The Housing Bubble

MarketWatch reports on the homebuilders. “Large home builders are dangling out more incentives to reluctant buyers as the roof caves in on the U.S. housing market. To entice customers, companies are serving up deals that include a free pool, a fancy kitchen or even a new car. But real-estate brokers say all buyers want is a cheaper house.”

“In September about 77% of home builders were offering some sort of sales incentive in response to spiking inventories, compared with 58% a year earlier, says Gopal Ahluwalia, at the National Association of Home Builders.”

“Forty-four percent of builders were reducing home prices, 4% were including a new car with the home and 5% were offering a free holiday trip. Underscoring the sharp pullback in the housing market, the NAHB didn’t even bother to poll builders on those three questions last year.”

“‘Inventories are at all-time highs,’ said UBS analyst Margaret Whelan. After the housing market peaked in 2004 and 2005, she said many large builders were caught with unsold inventories, which have bumped up even more due to cancellations. The companies that built so-called speculative or ’spec’ homes in an effort to squeeze every drop from the housing boom are now in the most trouble.”

“‘Home builders are generally using incentives now just to make sales happen,’ said analyst Todd Vencil. The more-speculative markets in recent years such as California, Florida and some other coastal areas are seeing the most incentives because inventories and cancellations are the highest.”

“‘Inventory does not ripen or get better with age, so the builders just want to move it,’ said Vencil. He said he’s heard the stories about some sellers offering free cars, which highlights how desperate some developers and builders are to attract buyers.”

“‘You see incentives in every market, they’re a marketing tool to get in front of customers,’ the analyst said. ‘However, there’s a difference between incentives for marketing purposes, and incentives to dump excess inventory.’”

“Among public builders, many analysts point to Lennar as the biggest user of incentives to protect its sales pace. ‘As we’ve continued to see weakening conditions in many of our strategic markets, we’re experiencing slower sales, higher cancellations, and greater use of incentives and discounting,’ said Lennar CEO Stuart Miller.”

“He said Lennar’s goal is to focus on cash flow at the expense of maintaining profit margins. ‘The best way to generate cash flow is to deliver our inventory..by reducing price to market pricing and converting inventory to cash,’ he said. ‘We have rigorously pursued this objective by using incentives and price reductions to sell homes and to back-fill cancellations.’”

“D.R. Horton CEO Donald Tomnitz said he thinks 2007 will be characterized by continuing incentives to move the existing inventory, which has largely been created by the speculators and investors having gotten out of the market.”

“‘Why are they out of the market? Because they can’t contract to buy a home today and resell it for 15% or 20% more,’ he said. With cancellations up and inventories growing, Tomnitz said D.R. Horton is trying to negotiate with buyers to close homes, noting ‘a bird in the hand is worth two in the bush.’”

“Delores Conway at the USC Lusk Center for Real Estate, said builders in California have gotten more creative with incentives. ‘The buyers’ expectations have changed a lot, they’re afraid of buying at the high point of the market, so they feel it’s to their advantage to just sit and wait,’ she said.”

“In Arizona, another hot market that’s pulled back, almost every builder is offering up extras to sell homes, said realty agent Edward Maddox. Maddox said one regional builder this summer offered a new Honda Civic if customers purchased a home during the month of July. ‘They’ll give you anything to sell the home,’ Maddox said. ‘It’s 180 degrees from last year.’”

“Yet Maddox and some other brokers said simple price discounts pique buyers’ interest more than gimmicky marketing incentives such as a free washer or dryer. ‘Most buyers are focused on lowering their monthly payments, and a new car doesn’t help with that,’ Maddox said.”

The Wall Street Journal. “The current housing slump is making remodeling a kitchen or bathroom or adding an addition easier and cheaper. Sluggish home-building demand is pushing down the cost of construction materials (prices for lumber are near their lowest level in a decade) and spurring contractors to take on smaller projects, and sometimes cut fees.”

“Custom and speculative builders are also starting to take on renovation jobs, picking up work they may have passed over just a year ago.”

“In Tucson, Ariz., Richard Fink, a custom home builder, used to do a few remodeling jobs as favors to former clients; now remodeling has grown to half his business. Samm Jernigan, a high-end custom home builder in Wilmington, N.C., said earlier this year he started ‘aggressively pursuing’ remodeling projects for the first time, and John Diament, a home builder outside of Philadelphia, says two months ago he started asking architects to send big remodeling jobs his way.”

“‘It’s good news for the consumer if you’ve got a lot more people seeking projects,’ says Gopal Ahluwalia, for the National Association of Home Builders.”

“Meanwhile, prices of framing lumber have fallen dramatically, says Shawn Church, the editor of an industry newsletter. The composite price per thousand board feet of framing lumber was $274 this week, compared with $375 a year earlier. Ken Simonson, the chief economist for the Associated General Contractors of America, says he expects to see a roughly 10 percent drop in prices of gypsum and construction plastics when government price data are released later this month.”

“The falloff is largely because of slowing new-home construction, which for several years had driven up the cost of materials. Growth in spending on remodeling has also slowed recently, a result of rising interest rates and homeowners who have postponed selling, along with presale renovations”

“The new environment means that homeowners are more likely to find contractors willing to take on projects quickly. ‘Rather than saying ‘call me next spring,’ they’ll be more likely to say ‘I’ll be over this week to the talk about the project,’ says Kermit Baker, at the Harvard Joint Center.”

“Contractor Don Sever in Oakton, Va., says he sees interest in remodeling starting to ease. He has trimmed prices by about 5 percent to attract more business. ‘People are much more cautious about spending that home-equity money,’ he says.”

“When Bruce Ash wanted to do a large-scale renovation at his Tucson home, he found Mr. Fink of Becklin Construction to take on the $700,000 project. ‘Normally, the market has been such that we could never get custom builders to remodel homes, but now, they are interested,’ says Mr. Ash, a real-estate manager.”