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alstry (< 20)

Time to STOP Building??? Foreclosures are rising dummies!!!!



June 01, 2008 – Comments (0)

Many of us have been reading about rising foreclosures.  Many of us have been reading about record price declines.  Many of us are aware that as prices continue to decline, the liklihood of additional defaults increase as more and more homeowners fall underwater on their mortgages.

In many communities around the country, home prices have fallen so far that selling prices are below construction cost.  Many of these high foreclosure areas are where large public homebuilders concentrated their building over the last seven years.

States such as Florida, California, Nevada, Arizona, and Texas have been effected the most.  This is exactly where public homebuilders focused their construction efforts selling homes to the masses.  Now the masses are giving back the homes and inventory is so high in some of these areas that homes are selling for half price or more off.

Not only that, rising default notices in these areas are assuring much more distressed inventory and further price declines as we head into the slower selling Fall season.  NOBODY WANTS TO BE HOLDING INVENTORY INTO WINTER.

At the point of homes selling for below construction cost, it becomes a guartanteed money losing and cash flow negative proposition for a builder to even build a house. 

Fort Meyers Florida is the epicenter of this phenomena.  Homes that were selling for upwards of $250K can be obtained for around $100K.  Builders can't build the homes for $150K even if you gave them the land for free.

Those that must sell their homes, job losses, job transfer, illness, ect....are likley very underwater if they purchased  within the last few years.  Many of these homes are flooding back to the banks and  the banks are liquidating them at cheaper and cheaper prices on the market creating a very negative downward spiral.

As foreclosures continue  to rise in areas where new homebuilders  congregate, prices will continue to fall.  Now that prices have fallen  below  construction cost in many areas, many HBs are simply shutting down to stem the negative cash  flow.

Those homebuilders that can contract to dirt and cash will likely survive, those with dirt and debt will fact significant hurdles.  The quicker a HB shuts down in these markets, the more cash that can be preserved.

From a SacBee article:

In Plumas Lake: a Ryland Homes subdivision called Thoroughbred Acres. Five lovely models and nothing else. Behind it a pile of Ryland flags and poles. I walked up to read the writing on the flags and a jackrabbit ran off. Down Arboga Road, another subdivision by Lakemont Homes. Even the models had dead lawns.

This weeks conference calls should be very interesting to see how HBs are  dealing with the foreclosure problems in their markets....some may argue a foreclosure problem they helped create by reckless overbuilding simply to generate cash flow and maintain handsome executive compensation packages.



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