Major Builder cancellations

[sdrealtor]

I can’t share exactly where they are or where I heard it, but a very reliable little bird told me yesterday that the master developer of a large master planned community had $120M of builder cancellations last week, most of whom walked away from 15% deposits.

[Daniel]

Sdrealtor,

Thanks for the info, but without the specifics it may do more harm than good. I’m already thinking “where the hell could this development be?”. By the way, 15% is a lot. Are you sure it’s not $15K? Developments I follow in Carmel Valley ask for $5K-$15K deposits, which works out to 1%-2% of the total purchase (rather tiny percentages, I think, no wonder people walk).

Also, $120M sounds like a lot. That’s like 200 units. Where in the world is this? A tower downtown?

[sdrealtor]

Daniel
Sorry for the confusion, it is not the buyer’s walking away it’s the builders walking away from lots they committed to buy. It probably represents around 250 homes that will not get built as well as any f/u phases.

SDR

[Daniel]

I see. That make sense. Actually, this is not good news for me. I would like builders to build, not “manage inventory”. Oh, well, I guess we’ll see if they can soften the blow by holding projects.

[an]

I was hoping builders keep on building too. Less profit per house is still better than no profit. If this is the trend, the builder stocks will get hammer some more. Their PE won’t hold up if the E keep on dropping.

[ybc]

Do you think that’s the rational behavior? (i.e. if you were a builder, that’s what you would have done to maximize profit?) In another word, are builders financially disciplined?

I wonder why not building smaller houses at lower price points? Demand for those should still be there.

[Daniel]

Thornberg wrote a few very good papers about this very issue. The answer is no, builders can’t build according to the demand of the market. Due do zoning regulations, permitting process, NIMBY opposition, etc, the builders end up building many more high-end houses than the market needs, and substantially less entry-level housing. Usually the builders are blamed for this (“those fat capitalist pigs!”), but it’s rarely their fault. Local regulations are a huge barrier to building more high-density and low-cost housing.

My position in a nutshell is: “builders are my friends, and NIMBYs are my enemies”.

[Carlsbadliving]

I’ll tell you that Thornberg article was dead-on. The builder has very little say over the final product now days. The NIMBYs have become so powerful (have experienced first hand in Carlsbad) that they consider high density to be low income. They think that high density will erode their property values. And don’t even get me started on rental units (only the scum of the earth would ever rent something). And we’re not talking high-rises here, we’re talking about townhomes. And then cities (who’s councils have elected officials) pander to the NIMBYs and only allow a limited number of higher density units to be built. The developer/builder is at the mercy of all of this. They basically have to sit back and be told what to build.

So in reality, it’s not up the builder or the marketplace. It’s purely up to the City.

[JES]

If builders are cancelling projects will this lead to significantly less inventory down the road, say in 1-2 years and upward price pressure again? Only if the resale inventory falls as well I suppose?

[Carlsbadliving]

You really can’t blame the builders. They’re just making a sound business decision. Just as many of us are waiting in the wings for the inventory to increase (and therefore purchase), the builders will be waiting in the wings with their empty lots for inventory to decrease.

[waiting hawk]

Don’t worry they are still building at 2004 levels.

My website tracking Temecula and South Riverside County

[SDbear]

Isn’t this good for us. Typically builders have huge margins on the finished homes as discussed by bugs, realtors(both) and docteur (whom I consider insiders). Major costs for them is land. Someone had mentioned that their typical construction cost is around $80/sqft. Generally speaking they could still build on the land with a bit more cost and recoup most of their investment. If they are walking away from their land or taking carrying costs, I would think they know they can’t sell even with price reductions. It wud be diff if they were just walking away from land options.
What wud it do for the sentiment? wud’nt it also hit the construction economy with less people getting paid. As for inventory reduction a couple hundred less than ~25k wud’nt make that much of a diff to hurt supply

[Bugs]

Kinda depends on the city in question. I saw a good number of projects in El Cajon get fast track approval and city assistance with upzoning, fees and permits in exchange for building projects with smaller unit sizes and higher density.

Every single one of those projects were huge money makers for their developers. I saw a project in Santee get rejected because the city wanted to see more units on that site; the developer re-engineered the site and got several more units on – then the city approved it.

I saw the same thing in National City on a couple occasions, and even the in city of San Diego. Those types of projects can be hugely successful if they aren’t opposed by the NIMBYs.

[Author]

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