Tide Turning for Builders

We went to a few open houses today. There were anywhere from 2-6 people at several of the open houses, but none of the houses we visited had any offers on the table, though the traffic has picked up.

All open house agents expressed that there have been no buyers. Where there once were bidding wars, and rhetoric of not enough houses for sale to meet demand, and houses selling in a weekend, now there are listings popping up like mushrooms.

At two of houses we visited today, talk turned to local builders and the cancellations they have had. This information was shared in a manner that indicated it indeed is a bad omen regarding the lack of buyers on the horizon.

The builders of Sonoma's McMansions have told a story about land being scarce, they aren't making anymore land... and it seemed for a while people were lining up to get into the limited supply of newer houses requiring no remodeling.

Now, apparently the story has changed. Not only are the existing homes sitting on the market, getting reduced multiple times, re-listed with a new mls # and listing date, or pulled off the market entirely, but even the builders are experiencing something unheard of to the newer agents.... cancellations. People walking away from big deposits to avoid $900k+ of debt.

We have no statistics yet to demonstrate just how many Sonoma County builders are experiencing cancelled orders since they haven't spoken out publicly yet, but it seemed like every person we spoke to had a story of knowing someone who backed out of buying a McMansion from Montini and a couple other local new developments.


Here is a little tidbit from builders in other areas...

"Buyers have stretched their finances to the limit in recent years to buy the homes of their dreams. Those buyers, and the market they helped build, are stretched to the limit."

"Prices for land and construction materials have skyrocketed in recent years. Interest rates, while still low by historical standards, are rising for both builders and buyers. The result is a widespread loss of affordability, McIlwain said."

"Now, the tide might be turning, in part because homes have gotten too expensive for prospective buyers."

"Builders who came through local planning boards carrying plans for a dozen 3,500-square-foot homes and visions of $700,000 price tags are chopping hundreds of feet off those homes and tens or even hundreds of thousands off their price tags."

'"We find ourselves doing homes "¦ that I never would have thought of two years ago," said Dan Fini, a local builder who just began work on an eight-lot subdivision in Hamptonburgh."

"Fini had banked on building homes 3,200 square feet or larger for prices running as high as $700,000. Now, he's planning to keep those homes under 3,000 square feet, and the prices below half a million."

'"We feel at this moment, anything below 450 (thousand), and especially 425, is still selling," said Fini. "The market is still there, but it has to be priced properly."'

"Fini is not alone, and that, it turns out, is one of the reasons he's lowering prices."

"In Orange County, there are a lot of 3,000-square-foot homes for sale."

'"There's a lot of them sitting," said Frank Nutt Jr., another local builder. Nutt is reducing the sizes and prices of homes he's building in Montgomery and Goshen."

"Single-family home sales in Orange County declined slightly last year, the first time that's happened since 1990. "

"It's a phenomenon that's taking hold across Orange County and in some of the country's hottest housing markets."

'"I've seen it in Los Angeles. I've seen it in Las Vegas," said John McIlwain, senior fellow for housing at the Urban Land Institute."

"The builders' rule of thumb used to dictate that a home sell for four times the cost of the land. These days, it's more like three times the cost of the land. That means a smaller house-to-land ratio. Builders are also cutting out some amenities."

'"We're at a turning point in our housing, where the median size of the home is going to start declining, and that would be the first time in a little over 20 years that that's happened."'

From the Dow Jones NewsWire

"There are signs a housing slowdown that has gripped certain high-growth markets during the past few quarters, is now spreading nationwide."

"Until now, home-building executives said the pullback in demand was largely confined to markets where sales had been overheated and home prices had skyrocketed during the past few years, such as Washington, D.C., parts of California (especially Sacramento), Phoenix and parts of Florida. They blamed speculative buyers for much of the pullback, saying investors had exited the market, causing less overall demand and more inventory."

"These hotspots continue to see the sharpest pullbacks, but other markets also are slowing.
Majestic Research analyst John Tomlinson, in his monthly report that tracks new-home sales in 40 major markets, found sales fell year over year in every market during February and March, with the average decline being 25%."

"Bernard Markstein, director of forecasting at the National Association of Home Builders, said there is no question housing demand is slowing nationwide. He said rising mortgage rates have given people reason to "pause" in their decision to buy."

'"We've been getting reports of a slowdown in housing across the board," Markstein said."

"Preliminary reports from builders Hovnanian Enterprises Inc. (HOV) and Toll Brothers Inc. (TOL), whose quarters ended April 30, indicate demand is falling faster and more sharply than previously thought, and that the pullback is no longer confined to hot markets that had seen sharp home price run-ups in the past few years."

"Hovnanian's orders fell 20% in its fiscal second quarter - an about-face from the 5.5% order growth reported in its fiscal first quarter. Toll's orders declined 32%, which is steeper than the 29% dropoff posted in its fiscal first quarter."

"For Toll, the order decline was across the board as all of its geographical regions reported year-over-year decreases in demand. Chairman Robert Toll attributed the declining demand to higher cancellations and to speculative buyers who are dropping out of the market and putting the homes they recently acquired up for sale."

"Although Toll said his company doesn't sell to speculators, "we have certainly been impacted by the overall increase in supply."'

"On top of this, some builders, such as Centex Corp. (CTX) and Hovnanian, have started taking writedowns in connection with land options. In general, when builders take writedowns to walk away from land options, it is a sign that either land values are falling or demand in that market has dried up. In past cycles, declining land values often were a sign that a market was falling fast."

"Washington, D.C., Los Angeles/Long Beach, Tucson, Ariz., Sacramento, San Francisco, and Phoenix saw the biggest declines with sales falling 22%, 50%, 50%, 46%, 30%, and 37%, respectively. However, even markets that hadn't been weak previously - such as Philadelphia, Dallas, and Las Vegas - softened in the quarter, with sales falling 30%, 15%, and 13%, respectively, he said."

'"Almost every single major market that we track is showing pretty significant year-over-year declines in sales," Tomlinson said. "It's much more broad-based" than it was prior to February.
Rising inventory, slowing sales and bigger incentive packages all signal a correction in the housing industry, Tomlinson added. But time will tell if this will lead to big dropoffs in home prices, "which I think most people are most afraid of," he said."

"So far, builders' efforts to offer more incentives and discounts have "failed to move the needle" in driving sales, Tomlinson said. As a result, he said some may need to resort to bigger price discounts."

'"That's the million-dollar question," he said."

"If companies continue to build at the pace they had in 2005, there could be more serious inventory problems."

'"We were building at a pace that we did not expect to be sustained and we're seeing a slowdown," Markstein said. He expects builders to slow their pace of construction to meet the softer demand."

"However, many builders aren't cutting back, and are instead talking about opening many new communities in order to drive order growth."

"Toll Brothers, for example, plans to open 80 communities during the next six months, and expects to wrap up fiscal 2006 with 295 subdivisions, up from 230 in fiscal 2005."

"Fitch Ratings analyst Bob Curran, noted that most of the publicly traded home builders are heavily weighted in big-growth markets, such as California, Phoenix, South Florida, and Washington, D.C., which experienced overheated demand and a spike in home prices during the past few years - and are now seeing the biggest weakness."

"As a result, the sharp slowdown in the hot markets makes the major builders "a little more vulnerable in the short term," he said. A slight slowdown in smaller markets won't make a huge difference for them, Curran said."

'"If you've got 25% of your assets in California, quibbling about what's happening in Salt Lake City isn't going to make a difference," he said."
-