Tuesday, August 22, 2006

Dow Jones: So Cal Housing Market Could Pull Homebuilders to New Lows - the market "is in the early stages of a tsunami wave of cancellations"

Thanks tofriend JesseL (from the bear boards) for this link!

I actually have some good photos of contruction projects by Standard Pacific and by Centex. When I can find a Java applet that lets a viewer look at a JPG as a panoramic view, I'll put the photos up.

I'm not yet seeing any signs of price cuts at Centex Fusion at South Bay, the big project just a few blocks away from me. Starting prices are still at about $517,000 to the best of my knowledge, which is still higher than what the builder originally planned.

S Calif Housing Market Could Pull Homebuilders To New Lows   

08-22-06 09:23 AM EST

NEW YORK -(Dow Jones)- Watch out, California. Your housing market is about to get 

The Southern California housing market is "in the early stages of a tsunami wave of 
cancellations and price cuts," predicts JMP analyst Alex Barron. Home builders with 
big exposure to this market could potentially take a hit that's even bigger than the
beating many took in Florida.

Barron, who recently returned from a three-day tour through Southern California, said 
he sees similarities between market conditions in this area and those in the troubled 
Florida market.

"Demand has hit a wall" in Southern California as skyrocketing prices over of the 
past few years have made homes less affordable, said Barron. Builders have responded 
by offering higher incentives and steep price cuts, and by allowing buyers to put 
down shockingly small deposits - of less than 1% - on homes, he said.

"Deposits below 1% are a very ominous sign as it signals to us that demand is very 
weak and homes have now become very unaffordable," said Barron.

"If it's a $700,000 home and suddenly the builder has cut the price for similar homes 
to $650,000 or $600,000 - and you only put down a $5,000 deposit, why wouldn't you 
walk away from it?" he asked. "We would expect cancellations to rise dramatically in 
coming months as it will be relatively painless to walk away from such a small 

He sees California's market conditions following in Florida's footsteps by only a few 
months. Florida has led the quickly deteriorating housing market for many of nation's 
homebuilders, where huge inventory gluts have forced builders to slash prices and 
offer extraordinary incentives in order to move sales.

However, a key difference between the two states is that Florida's woes were driven 
primarily by speculative investors and flippers who flooded the market and drove up 
prices over the past few years. Many of those same investors were forced to dump the 
homes they purchased back onto the market at fire-sale prices when the market 

By contrast, speculative investors were never as big in California. Instead, 
homebuilders themselves have been driving the inventory buildups in the Golden State, 
according to Barron.

"One of the more troublesome developments we saw in Southern California was that most 
builders were spec building entire communities at a time, with very few sales to 
support this level of construction," said Barron. "In one instance, we saw a 
community of about 100 homes where there were over 20 complete unsold homes, and yet 
the builder was already building the next 100 homes in the community next door with 
five sales."

That particular community was being built by Beazer Homes USA Inc. (BZH). Beazer, 
however, isn't alone, Barron said. He sees similar speculative building from other 
major publicly traded builders, including D.R. Horton Inc. (DHI), Lennar Corp. (LEN), 
Meritage Homes Corp. (MTH), Centex Corp. (CTX), California Coastal Communities Inc. 
(CALC), and Brookfield Homes Corp. (BHS).

"Many wrongly think that 'if you build it, they will come.' Well, they're not coming 
anymore," said Barron. As a result, he said that homebuilders that sell homes in 
California could be potentially hit even harder than they were in Florida.

"It appears to us in Florida, the one left holding the bag was the flipper or 
speculator," said Barron. "In Southern California, it appears to us the one left 
holding the bag is the homebuilder." He added that California is the state where the 
builders have most of their capital parked.

Michael Carliner, an economist with the National Association of Home Builders, 
disagrees that Southern California could be the straw that breaks the camel's back.

He said California tends to have longer land and zoning approval processes than many 
other states, such as Florida. As a result, he said California tends to be 
"underbuilt" in general.

In 2005, the number of housing starts per 1,000 people in California stood at 5.34, 
which is below the national average of 7, and far short of Florida's 15.08 and 
Nevada's 17.58, he said. In the first six months of 2006, the number of starts per 
1,000 people was 4.7 in California, 6.7 nationally and 13.8 in Florida. This means 
the pace of construction in Florida far outpaced California based on population 

Still, if speculative investors account for fewer buyers than in Florida, then they 
will also be responsible for fewer of the unsold homes in the market.

Data gathered from LoanPerformance, a mortgage information and analytics company, 
appear to back this up. Nationwide, the number of speculative buyers has surged in 
the past two years, with cities in Florida, Nevada, and Arizona dominating the top 30 

LoanPerformance found that 16.8% of all mortgages issued for new home purchases in 
1995 and 16.7% of those issued so far in 2006 were given to speculative investors and 
those purchasing vacation homes. This is up from 11.7% in 2003, 9.7% in 2002 and 7.9% 
in 2001.

Markets with the biggest percentage of speculative and vacation home buyers were in 
Myrtle Beach, S.C., and Naples and Fort Myers, Fla., where these investors 
represented 66.5%, 54.1% and 48%, respectively, of new mortgages in 2006. California 
markets only held down two of the top 30 spots, according to LoanPerformance.

Joe Snider, senior credit officer at Moody's Investors Service, said he still 
believes speculative investors were quite prominent in California and isn't convinced 
that public builders will take a tougher hit in California than they did in Florida.

However, Snider was surprised to hear that public builders were constructing entire 
communities on spec right now.

"The last time homebuilders did something like that was in the late '80s and early 
'90s, and some of them just didn't make it," said Snider. "There were seven 
homebuilders that went bankrupt in 1990, and the reason in every case was that they 
were long on land and they were financing it with short-term debt."

Snider said homebuilders learned tough lessons back then, and most no longer use 
short-term debt to finance their land purchases.

"If they've gotten back to a practice of building entire communities on spec - like 
they did in the late '80s and early '90s - that would definitely be a worrisome 
trend. But I've seen no evidence of that yet," he said.

Barron downgraded two builders that have large exposures to California - Standard 
Pacific Corp. (SPF) and Beazer Homes USA Inc.Standard Pacific gets about 49% of its 
revenue from California while Beazer currently gets about 20%.

Many of the major builders rely on California for a big percentage of their total 
revenues, including California Coastal Communities, 100%; Brookfield Homes Corp., 
73%; William Lyon Homes Inc. (WLS), 72%; Lennar Corp., 32%; KB Home (KBH) , 31%; D.R. 
Horton, 25%; Centex, 24%; Hovnanian Enterprises (HOV), 24%; M.D.C. Holdings Inc. 
(MDC), 22%; Meritage, 21%; Ryland Group Inc. (RYL), 21%; and Pulte Homes Inc.(PHM), 

-By Janet Morrissey, Dow Jones Newswires; 201-938-2118 


Blogger banned_on_the_run said...

From the Tuesday LA Times (registration req?):


Seems some developers still have money to blow. And blow it shall.

7:49 PM, August 22, 2006  
Blogger bearmaster said...

Yep, I expect to see many builders go belly-up and be acquired by more bubble-astute survivors.

I would not be surprised to see a number of public builders issuing corporate bonds within the next 12 months to help them over something they will probably call a "rough patch". I'm sure any bond offerings will be accompanied by lots of happy talk about how the housing market will rebound because "everybody needs to live someplace".

9:41 PM, August 22, 2006  

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