robert C. knows how they are selling?
Its where they discovered mammoth bones while excavating.
“These are very unpopular taxes but it decreases the cost of the home quite a bit.”
Did you mean M-R fees hide the true cost of owning the home quite a bit? Because I suspect the typical buyer pays more attention to the purchase price, and tends to underestimate the present value of ongoing costs like Mello Roos, HOA dues, taxes, insurance, interest payments, and maintenance.
Yes the true cost. Thanks.
Have construction cost really gone up 200% in that time period also?
Not even close…Actual costs are down. Think about this… Builders lock in labor and material costs way ahead of constructions. Materials (lumber) exports from the US+Canada is still plentiful.
higher density housing is fine, the problem is if those people have cars then you’ve got more traffic jams.
John Law,
I agree. The liberal dumbsh!ts seem to miss this point — more density of housing implies worse traffic on the freeways; just ask someone from the SF Bay area or Portland if you need evidence (and these are two areas where density is far higher than average). Even Sierra Club members generally own and operate automobiles…
The hope of these planners is to create enough “friction” to entice people to not own cars in the dense urban places.
the only place in CA that meets those criteria in my mind is the bay area with BART and SF Muni.
Despite limiting my Bay Area commute to a total of two miles on I-80, I nonetheless spent an inordinate amount of my day on the freeway. This idea that density and limited road space will “entice” people to not own cars is a pipe dream of enviros which is severely contradicted by the eveidence the first time you drive on the Bay Area freeways with your eyes open. The only reason the Bay Area (and SD, for that matter) have less severe automotive exhaust pollution than LA is that the San Gabriels are a far higher hurdle for the prevailing westerlies to clear than are the San Diego mountains or the Diablo Range (the Bay Area coastal range). It is also rather ironic how the environmentally sensitive Bay Area liberals export their automotive emissions (made far worse than they need to be due to gridlock conditions) to hapless Central Valley residents, who suffer from some of the worst air quality in the USA.
Yep. The lib press won’t mention that. But the Central Valley residents know the biggest amount of dirty air is blown inland from San Francisco, Oakland, and San Jose metro areas, rather than from the tractors on the farms. That and the insults for being called cow town residents by the bay area residents, to add insult to injury! It’s no different than your neighbor dumping his trash over into your backyard and calling you an idiot.
In a sense the Ultra -Libs,environmentalists, who still have a strong following in the State government, created a lot of the mess in California thru restricting growth(Smart Growth, or in Santa barbaras case, no-growth) along the coasts, forcing folks to flee to cheaper housing in the Central Valley.Inland empire regions. Result is that folks inland have to suck on the pollution blown in from the coastal areas. Plus increased urban growth in the Central Valley is killing the Pine trees in the Sierra Nevadas.
Worst of all, the major envirionmental groups such as the Sierra Club have not uttered a peep regarding the explosive increase in California’s population caused by,you guessed it, massive illegal immigration into the state, which has resulted in the explosive population increase , and resultant expolsive urban growth in the Cent valley/Inland empire. This has resulted in the almost complete disappearance of open pasture and farmland in the Inland empire, as well as Smog problems in then central valley.
“Even Sierra Club members generally own and operate automobiles… ”
And big SUVs, in many cases, as I’ve seen on bumper stickers. Last weekend on my Las Vegas stop on a connection from Los Angeles to Phoenix, I stood next to a family with four children. The father, around my age, was wearing a t-shirt promoting some “green” preserve. One of the kids too. All those mouths to feed, and I would guess four future SUV owners if the Middle East has any oil left by the time the oldest is able to drive. Ha!
Folks, did you not know that the California Bureaucrats, agency planners, utopians, basically believe in the concept of “social engineering”. That is, they truly want to impose their concepts of Land use/planning, population control and engineering thru such devices as the massive Scal metro rail system(which has not solved the SCal traffic gridlock one iota), car-pool lanes,ect. What happens is that Urban land use planning/transportation concepts imposed from above by Geeky Gov’t bureacrats in tucked-away little cubicles cannot deal with Scal urban reality. The reality is this: millions of illegals flooding into SCal untracted and unaccounted for, clogging the streets and highways and causing unplanned and uncontrollable urban immigrant-induced sprawl. The Geeky Government planners cannot deal with this because to do so would invited cries of racism.
Nothing will be done about this, expecially in California’s liberal Climate of political correctness, and we will continue to have ugly urban sprawl patterns and nightmarish commutes, which will get even worse as Government planners and builders start putting up more condos/apts in already densely populated coastal areas.
is it me or is it tough finding correlation between the price of lumber and housing?
Lumber
I guess we need an inflation-adjusted chart.
I think we are just getting back to a more normal market.’”
Okay. what’s normal?
‘There is nothing in economic fundamentals in household creation or job creation that is looking toward any kind of meltdown in housing prices. I think we are just getting back to a more normal market.’”
- Where do these jackass folks keep coming from?
See? There is nothing that can puncture a permentnatly high plateau.
The fact that the spin doctors even mention “meltdown” and “crash” and “pop” tells me that this a real possibility. The boosters are PAID to be jackasses.
“It is difficult to get a man to believe something when his paycheck depends on him not knowing it”.
Jay Brinkmann=Ostrich
Re: Fl. Insurance
http://tinyurl.com/f3gxr
” There’s a lot of people I’ve talked to who say, ‘Just till my kids get out of school and I’m out of here.’ ”
Allstate Floridian Insurance Co. alone is shedding about 269,000 property policies statewide….
In that article, “Florida insurers say claims from the eight hurricanes in 2004 and 2005 wiped out their surpluses, even though they collected higher home and condo premiums for more than a decade after Andrew.”
This is typical of media distortion or, at best, failure to illuminate. The phrase “wiped out their surpluses” refers to a number that should be pretty easy to corroborate: what was the surplus then and what is it now?
But the phrase, “…even though they collected higher home and condo premiums for more than a decade after Andrew” is almost useless. How much WAS that? It could have been 0.005% higher each year and that statement would be true. So we are left with absolutely no idea how close the premium increases came to closing the gap between surplus / adequate reserve / deficit, and are given the impression by innuendo that the insurance companies screwed the populace.
The whining politician who clearly implied that greater competition did not take place, contrary to the natural function of a free market, did not bother to speculate about why that is so, if indeed it is true. It is not in his political interest to do so.
Unelect ‘em all.
Thanks for the article, Eastof, very enlightening. It in part supports my position that insurance companies, in the long run, don’t have losses, unless they are stupid and underfunded, like the smaller players that went belly up after Hurricane Andrew. I have a strong disagreement with the local politicians about having a national catastrophe pool, because this will just encourage all the toxic development in Florida. Nobody ever mentions that all these billions of dollars in losses come from homes that are built in places where they shouldn’t be, not to mention the fact that someone has to pay for all those granite countertops that get blown away, and the miles of soaked carpeting after flooding (if you live on the ground floor of a multi-story building, or in a one floor home in Florida, carpeting is a REALLY bad idea, even from a health standpoint). And every time I see one of those office towers go up with facades of gleaming, reflective glass, I just cringe. Not only do they add heat to the already warm Florida climate, but we always joke that during a hurricane, those facades pose a “slice ‘em and dice ‘em” hazard.
“In the months ahead we can expect to see continued volatility in the market….”
Volatility implies changes in both directions. The gold market is volatile. The housing market is not volatile, it simply is declining. Recent data shows there is little risk in the housing market. Risk is the uncertainty of an outcome. If you buy a house today there is a strong probability you will lose money tomorrow.
(I have been reading little snips on possible ill advised investments in RE schemes for CalPers. I wonder to what extent the fund will be diminished after this unwinds?)
calpers has still sold billions in real estate the last few years, even if you do factor in their Sacramento investment and their India investment.
anyways, it’s like 5% of their assests if I’m not mistaken. they probably only hold it because they don’t want to disband that unit and it is probably for diversification purposes.
Ryland CEO Chad Dreier said that selling homes is now a challenge in nearly every market. ‘While we knew that eventually there would be a slowdown in housing, this downturn happened quicker than expected,’ he said.”
Chad Dreier CEO of Ryland Group (Home Builder)
Original Base Pay 1995… .$600,000
Annual Income 2005…….$18,173,976
Stock Options…………….$6,396,000
For Ryland CEO, Talk Of ‘Bubble’ Is Full Of Hot Air
BY KIRK SHINKLE
INVESTOR’S BUSINESS DAILY
Adapted from article published
Dec. 16, 2004
Chad Dreier spent the last decade helping erect one of the nation’s top 10 home builders.
As chairman and chief executive of Ryland Group, he’s seen markets boom and bust all over the country while guiding his firm to record profit the last five years.
IBD caught up with Dreier to talk about the health of the industry, his read on a few local markets, and what happened to all that talk of a housing bubble.
IBD: We spoke a year ago, and my first question then was about the housing bubble. What happened - or, rather, didn’t?
Chad Dreier: A year ago lots of people were talking about it. Obviously, it didn’t happen and we don’t see it happening in the future.
People were really preoccupied with the tech thing. People forget housing is a real asset. At the end of the day there’s just more demand than there is supply.
In fact, the slow-growth and no-growth movements put a damper on supply, so that sort of keeps home builders from building more houses. I think that’s a pretty good set of factors for us.
…
IBD: You’ve predicted flat margins for next year. Why is that?
Dreier: Some of that is being conservative, but the markets have had a good run. House price increases will be offset by material price increases. So right now we’re saying they’re flat.
IBD: It’s not housing prices coming down?
Dreier: No. I just don’t see that. Even in the tougher parts of the country you don’t see prices going down very much. With new homes that doesn’t happen very much.
IBD: What about markets that seem overheated now, like Las Vegas where your rival Pulte Homes recently offered a mea culpa for overpricing its homes? Are there any places you’re worried about?
Dreier: Well, I’m always worried. When prices pull back, like you saw in California in the early ’90s or in Boston in the mid-’80s, you have to worry about it.
But we haven’t seen our cancellations go up, and I haven’t seen incentives change much. Right now, we’re cautiously optimistic that next year we won’t see any of that.
http://www.investors.com/yahoofinance/2005w12/storyA06.asp
“People forget housing is a real asset.”
So were tulips.
That is way harsh. After the correction most of these homes will still be worth tens, possibly hundreds of thousands of dollars. Most of them.
Harsh, yes. And a direct comparison isn’t fair, but the point is anything someone else wants (at any price, above or below what you paid for it) is an asset. So saying that it is a “real” asset after it falls in value 10 - 50% on a 700K investment is not much consolation to the bag (scratch that), asset holder.
It is somewhat amazing that tulip bulbs could have been the underlying asset for a mania, given that they can be cultivated. The story that California is running out of land around San Diego (contrary to highly visible evidence of an ongoing construction boom) somehow seems much more plausible than the idea that a sufficient number of tulip bulbs could not quickly be raised to outstrip any conceivable level of demand.
In today’s SF Chronicle, there’s a syndicated article by Kenneth Harney on the new FHA bill passed by the House (it’s now being considered by the Senate). The bill does all sorts of questionable things, including offering zero down payment, FHA-backed products to subprime borrowers at low rates. (Great thinking, Maxine Waters!) The one thing I couldn’t figure out is if the bill actually raises the FHA loan limit of $417,000 in high-cost places. I didn’t see that it did, but I’m concerned because I live in the Bay Area, where $417K for a house is a long-ago memory. If they raise the FHA limits to some sort of “median” price, I’m afraid that prices here will never drift to their natural, lower levels. The article struck me as a little confusing: Did the bill passed by the House raise the loan limits in high-cost areas or not? Any input much appreciated.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/08/06/REGH1KB0Q11.DTL
I posted the SD Onion-Tribune’s version of Harney’s column above (probably the same as sfgate.com’s). This paragraph concerns your question:
“In high-cost areas, the FHA maximums would increase to the median home price level, but not beyond the loan limits of congressionally chartered Fannie Mae and Freddie Mac, now set at $417,000. The Fannie Mae-Freddie Mac limits move up annually as home prices increase.”
My reading is the loan limit would currently be set at the lesser of $417K or the area median (however determined). Like in the SF Bay area, $417K is far below the current median for San Diego. Still, the bill could have the effect of creating a subprime floor below declining prices in the markets formerly known as frothy, and sharing the cost of doing so across the US Federal tax base. After all I have read about the hoardes of buyers purchasing homes they cannot afford, I am highly skeptical about the FHA’s claim that they can control the risk created by offering 100%-financed loans. My sneaking suspicion is that this does not matter much to them, given that they will be above to ask all US taxpayers to help out in the event that their assumptions prove faulty.
“they will be able to…”
Thanks, GetStucco. Everything about so-called “affordable housing” programs drives me nuts. I absolutely do not see why we — and this really is a “we,” since all of us fund the FHA through our taxes — should be rushing low-FICO people who couldn’t even afford a 3% down payment (FHA’s current minimum dp) into their own mortgages. It’s just ridiculous. Hopefully the bill will die in the Senate, which seems to be happening a lot these days.
“3% — FHA’s current minimum dp”
In case you missed it, the new bill proposes to lower the dp to 0%. Didn’t anyone learn a thing from the 1920s, when margin loans (the stockmarket equivalent of 0% downpayment borrowing to purchase assets) led to the Great Crash? Or is this connection a hard one for Congressmen and their staffers to grasp?
The timing of this bill, passed at end of july, three monthes before the midterm elections, leads me to believe that is is a politically-motivated ploy which completely disregards sound financial/economic sense. Both the Dems and Republicans are out to show that they care about the poor and economically disadvantaged who are locked out of home ownership in the overpriced Re bubble cities(EG San francisco, Los Angeles). Thus the overwhelming vote(415-7)from the house, without any scant regard for the effect this bill might have on allowing the RE marketplace to float down naturally, and weed out irresponsible, financially stupid borrowers.
This Bill is a response to the Cries from Low-income groups and their DC lobbyists about housing affordability. It is nothing but election-year political pandering. This shows that our Government will make decisions based solely on short-term political survival rather than sound long term economic principles.
“I think renting sucks, although it is the right thing to do at this time. I hate the instability of it. I rented the cheapest dump I could find that was still in a relatively safe area, so as to hang on to my hard won savings.”
I am lucky that I live in a nice neighborhood and my rent is inexpensive, plus it’s under rent control so it will only go up 3% per year. However, “owning” would be much nicer, of course. To have your own home and back yard and all that, but at what price? In todays market most people have to put everything towards their house and God forbid if something happened like a layoff, kid got sick, other emergency… so there is definitely more instability in
owning today than it is in renting. I am not an economic expert and I don’t even care about all the charts I see. I just see prices going up and paychecks don’t keep up so it’s not difficult to figure out. I have a variety of friends, some low income, middle income and higher income and even those in the $100,000 income bracket are complaining.
Hang in there! I don’t think you will have to wait too
long before you’ll be able to get back in again.
““owning” would be much nicer, of course. To have your own home and back yard and all that, but at what price? In todays market most people have to put everything towards their house and God forbid if something happened like a layoff, kid got sick, other emergency…”
Emergencies? Emergencies be damned! People have gone overboard, period.
3000+ sq. foot houses (when under 2000 sq. ft would be more than comfortable); Gas guzzling Hummers, Escalades with LCD tv’s mouted in the seats, boats, RV’s and other unecessary toys.
But now the kool aid’s worn off. Gargantuan utility bills knocking at the door (gee, was it really important to keep that 400 sq foot unused foyer and 4th and 5th bedroom(s) cool during the heatwave?) Now the ARM has reset too. That stings, doesn’t it? Jesus, honey why didn’t we read the fine print on the loan(s)? What were we thinking?
Well, you weren’t thinking…at least with the logic needed to survive this bubble. Your thinking was limited to logic contaminated by greed, fear, and a total lack of patience and prudent pause.
You’ll want to sleep and dream it was all just a nightmare. But…
Reality will be waiting when you wake up.
Every detour still brings the same destination…with the same sign that reads. There is NO FREE LUNCH; there is no real, valid, worthy gain–without commensurate effort exerted to achieve it.
There’s your bed. Go take a nap.
DOC
“The construction industry, a major economic engine in Sonoma County, is scaling back home building as the housing market loses steam. Housing starts fell to a 10-year low in Sonoma County through the first half of this year as builders delay construction plans and cut prices.”
Cutting and running? I thought they would have stayed the course!
Yesterday, I talked to a administrative staff for a national construction company building in Modesto. He said construction has stopped and cancellations are up. He also commented on the AOL type appoach to cancellations: staff put pressure by offereing incentives after incentives, saying this is a great deal, we’re reducing the price, giving you upgrade.
Talk of the homebuilders reminds one of the irony of the housing bubble. So long as prices remain “high” and we all know they’re high, there’s a significant incentive for homebuilders to keep on a-building.
They’re going to keep cranking houses away (of variable quality, of course), while the “flippers” who’ve bought some of those houses will be thinking “There’s going to be a housing shortage!!!”.
The difficult moment arrives when in the middle of building/selling off a single development, the homebuilder undercuts (hugely in many cases) the prices of the flippers who bought homes in the development early on. The early homes sold high, the later homes sell less high, but the flippers who bought the early homes are trying to sell the same models ultra-high.
Not a pretty dynamic.
Of course, even non-flipper buyers (who just want to live there) become depressed because they see their same model go for much less money, and they see more attractive models go for the money they paid for their dwelling. Very sad.
“Not a pretty dynamic.”
Flippers who believed they were 100% certain to make easy money getting burned instead? Sounds as pretty as poetry to me…
Question:
Disney, Sony, and the other big studios have cut production dramatically… How the *ell has the pain from that *not* made the news? Yes, its *not layoffs,* its just not hiring contractors… I cannot think of a larger pool of high paid people who could have received an income “hair cut” in Los Angeles than those who support the movie studios. Yes, I know TV and ad production is up… but I’m having trouble believing that its enough to absorb the huge pool of now clientless contractors looking for clients.
Last I heard, its all about “shooting days” in the industry and a movie employs a *ell* of a lot more people per shooting day than ad or TV production… So I accept that good directors, etc. are probably getting full employment… but that leaves a lot of carpenters, actors, painters, and others looking for a paycheck…
Can anyone fill me in on what I’m missing? Or is the pain there, just not in the LA times (or horrid local TV)?
Neil
Officially 12 million or so people live in the LA area, plus however many millions of illegal immigrants. Despite it’s hugely self-inflated image, the movie business is relatively small. Probably the largest pool of highly paid people in LA is lawyers, followed by doctors, then the ‘import-export’ business. The first two are going to do pretty well, particularly those lawyers who chose to go into the previously humdrum RE area of law, followed by doctors who are going to be cranking out even more prescriptions for antidepressants than ever.
http://en.wikipedia.org/wiki/Los_angeles#Economy
Thanks for the link. I should have wikipedia’d this myself.
Neil
Yes, it *is* layoffs. Disney laid off 1000 people at the film studios last month. Warner Bros laid off about 500 in January from their Glendale office. I just heard of layoffs at Sony Pictures, but I don’t have the numbers. This stuff usually shows up in the LATimes, but finding it online after more than a day or two has passed is another story.
The thing about lay-offs like these at major studios is their ripple effect. I heard somewhere that for every one Hollywood studio job lost, there are two auxiliary jobs that are negatively effected — people with careers like stylists, caterers, makeup artists, personal shoppers, interior decorators, massage therapists, costume designers, landscape architects, the list goes on and on. I certainly see this in my friends (and friends of friends) in LA — many of whom are in that gigantic, fairly well-paid subculture of people who make their living off of the Hollywood lifestyle, even if they are not directly employed by a studio.
A question: why have they cut production?
I was born and raised in the SFV. Most of my friends (who I grew up with) are employed either in the entertainment industry (about 60%) and construction (roughly 40%). Agree that most don’t realize how big the entertainment industry is, esp for the support jobs (grips, production equipment, recording engineers, prop design, camera operators, etc.). I’ve been hearing about the slowdown in the ent. industry for awhile now. This thing is gonna hurt LA at least as much as the aerospace layoffs. Construction slowing as well. Heard from a friend the other day that, “houses just aren’t selling.” Was thisclose to having to sell boat and truck last week (before finding some work for the time-being).
IMHO, we are **in** a recession already. Numbers just aren’t showing it, yet.