Even as homebuyers were being offered a free washer, dryer, refrigerator and window blinds, plus 5 percent off the price or in cash to pay closing costs, business was dragging at Reeves Williams’ communities.
So at the end of July, home builder Reeves Williams began offering $20,000 in incentives or cash assistance. In the first week, 22 buyers had signed contracts for new homes. Then the mortgage market fell into a tailspin.
“We lost 17 of them. It was a huge hit,” says Martha Fondren, vice president of sales. “It was a credit issue. They did not have horrible credit. But they didn’t have the credit scores to get [a loan], and six months ago they would have.”
Since early August, the real estate market has sunk deeper into recession. Forecasts of a recovery have been pushed back to the middle of 2008 — at the earliest. For home builders, the market conditions are already worse than the last housing recession, in 1991-92. And depending on how the subprime mortgage debacle plays out in coming months, this recession could be more painful for the industry than the wicked one in 1980-82.
“Based on activity since early August, our experience is worse” than the past two corrections, Robert Toll, CEO of Toll Bros., told investors at a recent Credit Suisse conference.
Confidence Low
Sales of new homes fell in August to their slowest pace in 12 years, and the median price fell by 7.5 percent, the sharpest annual drop in 37 years. The confidence level of builders has fallen to its lowest point since the last housing recession.
“Who can’t be concerned with what we’re looking at right now?” Toll says.
Many builders, of course, are partly to blame because they overbuilt in some of the most torrid markets and slapped together homes on the speculation the party would go on. Those are the companies now bearing the brunt of the contraction.
But few builders — even the conservative ones — have escaped unscathed. Most of them face wrenching decisions about whether and by how much to reduce headcounts, lower prices, delay or abandon developments and write off and sell assets. And the builders are affecting the health of the broader economy, according to the Federal Reserve.
Short of cash, several builders have renegotiated with their banks to avoid defaulting on the terms and conditions of their credit lines and loans. Builders are squeezing subcontractors and suppliers for discounts. They’re also redesigning homes to be smaller or with cheaper features.
“We are reanalyzing every location we’re in,” said Ara Hovnanian, CEO of Hovnanian Enterprises.
Last month, the company sold 2,100 homes in a three-day nationwide “deal of the century” sale with big price reductions. The company has fired 30 percent of its employees, reduced its inventory of home lots by nearly half, renegotiated with subcontractors and re-evaluated option-contracts to buy land.
“No. 1, we’re not assuming a quick recovery,” Hovnanian says. “We’re operating as if this is going to continue for a long time.”
Since the middle of last year, builders have written off $10 billion in real estate, according to Stephen Kim, an analyst at Citigroup. He expects the companies to write off nearly $4 billion in the third quarter. Several public builders will report their earnings later this month. But Wall Street got a nasty preview recently when KB Home and Lennar released grim results.
Significant Deterioration
KB Home said its cancellation rate spiked to 58 percent for its third fiscal quarter, which ended in August. The company said it abandoned plans to build homes in Indiana and Fort Myers, Fla.
“There was a significant deterioration in the housing market, and this accelerated dramatically toward the end of the quarter,” said Jeffrey Mezger, CEO of KB Home. The number of buyers touring model homes and signing contracts hit “the lowest levels of the current housing downturn.”
KB Home hasn’t borrowed against its credit line but has renegotiated the terms to protect its liquidity. Beazer Homes, Standard Pacific, TOUSA and others have also gone back to their lenders for new terms on their loans or credit lines.
