At least eight weeks before the end of 2005, David Hill worried publicly that the new-home market had peaked. He'll be the first to confess now, however, that not even he could see what was going to happen in the first half of this year.

Like many of his big builder colleagues, the CEO of Kimball Hill Homes may have been deceived by the mixed signals of a new-home market gone slightly haywire after a mind-boggling run of record-setting years that kept defying economic precedent. Even accounting for the hyperbolic arc of growth that was unsustainable and for a cathartic purge of “flipper” buyers, the market forces that cause natural demand for new homes to increase appeared to be healthfully at work.

Ironically, the market's quirky behavior of the past few years set up most big builder executives to expect another pleasant surprise. Even as investors bolted and inventory fever-charted to new heights, deep down they believed demand would continue to prevail as it had the year before, and the year before that. After all, a litany of positive forces still fueled the home-buyer pipeline: job formation, income growth, immigration, existing home obsolescence, aging baby boomers, the emerging Generation Y adults, and more. So why not go ahead and predict another record year—and to hell with the greedy flippers?

But then June's numbers came to light. It was clear the mojo was all but gone.

In what should have been the most prolific sales month of the year, new-home sales dropped 11 percent versus June 2005 sales. What's more in June, the number of for-sale homes increased 20 percent over the previous year. Cancellations, a normal business phenomenon, suddenly leapt to menacing rates in many of the highest-voltage markets of the past three years.

“If you look at the inventory, we started to see it back in March,” Hill admits. “But why so many smart people did not factor it in, and why people didn't cut back on starts to be more in line with sales until early May, is because you have such a seasonality of the sale. You could always say, ‘Of course, we're ahead. Of course, we're building up inventory.' But, we're going to sell them all and deliver them all in April, May, and June like we always do.”

In fact, April sales inched upward, a decoy that got many thinking, “here we go again.” However, by May, every company with operations in what had been the country's best new-home markets found itself caught in gravity's downward grasp. “I think the period of realization for most CEOs was either the end of April, [or] certainly by the end of May. Everybody was sure that there was something really surprising happening,” Hill says.

Unlucky Five In the last major residential real estate downturn of the early '90s, the NAHB estimated nearly 15 percent of the country's 385,000 home building companies went out of business after the Financial Institutions Reform, Recovery, and Enforcement Act became law in 1989. The new standards limited the amount of money an S&L could lend to any one builder or developer and put a serious pinch in the industry's primary financing methods. These companies are among the most memorable bankruptcy filings from that era. NVR, of course, made an impressive return from the clutches of oblivion:

  • General Homes, Houston (1990)
  • Gemcraft Homes, Houston (1989)
  • Nash Phillips/Copus, Austin, Texas (late '80s)
  • U.S. Home Corp., Houston (1991)
  • NVR, Reston, Va. (1992)