Real Estate Investing

Fort Worth-based D.R. Horton Inc., one of America’s largest homebuilders, has had a hard year. Revenues dropped from $2.8 billion to $1.71 billion, home closings fell 36% and cancellation rates stayed at 44%. And they are not alone. Builders across America are running into similar hard times.

According to the Commerce Department, housing starts in January were at their lowest level in 17 years. Just over 1 million new homes were started in January, up 0.8% from one month prior, but down 28% from one year prior. Builders have offered all sorts of incentives to pique buyers’ interest, including discounts deep enough to anger surrounding homeowners who paid full price only to see their home value drop like a rock.

D.R. Horton is no different, except maybe in marketing tactics. The company’s recent “unauction” offered “auction-level pricing without all the hassle.” The tactic, also commonly referred to as a “firesale,” offered discounts of up to 50%, more than $300,000 in many cases. These are in about two dozen developments in southern California, a notoriously pricey real estate market. Well, obviously, response was overwhelming, with a line of buyers camped out in sleeping bags in the cold. According to the Outstanding Investment blog, this is the first of many such sales as builders look to cut their losses and boost their capital. What a boon for first-time homebuyers!

There have been some debates as to whether the U.S. housing market is truly as bad as proclaimed, or whether it is largely perpetuated by the media. From reading local news reports, it does appear that the national picture of doom and gloom may be a tad overblown. Here are a few stories from the local fronts:

1. Glenwood Springs, Colorado

2. Charlotte, NC

3. Jefferson County/Mt. Vernon, Illinois

4. Albany, NY

5. Boston, Mass.

6. Clarksville, Tenn.

7. Syracuse, NY

8. Seattle, Wash.

9. Austin, Texas

10. Bismarck, ND

11. Salt Lake City, Utah

12. San Juan County, NM

And this little gem, Real Estate Not Deflating in Entire U.S. See? It’s not all doom and gloom! But if you live in one of the areas of the U.S. that are suffering (and they’re certainly out there), stay tuned to learn some innovative selling techniques.

There is a raging debate with a thousand fingers pointing over whether a housing bubble even exists and who’s to blame. Federal Reserve Gov. Kevin Warsh recently stated the “market turmoil and economic uncertainty” is not caused solely by the subprime lending free-for-all, which makes sense. There must be several contributing factors.

It does seem there was plenty of writing on the wall to slow subprime lending long before the bottom fell out. However, the same applies for investors as well as ignorant consumers who didn’t educate themselves on the homebuying process and allowed themselves to be vulnerable.

Last but not least, as painful as it may be to admit, homebuilders definitely helped make this bed. This is another raging debate, but it cannot be denied that homebuilders contributed to the current housing surplus. Now, home starts are at a 10-year low and the National Association of Home Builders has found its members’ confidence levels at a 16-year low, The Wall Street Journal’s MarketBeat reports.

“And while builders have scaled back dramatically on housing starts and permits for additional homes to the lowest point in more than a decade, soft sales and years of overbuilding in some markets have resulted in a serious glut of new homes for sale on the market, according to government figures.”

This is a personally painful topic because I have a lot of ties to the building industry, but builders do tend to put a relentlessly positive spin on bad times. I recently interviewed one very successful builder who blamed the media for the housing market downturn. If the media would just say one positive thing about the housing market, he said, everything would turn around tomorrow. Fortunately for that builder, he was in Texas, where reality is a little less harsh than other areas of the U.S.

In their defense, builders are far from the only uber-optimists we could point to. That’s why it’s interesting to see then-and-now quotes from housing market experts, analysts and professionals.

October 2002, Alan Greenspan testifying before Congress:

“We’ve looked at the bubble question, and we’ve concluded that it is most unlikely, mainly because, one, we have a very diverse real estate market throughout the country.”

Sept. 16, 2007, Alan Greenspan in a Financial Times interview:

“The decline in house prices ‘is going to be larger than most people expect,’ Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market.”

Sept. 4, 2004, David Lereah, then-chief economist for National Association of Realtors:

“There is no national price bubble. Never has been; never will be.”

Sept. 23, 2007, David Lereah to The New York Times:

“Even the people that were talking about booms busting, my goodness they were talking about it in 2001 and 2002. And they were wrong for four years and they only became right at the end of 2004.”

Dec. 2006, Robert Toll, CEO, Toll Brothers, Inc., largest U.S. luxury homebuilder, in fourth quarter 2006 conference call:

“We don’t think it’s illogical to assume that pent-up [housing] demand is building.”

Sept. 18, 2007, Robert Toll, quoted by Reuters News Service re: the Fed’s decision to cut interest rate by half a percentage point:

“I would have done a quarter instead of a half because it signals we’re in deep doodoo.”

Now if you’ll excuse me, I’m going to go bury my head in the sand. Come get me when it’s over.