BW Article Bonfire of the Builders

[dontfollowtheherd]

With rumors swirling of a few homebuilders possibly filing bk there may be more to it than rumor. Case in point:

http://www.businessweek.com/magazine/content/07_33/b4046601.htm

Makes you wonder how many times this scenario has been played out across the U.S. We’re still at least 25% away from a serious bottom of any type imo.

[temeculaguy]

This has been perplexing me, how can they lose money with only a slight to moderate price reduction over the last two years despite still being priced higher than after inflation adjustments over the last ten years? Many of them secured the land before the bubble.

One development in my area of about 2000 homes and 10 builders had the land in 1998 when a 2500 sq ft house sold for 180-200k. They got hung up in some environmental concerns over a butterfly for a few years and then some nimby delays from the neighbors. They start building in about 2003 and as recently as 2005 when I looked at them they were selling for about 500k, plus or minus for larger or smaller. Now they are only about 2/3 done and are discounting to 350k to 450k and they are posting stock losses. Big builders that are represented there (lennar, centex, standard pacific, woodside, lyon, etc.) are posting stock losses and blaming Southern California as the reason they are losing money. How? In 8-9 from the time they managed to sell a home for a profit at 180k now they are losing money selling at 400k, normal appreciation and inflation of materials and labor did not rise at 10% a year and even if it did, 360k would be a profit. What other industry does this. In 1998 I bought a car for about 24k, today that car is 35k, that company wouldn’t lose money at 48k per unit. And if they had priced it at double what it was 8 years ago they could lower the price and the first 13k wouldn’t hurt them, just bring them in line with inflation.

I think I am missing something.

[temeculaguy]

This has been perplexing me, how can they lose money with only a slight to moderate price reduction over the last two years despite still being priced higher than after inflation adjustments over the last ten years? Many of them secured the land before the bubble.

One development in my area of about 2000 homes and 10 builders had the land in 1998 when a 2500 sq ft house sold for 180-200k. They got hung up in some environmental concerns over a butterfly for a few years and then some nimby delays from the neighbors. They start building in about 2003 and as recently as 2005 when I looked at them they were selling for about 500k, plus or minus for larger or smaller. Now they are only about 2/3 done and are discounting to 350k to 450k and they are posting stock losses. Big builders that are represented there (lennar, centex, standard pacific, woodside, lyon, etc.) are posting stock losses and blaming Southern California as the reason they are losing money. How? In 8-9 from the time they managed to sell a home for a profit at 180k now they are losing money selling at 400k, normal appreciation and inflation of materials and labor did not rise at 10% a year and even if it did, 360k would be a profit. What other industry does this. In 1998 I bought a car for about 24k, today that car is 35k, that company wouldn’t lose money at 48k per unit. And if they had priced it at double what it was 8 years ago they could lower the price and the first 13k wouldn’t hurt them, just bring them in line with inflation.

I think I am missing something.

[SD Realtor]

temeculaguy I would qualify my response as purely speculative as many more here have much more insight then I do regarding the builders. I “think” many of them (the builders) are leveraged, some more then others. I doubt that many of the projects they undertake utilize their own resources, they are most likely all financed. I don’t know if this land that they purchased was with their money or what. Imagine if someone else underwrote the purchase and what sort of rate the lender had to pay them for holding land for that long? This is only a guess and most likely is wrong… However that could help to explain it…

SD Realtor

[SD Realtor]

temeculaguy I would qualify my response as purely speculative as many more here have much more insight then I do regarding the builders. I “think” many of them (the builders) are leveraged, some more then others. I doubt that many of the projects they undertake utilize their own resources, they are most likely all financed. I don’t know if this land that they purchased was with their money or what. Imagine if someone else underwrote the purchase and what sort of rate the lender had to pay them for holding land for that long? This is only a guess and most likely is wrong… However that could help to explain it…

SD Realtor

[no_such_reality]

I think I am missing something.

Yep, it’s called an exit strategy. They close shop, eliminate all the documentation, people and records, and it makes it really much harder to get sued.

[no_such_reality]

I think I am missing something.

Yep, it’s called an exit strategy. They close shop, eliminate all the documentation, people and records, and it makes it really much harder to get sued.

[lindismith]

Great article, dontfollow.

Yes, the builders are leveraged, but only because of greed. It’s almost as if their whole industry only thinks in ‘greed-cycles’.

‘What can we make in this cycle?’

Every cycle has it’s end, and they know this, so it’s key to maximize each aspect before it’s over: hire illegals, put as many homes as you can on a tract, charge as much as possible, finance your buyers yourself, package off their loans to Wall St, and then get out.

Greed, greed, greed.

They have built their brand identity, so when the next cycle comes around, they just create their slick marketing brochures, install the signs and flags, and presto: back in biz! And the cycle goes again.

They deserve everything they’ve got coming.

[lindismith]

Great article, dontfollow.

Yes, the builders are leveraged, but only because of greed. It’s almost as if their whole industry only thinks in ‘greed-cycles’.

‘What can we make in this cycle?’

Every cycle has it’s end, and they know this, so it’s key to maximize each aspect before it’s over: hire illegals, put as many homes as you can on a tract, charge as much as possible, finance your buyers yourself, package off their loans to Wall St, and then get out.

Greed, greed, greed.

They have built their brand identity, so when the next cycle comes around, they just create their slick marketing brochures, install the signs and flags, and presto: back in biz! And the cycle goes again.

They deserve everything they’ve got coming.

[barnaby33]

I’d say the two things that are killing all the builders are the falling number of sales, plus land write-downs. Centex just took a several hundred million dollar write-down on land at its last reporting in july. Ouch thats going to kill profitability.

The builders are leveraged, but they owned more land than they will admit to, hence the write-downs.

Josh

[barnaby33]

I’d say the two things that are killing all the builders are the falling number of sales, plus land write-downs. Centex just took a several hundred million dollar write-down on land at its last reporting in july. Ouch thats going to kill profitability.

The builders are leveraged, but they owned more land than they will admit to, hence the write-downs.

Josh

[robyns_song]

Maybe I missed it but what does “write-down” mean?

[robyns_song]

Maybe I missed it but what does “write-down” mean?

[stansd]

Land Write-downs won’t cause BK-that’s a non-cash charge…the conditions that cause the write-down-falling prices, demand drying up, litigation-that’s a cash drain that can kill.

Stan

[stansd]

Land Write-downs won’t cause BK-that’s a non-cash charge…the conditions that cause the write-down-falling prices, demand drying up, litigation-that’s a cash drain that can kill.

Stan

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