Every business gets hit with a piece or two of bad news in a normal year. But builders again hit numerous obstacles to profitability--and just business survival--this year in an onslaught that took out many weakened players and continues to challenge the rest. Here are our 9 tough breaks for builders in 2009.
Foreclosures--and distressed sales--continued to rank as one of the biggest business challenges of the year in 2009 for builders and, unfortunately, are expected to be a plague in 2010 as well.
The numbers are sobering. In October, for example, more than 332,000, or one in every 385 housing units in the country, received some sort of foreclosure filing (default notices, scheduled auctions, and bank repossessions), according to California-based RealtyTrac. That figure, while down slightly from the previous month, was up nearly 19% from the same month in 2008.
The builders who could fight back did, by redesigning their homes or options to compete. They marketed the economic value of their new homes' greater energy efficiency compared to existing houses. Many also focused on the entry-level market, where buyers could take advantage of the first-time buyer tax credit and didn't have to worry about selling a current home.
2. Appraisal Problems
New appraisal rules introduced in 2009 sucker-punched builders who were already trying to get off the mat. Even if a builder (or an existing homeowner) managed to find someone to purchase a house, builders and sellers often found themselves forced to lower the price at closing or lose the sale when appraisals came in below the sales price.
It wasn't supposed to work this way. The new Home Valuation Code of Conduct, HVCC for short, requires lenders who want to sell their conforming loans to Fannie Mae and Freddie Mac to follow new rules designed to ensure greater appraiser independence and more honest home valuations.
However, critics complained that the rules overcorrected for boom time sins, turning home price inflation to deflation.They argued that low prices for distressed properties were unreasonably dragging down values for other homes, that the new rules encouraged the use of appraisers who were either inexperienced or unfamiliar with the market, and that the new requirements slowed down the sales process.
3. Weak Consumer Confidence
Uncertainty about the job market, falling home values, and worries that they couldn’t sell their own homes for any price--much less for what the paid for them--kept many consumers out of the housing market in 2009.
As the year wore on, there were some signs of improvement, as home prices seemed to bottom and stabilize. But builders have pronounced that stability to be fragile at best, saying that new declines in home prices or rises in mortgage rates could shatter that tenuous situation.
4. Elusive Profits
Builders who did sell homes in 2009 often lost money in the process, selling homes at low or nonexistent margins to shake whatever cash they could from the market. And they started the year in tough shape. According to Shinn Consulting, which does an annual financial survey of private builders, 2008 was the worst year financially for builders since 1970.
Public builders also struggled, adding minuses to their quarterly financial reports. Most managed to narrow their losses as the year progressed by slashing overhead, and a few are promising a profitable 2010. Still, it will be a challenging year. Many have shrunk themselves to the limit and the number of homes they closed in 2009 was even lower than in 2008.