Builders hunker down, try to wait out drought
As homeowners lose their houses to foreclosure, builders worry about losing their shirts.
Many small builders are struggling to stay in business, and larger, publicly traded development companies are reeling under huge losses as lenders tighten credit and housing sales stall.
On Wednesday, Ryland Group Inc. of Calabasas reported a second-quarter loss of $241.6 million, seven times higher than the average estimate of a Bloomberg survey.
The Ryland loss followed a report earlier this week that June housing starts were down 44% in California from a year earlier. “It’s very bad, the worst I’ve seen,” said Mick Pattinson, a 32-year industry veteran and chief executive of Barratt American, a private builder based in Carlsbad. “It’s impossible to build anything today at a profit, so builders are either taking losses or have pretty much stopped building,” he said.
Pattinson said his company, which builds in San Diego County and the Inland Empire, is down to 40 employees, from a high of 140.
“We’re trying to stay alive,” said Pattinson, whose company is scraping by with reconstruction work in fire-damaged parts of San Diego and a few custom home orders.
In addition to the 44% decline in housing starts last month, the California Building Industry Assn. said its latest figures on new-home sales showed a 51% drop-off in May from a year earlier.
Hopes for a recovery “have fallen apart” and that is “going to make the rest of 2008 a rocky ride for home builders,” said Jonathan Dienhart, research director of Hanley Wood Market Intelligence, which prepared the builders group’s report.
The Los Angeles area, which includes Orange County, has fared even worse than the state as a whole, the report said.
New-home sales in May were down 79% from a year earlier, and median sale prices for the month were off 23% from a year earlier, to $409,990. California new-home prices in May were down 14% from a year earlier, to $379,000.
Pattinson said financing was a major problem. Banks are making it difficult for builders to work out faltering loans, he said.
Pattinson said a group of about 30 builders had been meeting every two weeks in San Diego to discuss problems, such as banks cutting off financing for projects that are already underway.
Many builders will go under, Pattinson said, because “banks aren’t supporting businesses that supported them for decades.”
The few new houses that are selling are often niche projects. In Fountain Valley in Orange County, Far West Industries sold out a 54-home development, with many houses priced over $1 million, in three months.
Far West senior vice president Scott Lissoy said the project worked because there was little available land for new homes in Fountain Valley and demand was strong for the area’s high-performing school district.
Lissoy said that, because he grew up in the area, he was confident there would be enough buyers for the development when his company acquired the land in 2006, even as the housing market was cooling.
“I understood there was very, very limited opportunity for new home construction,” within the school district, he said. At the same time, Lissoy believed there was pent-up demand from families in nearby areas such as Garden Grove and Westminster who wished to trade-up.
In the Inland Empire, however, the company has had to slash prices to sell its houses and has slowed new construction.
Lissoy said the Santa Ana-based company was now focused on buying discounted land abandoned by others and holding it until the market recovered. Far West recently purchased 300 lots in north Indio from another builder. “We bought them to hold until the market stabilizes,” he said.
When might that be?
“I do not know when we can even talk about a recovery,” Lissoy said.
The National Assn. of Home Builders index of builder confidence hit a record low this month after rising earlier this year. July’s index score of 16 on a 100-point scale was the lowest since the index began in 1985.
Ryland reported its earnings after the close of regular trading, where its shares gained $1.16 to $26.50.
The company said it lost $5.70 a share, compared with a loss of $1.25 a share for the same period last year. Revenue fell 34% to $487.9 million.
Ryland shares fell below $25 in after-hours trading. Company executives will discuss earnings in a conference call with analysts today.
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