Long-term demand may be on the rise, but swollen inventories, sub-prime fallout, and crumbling consumer confidence are sidelining buyers in the meantime.
Face it. Deep down inside, you knew this was going to happen, sooner or later. Things just couldn't keep going they way they were. You knew it was a bubble; you had plenty of stories in newspapers and magazines and on TV to back up your conviction. Plus, you've been in this business long enough to know that housing runs in cycles. And you are one of the few who was prepared for this.
Or perhaps you were not.
If the latter is the case, or even if it is not, now is when you'd best get prepared. The best way to do that, based on other businesses in which bubbles have burst and left the laggards out to dry, is to rethink strategy while casting a jaundiced eye upon the information on which you base decisions.
Here is the reality: New-home prices on average rose 30 percent in 2003, 2004, and 2005. At the same time, starts overshot the market–discounting flippers and financially overmatched buyers–by as many as 300,000 homes. Now it's payback time. And for big home builders, it's a question of how much of the bounty they reaped will need to be given back to the market. The ultimate cost seems unknown since "the bottom" of the cycle remains unclear. Still, there's no such thing as business today without weekly, monthly, and quarterly projections. Projections minus visibility demand one thing: Multiple scenarios.
This is the first in a three-part series that intends to help you conduct that rethinking. It explores the widely held theory that there is pent-up demand for new homes in the marketplace. Unleashing it, if it exists, could buoy the market.
However, in the July issue, we'll assume a status quo scenario in which economic stability prevails and the spotlight is cast on "The Inventory Debacle." In August, we'll present the ramifications of the housing market dragging the entire economy into recession. Stay tuned for parts two and three.
Tucked up against the foothills of California's San Gabriel Mountains, 25 miles east of Los Angeles, likely sits the last new homeownership opportunity of any real magnitude in the San Gabriel Valley–forever.
Beckoning move-up buyers with breathtaking views, a panoply of amenities, and a brand-new school, the 500-plus acre community of Rosedale has more than 6,000 people registered as "interested" in its eventual 1,250 single-family and attached residences. While traffic is strong, the challenge for the project's builders, among them Fieldstone Communities, is converting those leads into sales.
"All the builders in here recognize that it's a very special place," says Jo Faris, Fieldstone's division president. "Unfortunately, we aren't selling homes two years ago, we're selling now. The challenge today is getting buyers' homes sold so they can purchase homes in Rosedale. If those buyers had their homes sold, there would be incredible demand."
For months, contrary to economic analyses, builders have clung to the conviction that by solving some secret code–be it creative promotions, a reverse in psychology, an A-plus location, an unforgettable product offering, or too-good-to-be-ignored prices–demand could be unleashed, from the community level up through the entire industry. The requisite macroeconomic drivers, the very indicators that have been traditionally relied upon to trend the past and model the future, support that notion. The three fundamentals of demand for new homes–household formation, second-home/vacation home demand, and need to replace obsolete housing stock–are on the rise.
Yet, if Faris seems more tense than enthusiastic, it's likely because her laptop holds a myriad of economic reports and consumer data that clearly dispels any notion of pent-up demand. Sound conflicted? It is.