Housing 2009

Year of Transition

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Housing 2009

The huge glut of vacant, unsold builder inventory across the nation is almost completely gone. National builders and bank asset managers discounted the existing new homes until the specs were sold, often at huge losses. The land-bank accumulated by anxious builders for future development and sales is virtually gone. The greed driving more and more development gave way to fear of a spinning interest meter attached to the income-depleting vacant land. Unfortunately for most, it was 12 months too late.

The third and fourth quarters of 2008 devastated many local and national builders as the recession took hold and Wall Street disintegrated. Bear Stearns, then Merrill Lynch, and finally Lehman Brothers were effectively dissolved, causing panic as the stock market declined and the Federal Reserve Chairman and Secretary of the Treasury begged for funds. Thousands of speculators and home-buyers refused to close on new home purchases, and walked away from earnest money and deposits held by builders. The inventory of finished homes burned through fully phased construction loans, and that coupled with depleted and fearful banks unwilling to extend lifesaving lines of credit, were the death knell for under-capitalized and over-extended builders.

In many cases, lenders needed to repatriate the funds from individual new home closings, and demanded all the proceeds to clear the title and to reduce debt on other lines of credit. The fear of loss overcame greed for lucrative fees and interest charges; lenders protected their loans. Many builders were left with no proceeds to continue operating, and were left with no choice but to close the operation. Tradesman, suppliers, superintendents, sales and office staff, as well as owners and directors lost jobs and positions. The fear of expanding capital loss drove banks and lenders to acquire unsold inventory in an unfriendly environment. Primary lenders received partial re-payment, and those further downstream received nothing, resulting in many suppliers and sub-contractors facing financial difficulty. In true "trickle down" fashion, losses mounted.

"Greed gave way to fear!"

In an attempt to anticipate future growth and development, expensive land holdings were acquired during the greedy years of 2005-2007. Many national builders recognized the potential devastation inherent in their leveraged land banks and liquidated early into the down cycle. Some builders refused to sell their holdings, but eventually their lenders sold at huge losses, often for less than the development costs. As the de-leveraging reached crescendo, anyone over-encumbered was financially swept away. Greed gave way to fear!

The financial storm seems to be passing. Fears of a double dip or "W-shaped" recession are not materializing. There has been much damage done to the economy, and there is a huge clean up underway. Unemployment will be high for the next 12 months, but should start to decrease by the spring of 2010. The trillions of dollars earmarked for the recovery have not been fully deployed, and as the capital enters the economy, there should be a very noticeable improvement... possibly soon.

"...the supply of bank foreclosures should dwindle to a trickle, and the financial storm will have been reduced to showers from an epic hurricane."

The surviving home building companies have written down balance sheets and incurred huge losses. They are different organizations now than a mere 12 months ago. They will encounter far less competition going forward. They will have better sub-contractors because the inferior companies are no more, and the surviving builders will get better service and better pricing. New land acquisition will be at a much-reduced cost basis, and lower interest rates will reduce holding costs. Possibly within the next 12-18 months, the supply of bank foreclosures should dwindle to a trickle, and the financial storm will have been reduced to showers from an epic hurricane.

The natural growth of the US population will likely seed pent up demand for new homes; cautious and wiser builders may start to grow again and be profitable. The markets appear to be normalizing; the new business cycle is starting. The cycle will again swing from fear back to greed, but hopefully our experience with excess leverage will not be soon forgotten; nor the ugly face of fear!


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