Home News Builders Say They’re Ready for This Housing Slowdown. ‘I’ve Learned My Lesson.’

Builders Say They’re Ready for This Housing Slowdown. ‘I’ve Learned My Lesson.’

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NORTH LAS VEGAS, NV – A year ago, business was booming for Touchstone Living Inc. This Nevada builder had a list of 639 eligible buyers on his list of homes about 15 miles north of the Las Vegas Strip.

Today that list has shrunk to about 30. Soaring to 6.94%the highest level since 2002 and more than double from a year ago.

This isn’t good news for Touchstone or its owner Tom McCormick. That said, potential indicators of how this slowdown will play out don’t look like the last time the Las Vegas market crashed.

McCormick said the new company has less debt, fewer lenders, slower growth and fewer land purchases than its predecessor, which faced the 2007-09 recession.

“I learned my lesson,” he said. Still, he said, “I’ve never seen it change so fast,” referring to the rapid decline in sales.

Touchstone owner Tom McCormick says the last recession has taught him important lessons.

Demand plummeted as mortgage rates rose after the pandemic-fueled buying spree that unleashed the strongest U.S. housing boom in 15 years. With new homes expected to be completed in the coming months, many builders are cutting prices.Used house prices are declining from peak in springand construction of single-family homes in September fell 18% year-on-year.

During the initial housing market downturn, partly due to the collapse of the subprime mortgage market, About half of the home builders disappearedHomebuilders who have been through it have learned some hard lessons and said the current slowdown won’t lead to another industry implosion. tightening underwriting standards In recent years, it has reduced the risk of waves of foreclosures.

McCormick’s former homebuilder stopped construction in 2009 after losing the project to a foreclosure. Homebuilders have become more conservative in recent years about taking on debt and owning lots of land, industry analysts say. We are increasing the use of land banks and other third parties that offer the option to purchase land.

Some home builders who have completed single-family homes but have yet to sell them are looking to the rental market for revenue, Sell ​​them in bulk to investors at discounted prices and use them as rentals.

McCormick said rising mortgage rates this year have slashed the number of people wanting to buy his home. “They still had good credit and were doing good work,” he said. But rising house prices and interest rates “just pushed them out of the market,” he said.

Realtors say other prospects are hesitant to buy anything now because of economic uncertainty. Consumer sentiment about the housing market plunged to its lowest level since 2011 in September, according to the .

fannie mae.

“It’s amazing how quickly things have gone from bad to worse,” said Ivy Zelman, CEO of real estate research and advisory firm Zelman & Associates.

Walker & Dunlop Ltd.

But referring to the loose lending environment prior to the 2007 financial crisis, she said, “It’s a big difference from the days when we had exotic mortgage products and no money.”

After mortgage rates soared, the number of eligible prospects plummeted.

During the first two years of the Covid-19 pandemic, homebuilders were unable to build homes fast enough to meet demand. supply chain issues And labor shortages have slowed the pace of construction. Builders limited sale So they never sold more homes than they could build, choosing buyers from waiting lists and lotteries. Prices skyrocketed and builders built as much as they could.

With sales of new homes slowing, the risk of oversupply has increased. According to the Census Bureau, about 800,000 single-family homes were under construction in September, up 11% year-over-year and up 52% ​​from September 2019 on a seasonally adjusted basis. Many of these homes were built before the market slowed.

Some are already sold, but not all.to lure reluctant buyers; or prevent others from cancelingbuilders pay mortgage lenders upfront fees to lower mortgage rates for buyers and offer other incentives such as long-term interest rate locks. Builders are also canceling deals to acquire land. increase.

According to the Census Bureau, the market had 8.1 months of new home supply at the end of August.

“They have a lot of inventory under construction and they want to move it,” said Karl Reichardt, a home building analyst at financial services firm BTIG. “I think it will get worse before it gets better.”

McCormick said Touchstone has less debt and fewer lenders than the company before it headed into the 2007-09 recession.

Renner Ltd.

said in its September earnings call that new orders in the third quarter were down 12% from the same period last year. Average selling prices for new orders were up 1% from the year-ago quarter, but down 9% from the second quarter.

“It is clear that there will be more rate increases that we are trying to address,” Renner Chairman Stuart Miller said by phone. Builders will need to cut prices and offer incentives or sales will fall, he said.

Rising interest rates also hit the second-hand home market. Sales activity from January to September fell 27% on a seasonally adjusted annualized basis, a sharper decline than during the subprime crisis.

Still, existing home prices have been rising nationwide since a year ago. The number of existing homes for sale remains well below historical levels, Millennials are in prime time to buy homes—Both factors could limit price declines, economists say.

New home construction, which accounts for about 10% of total home sales, is likely to see sales slow and prices fall in the short term as new homes are typically more expensive than existing homes and supply continues to grow. facing risks.

For McCormick, the summer slowdown was a scary reminder of how easily markets can turn.

He was the owner of Astoria Homes, one of the largest privately owned home builders based in Nevada, during the housing boom of the early 2000s. In 2004 and at his peak in 2005, Astoria built about 1,000 homes a year.

“It’s been great,” McCormick said. “I became overconfident.”

The supply of new homes in the national market at the end of August was 8.1 months.

When the subprime mortgage crisis erupted in 2007, the housing market collapsed and many builders went bankrupt.became Las Vegas One Face of the State Foreclosure CrisisHomebuilders who overbuilt homes during the boom couldn’t compete with existing homes that sold for far less than new construction.

Astoria’s workforce has shrunk from 170 to three, including McCormick. Some of its lenders have been taken over by the Federal Deposit Insurance Corporation. Mr. McCormick, who personally guaranteed Astoria’s debts, spent years settling them.

Some home builders were so shocked by the crisis that they hesitated to build more buildings for years.

“The great financial crisis was 15 or 16 years ago, but it still feels very fresh and raw to Las Vegas builders because they are more vulnerable than anyone else in the country. Because I was facing it,” said Ken Perlman. His principal managing John Burns Real Estate Consulting based in Irvine, California.

As a result, the supply of new housing is not as surplus as it was before the housing crisis.

Nationwide, the number of home builders fell by 50% between 2007 and 2012, according to the National Association of Home Builders. Single-family home starts fell from 1.7 million in 2005 to 445,000 in 2009, according to the Census Bureau. The builder said he would not reach his one million single-family home starts again in a year until 2021.

By 2012, McCormick was ready to step in. He expected Las Vegas’ population to continue to grow and housing prices to recover. Touchstone sold its first home in 2014. It is the largest privately-owned builder based in Nevada, and last year it captured about 4.8% market share in the Las Vegas area, according to Builder Magazine.

For McCormick, the slowdown in sales was a terrifying reminder of how quickly markets change.

The S&P Homebuilders Select Industry stock index is down 36% this year, outpacing the S&P 500’s 21% decline. U.S. homebuilder confidence fell for the 10th straight month in October, reaching its lowest level since May 2020, according to NAHB. About a quarter of the builders surveyed by the association in September said they had lowered prices in the previous month.

In the Las Vegas area, new home sales fell from more than 1,000 monthly sales in the first quarter to 488 in August, said Andrew Smith, president of Las Vegas-based Home Builders Research.

Perlman said most Las Vegas-area builders surveyed in September lowered prices from August levels, given incentives such as interest rate buybacks.

McCormick hopes Touchstone’s pricing will favor his company in a depressed market. Touchstone homes sell for around $315,000 to $433,000. According to Home Builders Research, the median closing price for his new homes in the area in August was about $492,000.

In September, Touchstone decided to: Started leasing some properties Demand for homes is expected to remain low.

“People still want to own a home, but they can’t afford it,” McCormick said. “So we have to change our business plan.”

write destination Nicole Freedman [email protected]

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