On Bloomberg: "There's a greater than 50 percent probability that the financial system 'will come to a grinding halt'.", says Gregory Peters, head of credit strategy at Morgan Stanley.
Recent land transactions in California, Phoenix and Southeast Florida, while few in number, have fetched discounts of 70% and 80% on finished lots... Exactly as one would expect. In the earlier days of this bubble, people sometimes stated that house prices should be the land price, plus construction costs, plus a small profit. But of course in reality, land prices are set by the estimated price of the housing, minus construction and construction loan costs and a small profit. Right now, nobody really thinks that they can make money building houses. Since land prices are set by people's estimates of housing prices a year or more in the future, it makes sense that they would fall MUCH faster than housing prices.
The dot.com bust is causing staffing problems now for some of the companies I do work for.
When the industry fell out of favor, enrollment in related college curriculums dropped off, and now it's very hard to find people if you have certain requirements.
We've had numerous positions open for about a year, and have almost given up on doing interviews because the quality of the candidates has been so poor recently.
I think down the road we could see a similar supply crunch in housing if the industry really gets murdered.
"We are better off holding off on sales at this asset and not discounting as steeply as the market is discounting right now," says Emile Haddad, Lennar's chief investment officer, who oversees the company's large West Coast projects. "It doesn't make sense for us to sell it in an environment that as strained as it is right now."
You mean the USA real estate industry is actually thinking about changing its modus operandi "BUILD IT AND THEY WILL COME" that has served them so well for decades ?
NEW YORK (Reuters) - Bank of America Corp (NYSE:BAC - News), the second-largest U.S. bank, said on Tuesday it has suffered a $3 billion loss stemming from its exposure to collateralized debt obligations.
The pretax loss would be reflected in fourth-quarter results, and could grow if market conditions worsen, Chief Financial Officer Joe Price said at a Merrill Lynch & Co. banking and financial services conference.
Price also said Bank of America is setting aside more money for potential losses elsewhere, but considers the losses "manageable."
Sachs CEO Lloyd Blankfein said Tuesday that the firm maintains a short position in the subprime mortgage market
Can anyone expect the market to absorb new mortgage originations when GS is this bearish on that market.
And Paulson is telling China to buy our paper?
--
Build before the mortgage market is being sucked in by the black hole?
Mortgage Black Hole Is Deeper, Darker, and Scarier Than Any One Thought
That is the conclusion of the highest paid CEO on Wealth Street, Mr. Blankenfein of Goldchain Silverknife.
I beg to differ. Some of us cranks had known the nastiness of this black hole quite accurately for some four years. Being a banker you dont understand bankers mischief and its consequences, Mr. Blankenfein. Your heart is filled with darkness. This black hole will suck the financial life out of tens of millions of American households. I am sure that you sleep well knowing how the trickery of toxic mortgages that produced so much profit for you and your brethren. Now, your firm is profiting from the other side, short, of this mess. Aint America great, Mr. Blankenfein?
If they hold enough cash or have enough bankable equity to borrow to get cash to meet their current debt service... or can restructure their loans to reduce immediate debt service burden... better than their competition can... then they'll survive.
They should have done this along time ago - over a year or more. But they were showing positive earnings even as the problems became clearly manifest... What CEO is going to option to be the first to take the earnings hit even though it would have positioned the company to be in better shape now?
People will need new homes again someday - the question is when and who will be there to build them.
Moral of the story: going into hibernation in winter isn't stupid if you don't have the option to 'migrate'. But you have to have enough fat on the body going into hibernation to make through the long cold winter or you never wake up. My guess is more than a few of these folks don't have enough fat.
ac, I'm afraid there has been a shortage of real skilled tradespeople at least since I was a kid in the 70s. I imagine it goes back further, but I wouldn't know.
On the other hand, there will never be a shortage of guys who own a skil saw and a hammer and are willing to take out a 7 year loan on a pickup truck so they can work construction. Those are the ones who work for the national homebuilders. I finally had to kick a contractor out of my bathroom yesterday because he kept bringing in an endless chain of these guys.
Can I buy a lot for 80% discount in Phoenix, please? Where?
(1) They DON'T want to sell at 80% discount - but if they were to sell that's what they'd have to charge... so they wait.
(2) They won't sell you a lot at anything close to that discount... but might sell you a whole subdivision marked down a bunch if you've got a couple 6-10 million to plonk down. Understand though - just how much they over paid at the top when considering thier 'discount'.
Oh ya... I forget, they aren't making any more desert.
Unoccupied new homes have a shelf life. Maybe 18 mos - 2 yrs. After that they will probably be unsellable.
So hold all you want boys, but the clock is ticking and the upturn is years away.
tick, tick, tick...
I actually find the Goldman Sachs claims to be pretty plausible. They made out like bandits in the bubbles of the 20's and the 90's, so they seem to know what they're doing when it comes to exploiting irrational exuberance.
It's ridiculous to mothball clusters of houses for any length of time. It gives the whole neighborhood a taint that will knock prices down 10-20% permanently, beyond local market. Nobody wants to live in a new old house or neighborhood. The builder is not going to give these houses the same care, maintenance and security that a homeowner would. And that will become apparent when they come on the market.
The houses and neighborhood would actually come out ahead if they rented them out for a year or two. Why don't they? The answer tells you that this is a PR strategy, not a real strategy.
As a PR strategy, it's just another example of builder inanity. It's the builder equivalent of green wrist bands.
It's ridiculous to mothball clusters of houses for any length of time.
They don't mothball the houses they've already built - they try to liquidate those for whatever they can get - move 'em out! They are mothballing their OPERATIONS meaning we might begin to see Res RE unemployment start to follow completions more closely.
In that Toll Bros. conference from a few days ago they discussed this - its not that big of deal to shut down a phase or whole development BEFORE the stick build starts. Once into stick build they have to finish & sell ASAP else it spoils as you pointed out.
There is still sunken cost from the prep prior to stick build but that's part of the 'cash burn' equation... its milk already spilled.
The interesting thing to see will be 'new orders' - will they try to shore up cancellations by more stringent qualification & larger down payments... or do they just shut down the selling effort almost completely and let RE agents sell the already built inventory. Mothballing the selling effort is very different than mothballing the build.
Point is if they want to stop the bleeding from building stuff that doesn't sell they need to do it as far up stream as they can control.
Very interesting read from an operations perspective.
The problem is we only think of mand anymore in terms of its buildable value.
We need to start giving open space value, too. Otherwise, we aren't going to have any.
Of course if we had a government that actually gave a damn about this issue that would help too.
Living in the SoCal chaparral, one of the world's most endangered environments, it saddens me every time I see a massive new development going in. And then it's all exposed to fire risk anyway and we get these huge wildfires. So ridiculous.
We need to get a lot more sensible about where and how we build.
Just put an oil man in charge. Cap the wells until the price supports it again.
Create a land bank, REIT, or whatever to sell the land to and bank it 1-2 years.
Looked at finished subdivision in the last bust in NOCAL and would have needed a check for $10K per lot to proforma. Seller didn't want to donate. Duh. Land is the most elastic, especially with Wall Street money and calculators missing the risk button - I mean computers missing the risk chip.
There is a method to the madness of land sales and valuaion. Currently, most homebuilder land is worthless - and the truthful builders will admit it, such as the CEO of Lennar.
I can go on in detailing the amount of off balance sheet debt that will really throw these builders for a loop, dumping billions of property in a saturated market in a distressed transaction, causing comps to drop, reducing collateral on loans and decreasing the wealth of homeowners nationwide, in addition to reducing the value of the underlying for most of the leveraged derivatives that are currently going bust - thus really making them go haywire - you know what they say "You ain't seen nothin' yet"
They are the weakest link with the greatest need for capital, at the very time credit is tightening and getting expensive. Amazing that you're not flat broke. At least not yet.
Sebastian's Lament - Broke BEFORE we enter recession.
Wouldn't it be in the owners' interest to liquidate some companies now rather than letting them burn cash until nothing is left?
If they can liquidate and at a decrnt positive they should - my guess is they can't. My guess is they would have to 'write a check' at closing to sell the company right now.
Combine assets at current market vs liability and my guess is they sell for zero net worth right now... The only value the firms have is as a discounted cash flow from operations... and the positive part of that cash flow stream is out there when the market recovers and theoretical at that... so the art to realizing any kind of positive stock holder equity now is to just survive and hope you have the cash & credit worthiness to manage the cash burn going forward... (meanwhile throttle back operations as much as possible to make sure you have enough fuel to make it)...
Many of us here were screaming for that a year ago or more... it was time to 'shut down' and 'hunker' way back then. But they missed our signals for some reason...
Dryfly - yea I would also ask that of Detroit - their union pacts are their "land debt". If they stopped now would there really be a value? OK the market would say yes.
Builders need to be a lot less leveraged - at lease the land does.
The debt of the home builders cannot be overemphasized. Much of it, if not most of it in many cases is off balance sheet - with much of that recourse in some fashion or the other. Lennar stock holders have $2 of debt for every dollar of equity, producing negative cash flow, in a horrible macro environment that is getting worse, with competition slashing prices by more than 50%, with housing prices dropping like a quarter back with weak knees.
I am suspicious about the homebuilders intentions here. Their customers are taking a strategy of "don't buy now -- wait until prices drop to rock bottom". So if I was a builder, why not bluff the market with "I'm not going to sell these houses at any lower price". Just as a ploy to change market psychology, and get some buyers off the fence.
Fact is, they can still make a profit in many markets at lower prices than what they're asking. But only if they can convince some people to get off their butts and buy instead of waiting.
There's no way the builders can sit on all those houses through '08 like they're claiming.
Dryfly - yea I would also ask that of Detroit - their union pacts are their "land debt".
Sippn, all during the boom I was saying the builders were adopting automotive industry 'strategy'... everything from building large vertical supply chains, to national marketing (uniform 'offerings' pretty much the same in Phoenix as in Peoria) to in-house financing (a la GMAC)...
In short building a large national corporate organization managing a diverse 'independent' supply chain. Increasing their fixed cost and out-sourcing their variable cost - works great on the way up but a disaster on the way down.
I was saying then (circa 2004-2005) that all we need to see are 0% down, cash rebates, builders taking discounted trade-in's to push sales and finally 'leasing' to truly know the two have morphed into each other... and I suspected it would produce the same results long-term. Not good results either.
Not all my 'predictions' came to pass but it has been eerily close...
The funny thing is many of the guys running these firms supposedly have MBAs from prestigious institutions... what the hell did they teach them? I got a masters in mfg (hybrid MBA-Mfg Engineering MS) from a decidedly second tier school and we covered this stuff ad nauseum. You never fix your cost structure farther than your decision horizon UNLESS you hold reserves (cash & equiv.) to carry you through... and leverage is THE WORST thing you can do!
I can't see how they can claim they were fooled... this stuff is OPS 101 stuff.
Yeah, if I'm a buyer, I'd definetely want to buy a house from a soon-to-be BK builder who is going to be focused on saving money (building total shit and servicing his debt) vs. quality craftmanship.
Rumor has it that Lennar will finish the phase of Central Park West that is currently under construction and RENT it until housing values return, then kick out the renters and do a major rehab as part of renovating the site.
I know a dairyman who bought several sections of farmland in Maricopa county for $3000 an acre and sold it for $60,000/ac THREE YEARS later. An 80% discount (to $12K/ac) on that price is still 400% of what the land is worth as farmland.
That is how the boom bust cycle works. The underlying asset usually ends up above where it started. The kicker is that most speculators get in at the top of the market, hence tend to lose the most despite the fact that the inflated asset ends up net positive.
The companies who gorge on the bust aren't so lucky though. They either go out of business or end up where they would have been without the boom on a real, inflation adjusted basis.
There was a right answer, but they made the wrong choice some time ago. There is no answer now, just consequences.
On Bloomberg: "There's a greater than 50 percent probability that the financial system 'will come to a grinding halt'.", says Gregory Peters, head of credit strategy at Morgan Stanley.
Recent land transactions in California, Phoenix and Southeast Florida, while few in number, have fetched discounts of 70% and 80% on finished lots... Exactly as one would expect. In the earlier days of this bubble, people sometimes stated that house prices should be the land price, plus construction costs, plus a small profit. But of course in reality, land prices are set by the estimated price of the housing, minus construction and construction loan costs and a small profit. Right now, nobody really thinks that they can make money building houses. Since land prices are set by people's estimates of housing prices a year or more in the future, it makes sense that they would fall MUCH faster than housing prices.
The dot.com bust is causing staffing problems now for some of the companies I do work for.
When the industry fell out of favor, enrollment in related college curriculums dropped off, and now it's very hard to find people if you have certain requirements.
We've had numerous positions open for about a year, and have almost given up on doing interviews because the quality of the candidates has been so poor recently.
I think down the road we could see a similar supply crunch in housing if the industry really gets murdered.
Bubbles are bad.
bulldoze and plant grass.
Unclear on the concept:
"We are better off holding off on sales at this asset and not discounting as steeply as the market is discounting right now," says Emile Haddad, Lennar's chief investment officer, who oversees the company's large West Coast projects. "It doesn't make sense for us to sell it in an environment that as strained as it is right now."
ac, I think they she (and others) might still think the land is worth what they paid for it!
You mean the USA real estate industry is actually thinking about changing its modus operandi "BUILD IT AND THEY WILL COME" that has served them so well for decades ?
OT, but good news! Subprime is contained at Goldman!
http://www.marketwatch.com/news/story/goldman-ceo-sees-no-big/story.aspx?guid=%7B4AF9FAF2%2DB0E2%2D4ACA%2D8134%2D5BBD5FCACFD6%7D&siteid=yhoof
http://biz.yahoo.com/ap/071113/goldman_sachs_writedowns.html?.v=1
ac, I think they she (and others) might still think the land is worth what they paid for it!
I still think my pets.com stock is worth what I paid for it, but I can't get no bids on my offer. =(
Moin,
Bank of America sees $3 billion loss on CDOs
NEW YORK (Reuters) - Bank of America Corp (NYSE:BAC - News), the second-largest U.S. bank, said on Tuesday it has suffered a $3 billion loss stemming from its exposure to collateralized debt obligations.
The pretax loss would be reflected in fourth-quarter results, and could grow if market conditions worsen, Chief Financial Officer Joe Price said at a Merrill Lynch & Co. banking and financial services conference.
Price also said Bank of America is setting aside more money for potential losses elsewhere, but considers the losses "manageable."
To be continued.....
Whether 'tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of contagion.
OT, but I see Miss Market is making like Mary Poppins over WMT's "good news," which couldn't be flimsier. Oy!
Can I buy a lot for 80% discount in Phoenix, please? Where?
O-Joe
Sachs CEO Lloyd Blankfein said Tuesday that the firm maintains a short position in the subprime mortgage market
Can anyone expect the market to absorb new mortgage originations when GS is this bearish on that market.
And Paulson is telling China to buy our paper?
--
Build before the mortgage market is being sucked in by the black hole?
Mortgage Black Hole Is Deeper, Darker, and Scarier Than Any One Thought
That is the conclusion of the highest paid CEO on Wealth Street, Mr. Blankenfein of Goldchain Silverknife.
I beg to differ. Some of us cranks had known the nastiness of this black hole quite accurately for some four years. Being a banker you dont understand bankers mischief and its consequences, Mr. Blankenfein. Your heart is filled with darkness. This black hole will suck the financial life out of tens of millions of American households. I am sure that you sleep well knowing how the trickery of toxic mortgages that produced so much profit for you and your brethren. Now, your firm is profiting from the other side, short, of this mess. Aint America great, Mr. Blankenfein?
Jas
The thing to watch is their cash burn...
If they hold enough cash or have enough bankable equity to borrow to get cash to meet their current debt service... or can restructure their loans to reduce immediate debt service burden... better than their competition can... then they'll survive.
They should have done this along time ago - over a year or more. But they were showing positive earnings even as the problems became clearly manifest... What CEO is going to option to be the first to take the earnings hit even though it would have positioned the company to be in better shape now?
People will need new homes again someday - the question is when and who will be there to build them.
Moral of the story: going into hibernation in winter isn't stupid if you don't have the option to 'migrate'. But you have to have enough fat on the body going into hibernation to make through the long cold winter or you never wake up. My guess is more than a few of these folks don't have enough fat.
ac, I'm afraid there has been a shortage of real skilled tradespeople at least since I was a kid in the 70s. I imagine it goes back further, but I wouldn't know.
On the other hand, there will never be a shortage of guys who own a skil saw and a hammer and are willing to take out a 7 year loan on a pickup truck so they can work construction. Those are the ones who work for the national homebuilders. I finally had to kick a contractor out of my bathroom yesterday because he kept bringing in an endless chain of these guys.
Nice link, jmf.
No one tell Sebastian, O Joe, or Banker, but a $3B writedown by BofA will take Q4 projected EPS from $1.10 per share to half of that.
No way are earnings in Q4 '07 coming in higher than Q4 '06.
The Financials Really Start Hitting the Fan on Thursday
Daily Kos: [UPDATED] The Financials Really Start Hitting the Fan on Thursday.
On November 15th, FASB 157 (Financial Accounting Standard Board's "Fair Value Measurements") goes into effect.
This will have a very serious impact on Level 3 asset valuations.
Level 3 should be deemed "Don't ask, don't sell"
Here's the proper way to describe the 3 levels of securities (h/t Russ Winter):
Level 1 = mark to market
Level 2 = mark to model
Level 3 = mark to make-believe!
Can I buy a lot for 80% discount in Phoenix, please? Where?
(1) They DON'T want to sell at 80% discount - but if they were to sell that's what they'd have to charge... so they wait.
(2) They won't sell you a lot at anything close to that discount... but might sell you a whole subdivision marked down a bunch if you've got a couple 6-10 million to plonk down. Understand though - just how much they over paid at the top when considering thier 'discount'.
Oh ya... I forget, they aren't making any more desert.
Bogus Doomsday: November 15
"The actual requirements have been implemented by major firms throughout the year, as David Faber (along with other sources) reported today on CNBC."
(Hugely OT) This is shaping-up to be the day I've been waiting for, so I've re-entered my small-cap portfolio. I'm sure everyone wishes me luck.
Sebastia
To strive, to seek, to find, to securitize, to rate...
...but not to yield...
Unoccupied new homes have a shelf life. Maybe 18 mos - 2 yrs. After that they will probably be unsellable.
So hold all you want boys, but the clock is ticking and the upturn is years away.
tick, tick, tick...
o one cares
JG, you have'nt heard about Bofa's one time gain?
Moin again from Germany,
something interetsing has happened today with Deutsche Bank in Germany
They also said a few days before that they are net short the US mortgage market.
After the commenst from GS the US shares of GS and Lehman are up over 6 percent.
Look at the
"impressive reaction" from Deutsche ( 52 week low was 82)....
Havn´t seen this for months.....
I actually find the Goldman Sachs claims to be pretty plausible. They made out like bandits in the bubbles of the 20's and the 90's, so they seem to know what they're doing when it comes to exploiting irrational exuberance.
Insider transactions seem pretty one way. When in doubt, follow the money.
GS: Insider Transactions for GOLDMAN SACHS GRP - Yahoo! Finance
It's ridiculous to mothball clusters of houses for any length of time. It gives the whole neighborhood a taint that will knock prices down 10-20% permanently, beyond local market. Nobody wants to live in a new old house or neighborhood. The builder is not going to give these houses the same care, maintenance and security that a homeowner would. And that will become apparent when they come on the market.
The houses and neighborhood would actually come out ahead if they rented them out for a year or two. Why don't they? The answer tells you that this is a PR strategy, not a real strategy.
As a PR strategy, it's just another example of builder inanity. It's the builder equivalent of green wrist bands.
Sebastian,
good luck with swinging that dead cat around. hope your place is big enough so you won't hit anything.
Wouldn't it be in the owners' interest to liquidate some companies now rather than letting them burn cash until nothing is left?
To build or not to build: that is the question.
Neither a borrower nor a lender be: that is the answer.
It's ridiculous to mothball clusters of houses for any length of time.
They don't mothball the houses they've already built - they try to liquidate those for whatever they can get - move 'em out! They are mothballing their OPERATIONS meaning we might begin to see Res RE unemployment start to follow completions more closely.
In that Toll Bros. conference from a few days ago they discussed this - its not that big of deal to shut down a phase or whole development BEFORE the stick build starts. Once into stick build they have to finish & sell ASAP else it spoils as you pointed out.
There is still sunken cost from the prep prior to stick build but that's part of the 'cash burn' equation... its milk already spilled.
The interesting thing to see will be 'new orders' - will they try to shore up cancellations by more stringent qualification & larger down payments... or do they just shut down the selling effort almost completely and let RE agents sell the already built inventory. Mothballing the selling effort is very different than mothballing the build.
Point is if they want to stop the bleeding from building stuff that doesn't sell they need to do it as far up stream as they can control.
Very interesting read from an operations perspective.
The problem is we only think of mand anymore in terms of its buildable value.
We need to start giving open space value, too. Otherwise, we aren't going to have any.
Of course if we had a government that actually gave a damn about this issue that would help too.
Living in the SoCal chaparral, one of the world's most endangered environments, it saddens me every time I see a massive new development going in. And then it's all exposed to fire risk anyway and we get these huge wildfires. So ridiculous.
We need to get a lot more sensible about where and how we build.
Dryfly you're right.
Just put an oil man in charge. Cap the wells until the price supports it again.
Create a land bank, REIT, or whatever to sell the land to and bank it 1-2 years.
Looked at finished subdivision in the last bust in NOCAL and would have needed a check for $10K per lot to proforma. Seller didn't want to donate. Duh. Land is the most elastic, especially with Wall Street money and calculators missing the risk button - I mean computers missing the risk chip.
There is a method to the madness of land sales and valuaion. Currently, most homebuilder land is worthless - and the truthful builders will admit it, such as the CEO of Lennar.
See Lennar's CEO on the topic: Reggie Middleton's Boom, Bust & Bling Blog - HAS MOVED TO REGGIEMIDDLETON.BOOMBUSTBLOG.COM!!!: Straight Talk From the ex-Homebuilder CFO: Yes.. straight from the Lennar CEOs mouth... land has zero value...
then see how we come to the conclusion it is worthless by going through a short piece on land valuation (as oppposed to housing valuation): Part I Reggie Middleton's Boom, Bust & Bling Blog - HAS MOVED TO REGGIEMIDDLETON.BOOMBUSTBLOG.COM!!!: Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt I and PArt II Reggie Middleton's Boom, Bust & Bling Blog - HAS MOVED TO REGGIEMIDDLETON.BOOMBUSTBLOG.COM!!!: Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt I
I can go on in detailing the amount of off balance sheet debt that will really throw these builders for a loop, dumping billions of property in a saturated market in a distressed transaction, causing comps to drop, reducing collateral on loans and decreasing the wealth of homeowners nationwide, in addition to reducing the value of the underlying for most of the leveraged derivatives that are currently going bust - thus really making them go haywire - you know what they say "You ain't seen nothin' yet"
Sounds gloomy, doesn't it?
Sebastian...Small Cap, LMAO!
They are the weakest link with the greatest need for capital, at the very time credit is tightening and getting expensive. Amazing that you're not flat broke. At least not yet.
Sebastian's Lament - Broke BEFORE we enter recession.
Wouldn't it be in the owners' interest to liquidate some companies now rather than letting them burn cash until nothing is left?
If they can liquidate and at a decrnt positive they should - my guess is they can't. My guess is they would have to 'write a check' at closing to sell the company right now.
Combine assets at current market vs liability and my guess is they sell for zero net worth right now... The only value the firms have is as a discounted cash flow from operations... and the positive part of that cash flow stream is out there when the market recovers and theoretical at that... so the art to realizing any kind of positive stock holder equity now is to just survive and hope you have the cash & credit worthiness to manage the cash burn going forward... (meanwhile throttle back operations as much as possible to make sure you have enough fuel to make it)...
Many of us here were screaming for that a year ago or more... it was time to 'shut down' and 'hunker' way back then. But they missed our signals for some reason...
Reggie - thanks - what I said.
Dryfly - yea I would also ask that of Detroit - their union pacts are their "land debt". If they stopped now would there really be a value? OK the market would say yes.
Builders need to be a lot less leveraged - at lease the land does.
The debt of the home builders cannot be overemphasized. Much of it, if not most of it in many cases is off balance sheet - with much of that recourse in some fashion or the other. Lennar stock holders have $2 of debt for every dollar of equity, producing negative cash flow, in a horrible macro environment that is getting worse, with competition slashing prices by more than 50%, with housing prices dropping like a quarter back with weak knees.
I said this in a thread last night...
I am suspicious about the homebuilders intentions here. Their customers are taking a strategy of "don't buy now -- wait until prices drop to rock bottom". So if I was a builder, why not bluff the market with "I'm not going to sell these houses at any lower price". Just as a ploy to change market psychology, and get some buyers off the fence.
Fact is, they can still make a profit in many markets at lower prices than what they're asking. But only if they can convince some people to get off their butts and buy instead of waiting.
There's no way the builders can sit on all those houses through '08 like they're claiming.
Dryfly - yea I would also ask that of Detroit - their union pacts are their "land debt".
Sippn, all during the boom I was saying the builders were adopting automotive industry 'strategy'... everything from building large vertical supply chains, to national marketing (uniform 'offerings' pretty much the same in Phoenix as in Peoria) to in-house financing (a la GMAC)...
In short building a large national corporate organization managing a diverse 'independent' supply chain. Increasing their fixed cost and out-sourcing their variable cost - works great on the way up but a disaster on the way down.
I was saying then (circa 2004-2005) that all we need to see are 0% down, cash rebates, builders taking discounted trade-in's to push sales and finally 'leasing' to truly know the two have morphed into each other... and I suspected it would produce the same results long-term. Not good results either.
Not all my 'predictions' came to pass but it has been eerily close...
The funny thing is many of the guys running these firms supposedly have MBAs from prestigious institutions... what the hell did they teach them? I got a masters in mfg (hybrid MBA-Mfg Engineering MS) from a decidedly second tier school and we covered this stuff ad nauseum. You never fix your cost structure farther than your decision horizon UNLESS you hold reserves (cash & equiv.) to carry you through... and leverage is THE WORST thing you can do!
I can't see how they can claim they were fooled... this stuff is OPS 101 stuff.
Yeah, if I'm a buyer, I'd definetely want to buy a house from a soon-to-be BK builder who is going to be focused on saving money (building total shit and servicing his debt) vs. quality craftmanship.
Pricing these turdboxes to sell...lol.
Can I buy a lot for 80% discount in Phoenix, please? Where?
O-Joe
Joe
I'm sure you could find graded lots in Laveen, Surprise or Pinal County. Built houses in the boonies are being offered at 50 cents on the dollar.
Dryfly "what the hell did they teach them?"
Deposit the bonus check before disclosing the f up.
The monetary reward system outweighs the classes you (and I took).
Living in the SoCal chaparral, one of the world's most endangered environments, it saddens me every time I see a massive new development going in.
I understand how you feel. It's exactly how I felt about it when your housing development went in.
Rumor has it that Lennar will finish the phase of Central Park West that is currently under construction and RENT it until housing values return, then kick out the renters and do a major rehab as part of renovating the site.
80% discount from top on land in Phoenix.
I know a dairyman who bought several sections of farmland in Maricopa county for $3000 an acre and sold it for $60,000/ac THREE YEARS later. An 80% discount (to $12K/ac) on that price is still 400% of what the land is worth as farmland.
That is how the boom bust cycle works. The underlying asset usually ends up above where it started. The kicker is that most speculators get in at the top of the market, hence tend to lose the most despite the fact that the inflated asset ends up net positive.
The companies who gorge on the bust aren't so lucky though. They either go out of business or end up where they would have been without the boom on a real, inflation adjusted basis.
See my housing forecasts here Reggie Middleton's Boom, Bust & Bling Blog - HAS MOVED TO REGGIEMIDDLETON.BOOMBUSTBLOG.COM!!!: Okay, I have just recharged the batteries in my crystal ball: Back tested Home Price Trends - Historical and Forecasted