The Housing Chronicles Blog: Builders seeing a pricing trough through 2012

Thursday, May 8, 2008

Builders seeing a pricing trough through 2012

By their very natures, homebuilders are typically an optimistic bunch, but gathering at this week's Builder 100 conference in Scottsdale, Arizona, they're trying to be more realists than optimists and foresee a pricing rebound delayed until 2012. From a story:

The downturn in home building will end around the end of 2009, with a three- or four-year trough to follow that will last as long as the next president's term in the Oval Office, said KB Home president and CEO Jeff Mezger, Wednesday at the BUILDER 100 Conference in Scottsdale, Ariz.

Mezger said that building activity would pick up during the trough, but that prices would not start increasing until the trough ends, sometime after 2012.

Tom Eggleston, president of C.P. Morgan, based in Indianapolis, said roughly the same, though he pegged the bottom to be at the end of 2008, with a trough lasting through 2012...

As to who was to blame for the housing downturn, the CEOs, including Meritage Homes chairman and CEO Steve Hilton, said there was enough blame for anyone attached to home building. The Federal Reserve Board caused interest rates to fall too far, mortgage lenders offered exotic products that pulled too many people in, consumers were greedy and bought too much...

That excess inventory, still being worked through, had led housing starts to plummet since 2005, begging the question, what is a true sustainable level of new-home starts. The Harvard Joint Center for Housing Studies, as well as the National Association of Home Builders pegs the level of total new-home starts to be 1.9 million per year. But many analysts have argued that number is far too high-considering that the peak in housing starts before the most recent bust was just 2.068 million in 2005.

Eggleston said single-family detached housing starts will be 630,000 units this year, and in four years will grow to 825,000-down from the peak of 1.7 million in 2005. Eggleston said he hoped to see that number grow to 1 million sooner rather than later.

Hilton suggested that the sustainable level of total new-home starts was between 1.5 and 1.7 million, meaning the industry built between 1.5 and 2 million new homes too many during the boom.

Mezger said the 30-year average for new-home starts was 1.2 million. Mezger also blamed the housing recession on, "affordability and pricing."

All three men agreed that builders are facing stiff competition from foreclosed properties currently...

Mezger and Hilton admitted frustration with their sales processes and teams.

"It puts my hair on fire," Mezger said, noting that his salespeople do not follow up with potential customers nearly well enough. "It's (now) a condition of employment."

Hilton put the blame on builders for not investing more in training.

"We have nobody to blame but ourselves," he said. "We became a victim of our own success."

The executives said they and other builders were being far more cautious about any future land purchases and were more likely to buy smaller parcels, though they disputed the notion that builders would move en masse to a business strategy that called for buying no land.

After admitting to having to discount and slash prices to move homes, these building leaders said that they are no longer about growing as large as possible...

Hilton said Meritage is now chasing profits, not revenues. The company is in 12 markets and is not interested in expanding that number, but rather growing share to be 5 percent of each market...

Mezger said KB currently has an average of a 4 percent market share in its current markets (having left Washington, D.C., Chicago, and Indianapolis), and that he wants to see the company hit 6 percent to 8 percent of each market. Once it reaches that goal, then KB might look to expand, Mezger said.

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