Wikinvest Wire

Tables turned on home builders

Friday, March 13, 2009

This Wall Street Journal report from earlier in the week is just dripping with too much irony to let it slide by without making a few comments.

As those of you who have followed the housing market closely for the last few years might recall, homeowners who needed to sell their 2003 or 2004 purchase in 2006 or 2007 had complained that the home builders were routinely undercutting them on price, making it impossible to get top dollar.

This was part of the natural evolution of the housing bubble.

Once prices peaked, it was much easier for builders to start lowering their prices, cutting modestly into their huge profit margins while emotionally attached homeowners, who had to move for one reason or another and wanted all the home equity they could get, sought the same price that their neighbors got back when the housing bubble was fully inflated.

But, since prices began to plunge, trillions of dollars in home equity began to evaporate, and foreclosure sales began to dominate all other sales, the tables have been turned on the home builders as their prices are now routinely undercut by banks seeking to dump their growing inventory of foreclosed properties.

The details are all here:

Foreclosed Houses Haunt Home Builders

As the normally hot spring selling season begins, two houses in the Inland Empire region of Southern California sum up the big problem facing many of the nation's largest home builders.

One of the houses, a four bedroom built in 2006 that was seized by a lender in a foreclosure action, is listed for sale at $229,900. Meanwhile, in the same housing development, D.R. Horton Inc. is trying to sell a new house that looks nearly identical for $299,000, or 23% more.

Or consider Pulte Homes Inc.'s predicament in Henderson, Nev., near Las Vegas. The builder is trying to sell a new, four-bedroom house for $214,990, while a home owner is trying to dump a similar house, which Pulte built two years ago, for $149,999. That price is less than the owner's mortgage under a "short sale" approved by the lender.

In many markets, "we are no longer competing with other builders. We are competing with foreclosures," said Steve Ruffner, president of the Southern California division of KB Home.

Sales of used homes are actually rising in some regions because of foreclosures, but new-home sales fell to a four-decade low in January, down 77% from their peak in summer 2005. Altogether, home builders sold houses at a seasonally adjusted annual rate of 309,000 units in January, down from a peak of 1.4 million in July 2005.

Home builders are confronting the competition from foreclosures at a difficult time in their history. Small builders are dying by the dozens, while some large companies are staying afloat by cutting expenses and scrambling to restructure debt.
At the rate things are going, with banks abandoning properties in some parts of the country, the local government may soon be undercutting the prices on bank owned properties.


dearieme said...

"$229,900. Meanwhile,...D.R. Horton Inc. is trying to sell a new house that looks nearly identical for $299,000, or 23% more." Even without a calculator it looks like 30% more to me.

Anonymous said...

dearieme your observation is spot on. Obviously, the journalist erroneously calculated the price difference from DR Hortons $299K price instead of from the $229.9K foreclosure price.

Anonymous said...

List price and actual sale price may eat up that 30%.

Anonymous said...

That would be because the journalist apparently doesn't understand the difference between a discount and a markup.

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