If I were a home builder, I would have buttoned down the hatches last spring, when the market turned. All indications of a slowdown were there. I would have finished out my projects, been done by mid 2005 or early 2006, and reduced my staff and overhead until the next boom.
Which builder did that? Aren’t they all stuck with a bunch of inventory, just like in the last cycle?
It’s quite surprising that the real estate insiders show the most denial. I’ve met developers and realtors who think this is a temporary dip, and we will see a slower rate of appreciation. It boggles the mind that these guys, who have been through several cycles, were caught completely off-guard in this slowdown.
A company like Toll, which survived the last downturn, should have known what to look for and seen the slowdown coming. Why are they caught with their pants down?
Some builders are going to be in real trouble, but other builders, who may have bought their vacant land or vacant finished lots in 2004 or earlier, are going to be just fine. Their sales will be slower, and they will most likely be giving big sales concessions, but some will still be profitable.
Let’s say you are a builder in San Diego, and you bought a large vacant parcel in 2002 or 2003, intending to build in 2005 or 2006. Even at todays’ lower prices, you may still turn a profit. You won’t make as much money as you would have if you had sold your homes 12-18 months ago, but you can still sell your homes at much higher prices than you could have gotten in 2002/2003.
Think about a company like Pardee Homes, who owned property in Carmel Valley back to the 1970’s. Their cost basis is so low that they can’t lose money no matter what they sell homes for today.
In the early to mid 1990’s, there were still new homes being sold, even though there was a housing recession in Southern California. The builders who went broke were those who had bought their land just before the market went in the toilet. The builders who will be in trouble this time will be those who purchased vacant land/lots around 2005.
"Battle stations, Battle stations, this is not a drill! Proceed to your battle stations immediately: starboard forward, port rear, I repeat this is not a drill, all hatches will be battened down in 4 minutes."
Notice that the hatches are not battened down until 4 minutes after the threat has been identified. This is to allow the crewmembers to move freely to their defensive position. All I can say is the warning has been called, get your a$$'$ to a defensive position.
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