Tuesday, November 13, 2007

Home Builders: To Build or Not to Build

by Calculated Risk on 11/13/2007 10:11:00 AM

The WSJ has an article today, Home Builders Opt for Mothballing, that starts with Lennar's decision to halt work on projects in Orange County, CA.

The WSJ article discusses an important point that we've discussed before. Many of the home builders are stuck with too much land and too much debt. They can't sell the raw land, so they keep building - and selling at a discount - to service their debt.

One alternative would be for builders to sell their land instead, but that market is even more dismal than the one for housing. Recent land transactions in California, Phoenix and Southeast Florida, while few in number, have fetched discounts of 70% and 80% on finished lots, according to Zelman & Associates, an independent housing research firm.
Some builders don't have the luxury of waiting for a brighter day. The more highly leveraged companies are slashing prices to move inventory to generate cash and pay down debt. This fall, builder Hovnanian Enterprises Inc., based in Red Bank, N.J., offered discounts on homes of as much as 30%, while Standard Pacific Corp., of Irvine, Calif., has been offering discounts and other incentives of as much as 25% on certain homes.
"Many builders are stuck between a rock and hard place," says Jonathan Dienhart, director of published research at Hanley Wood Market Intelligence, a housing research firm in Costa Mesa, Calif. "They can't make money by building, and they can't make money by not building. They have to choose the lesser of two evils."
To build or not to build: that is the question.

I suspect there is no right answer for some.