“Mothballing” -- When builders stop building

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Here’s another headline that was hard to imagine a year ago: Homebuilder Lennar has announced plans to ‘mothball’ a major development in Irvine: ‘The company announced that it will build just 259 of the 1,100 homes planned for its Central Park West development in Irvine and will not sell any until the market improves, an industry practice known as ‘mothballing.’

USC real estate expert Stan Ross lays out the logic behind ‘mothballing’ here, along with the pros and cons of its impact on the market. Some highlights:

--’Mothballing means shutting down new construction and putting future development activity on hold until the market changes, then resuming once things have improved.’

--Historically, it has been a smart move for builders with deep pockets and the ability to drop out of certain markets for a year or longer: ‘Mothballing can be extremely beneficial. I’ve been through six down cycles in my lifetime. When you go back to the last couple of cycles, those companies that had the financial capacity to just hold on to their inventory wound up with a huge recovery when the markets turned.’

--The impact on the overall market is mixed -- ‘Mothballing is beneficial to existing homeowners trying to sell because it stops further reductions in price. ... On the other hand, neighbors of mothballed areas might say, ‘I thought I was living in a neighborhood, and now I’m next to vacant land.’ And worse than that is, if a company mothballs an amenity that’s been promised, like a playground or a park, customers are really unhappy.’

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Photo Credit: Reuters