1650 E. River Road
Homebuilders are Feeling the Pain of the Down Market
Yesterday KB Home reported their 4th quarter results and they were dismal, to be optimistic about it. For the quarter ended Nov. 30, the company posted a loss of $772.7 million. That’s a $ 772.7 MILLION LOSS in 3 months! This just goes to show how bad things really are for all builders. KB Home, in my opinion, runs a pretty good operation building homes for primarily first time homebuyers. Other homebuilders have faired just as badly. Pulte, DR Horton, Richmond American, and Standard Pacific (who just sold their Tucson operations earlier this month) have all been beaten down pretty hard.
I have many contacts in the new home building industry in Tucson AZ, and the story is the same regardless of builder — few to no sales. WHY? Well the simple answer is that the homes and incentives are not enough to get buyers off the fence, and in most neighborhoods, foreclosures and short sales are much lower in price than a brand new spec home. In addition, many builders have land holdings in neighborhoods in which they purchased the land at the very top of the market. Having spent so much on the land, they are having a very difficult time being able to build the homes for an attractive sales price when completed. Some builders have also put the brakes on building any homes on spec, i.e., without a ready willing and able buyer who is extremely well qualified and also has a full earnest money deposit with the builder. All the homebuilders in Tucson are doing their best to combat and weather the storm that has lasted over 2 years now.
Some builders like KB Home have decided to go back to their roots and build homes that are the least expensive in the marketplace. They are trying to build the most square footage for the dollar, and are leaving out many options that others are including in the price. Other builders in Tucson have gone the way of A.F. Sterling, going to the upper end and building homes starting at 500k and above. Although A.F. Sterling has built some less expensive homes in the past few years, most if not all of their new communities are over the 500k price. Higher end buyers have fewer issues qualifying for a mortgage and can also afford larger earnest money deposits, so if they cancel, it allows the builder a little more safety.
It will be interesting to see what 2008 has in store for the real estate business in Tucson and the U.S. at large. My prediction is that it will be a very rough year again for the builders and mortgage companies. The market should get stronger by the end of 2008, but until then, there will be a lot of competition from short sales and REO (bank owned) properties that will be priced lower than what any homebuilder can build the same home for. I also see at least one large homebuilder going bankrupt in 2008, and maybe more. The conditions have just gotten that bad and there is definitely “blood in the streets” in the current real estate market. As the old saying goes, to make incredible money in real estate you have to be ready to start buying when you see the “blood in the streets” and everyone is running and trying to sell. Well, to my mind, a 772.7M (yes, more than ¾ of a BILLION DOLLARS) lost in only 3 months means that things are incredible bad for the industry.