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question everything Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Nov-14-07 02:59 AM
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Home Builders Opt for Mothballing
The Wall Street Journal

Home Builders Opt for Mothballing
Some Bet Projects Put On Hold Will Hurt Less
Than Losses on Discounts
November 13, 2007; Page A19

As the glut of unsold home remains stubbornly high and housing demand slides, home builders face a dilemma: to sell, or not to sell? Lennar Corp., for one, has joined the "not to sell" camp at its development in Orange County, Calif. The Miami company plans to finish building 259 homes -- the first phase of a 1,100-unit development in Irvine -- but it has decided not to sell any of them until the constrained mortgage market and swollen housing inventory improves.


Analysts expect more builders to mothball projects in the coming months, as they decide that the losses from selling homes at huge discounts are greater than the costs of carrying properties on their books. But it's not an easy decision. Builders are facing increasing pressure from lenders to service their debt and also have overhead expenses to support.


Some builders don't have the luxury of waiting for a brighter day. The more highly leveraged companies are slashing prices to move inventory to generate cash and pay down debt. This fall, builder Hovnanian Enterprises Inc., based in Red Bank, N.J., offered discounts on homes of as much as 30%, while Standard Pacific Corp., of Irvine, Calif., has been offering discounts and other incentives of as much as 25% on certain homes. Both companies say their recent, heavily marketed discounts have sparked sales in the difficult market.


Lennar's move in Orange County is unusual in that the company is mothballing homes. Builders typically mothball partially developed or undeveloped land because vacant homes require watching. One alternative would be for builders to sell their land instead, but that market is even more dismal than the one for housing. Recent land transactions in California, Phoenix and Southeast Florida, while few in number, have fetched discounts of 70% and 80% on finished lots, according to Zelman & Associates, an independent housing research firm.


Builders continue to put up new homes, though in far fewer numbers than during the housing boom. According to the Census Bureau, builders started construction on 79,400 single-family and 21,200 multifamily homes in September, which was down 33% and 31%, respectively, from the same month a year earlier. Housing starts are off by about 48% from a peak in January 2006. Considering there are too many houses already looking for buyers, it might seem surprising that builders are building at all. But unlike auto manufacturers that can ramp production up or down in a matter of weeks, it can take years for a housing development to makes its way through the development pipeline. By the time the builder has spent money putting in roads and sidewalks, the housing market may have turned.


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Sen. Walter Sobchak Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Nov-14-07 06:35 AM
Response to Original message
1. yeah, well lets just see how patient your project financing is
The California housing market hasn't fallen a quarter of what it is going to, this is a stupid idea the cost of preserving unoccupied homes will only increase the loss they are going to take on these properties. To say nothing of the fact the project financing will hit the roof, they are not in the long-term or high-risk financing business.
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sendero Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Nov-14-07 07:55 AM
Response to Original message
2. That means..
... that they think the downturn will be short lived. Because it costs money to sit on such substantial assets, and the clock will be ticking.

I predict the moth-balling won't last long enough to do much good.
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AnneD Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Nov-14-07 02:32 PM
Response to Reply #2
3. It never went far ....
during the Houston RE bust of 87. That thinking lead to the S&L crisis....
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sendero Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Nov-14-07 06:49 PM
Response to Reply #3
5. I see it mostly...
... as typical dig in your heels thinking.

The same thinking that will cause many to lose their house because they were unwilling to sell at a 5% loss, so now they will take foreclosure.

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Warpy Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Nov-14-07 02:54 PM
Response to Original message
4. I saw this in the late 70s and early 80s
Builders would stop in mid construction, seal door and window openings, and generally leave houses half built until the market turned around. Employees got their pink slips unless they were needed for the tide me over business of home renovations, something that picked up when high interest rates killed the market for new construction.
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