The homebuilders are obviously stuck in a rut. Sales of new homes in and around Irvine have ground to virtual halt, and in response the builders have attempted one of the following remedies:

• Suck it up and finish buildout. Communities that are more than 80% built out may find it easier to finish contruction and offer the last units for sale. Observed behavior has been to lower prices modestly and/or wait for someone to buy at a long-standing price.
• Postpone. This can take the form of postponing the start of a community (Orchard Hills), or postponing the sales even though models are built (Woodbury East). It is theoretically possible for a partially built & sold community to suspend sales with the intent of re-opending, but I am not aware of any examples.
• Bail out. This can take the form of abandoning plans to build, or more interestingly, actively euthanising a partially built community without any intention to return. Portola Springs’ Decada and Columbus Square’s Astoria are good examples; each shut down after one to two years of sales and not even reaching half of originally planned buildout.

Despite the fact that the market has changed so drastically from that of two years ago, I don’t sense an appropriate level of urgency on the part of homebuilders or the Irvine Company in adapting to the new downward-moving market. I’d like to offer my constructive analysis of what will and won’t work to get customers buying again. Some of these are based on what has been attempted or might be. Others are just ideas.

What Definitely Will Not Work:

1. Sell even harder the great lifestyle that awaits. We’ve all seen a nauseating number of markeing pitches showing thirtysomethings drinking wine in a back yard or at a dining room table, sunlight trail biking/exercise pictures, and a strange emphasis on shopping that is two minutes away (as opposed to having to drive a whole six minutes to get to the on of the other dozen retail areas in Irvine).
2. Try to make a big deal out of underwhelming discounts that are (at least) months behind reality. It is not just naive private sellers that demonstrate proclivity in chasing down the market. Despite some relatively aggresive cuts early in the slowdown, new homebuilders also participate in the “day late and dollar short” school of thought by offering $25k or $50k off of residences that were $75k-$100k overpriced when first floated and are now $125k-$150k or more overpriced because time has elasped, the market has worsened, and the prices haven’t changed.
3. Offer ‘until close of escrow’ price protection. With virtually no sales taking place and inventory likely ready to go, anyone who does purchase probably will have a 30ish day escrow. In this slow of a market, no reductions are likely to take place in that timeframe, and if they did, the buyer can always play the game of I-won’t-close chicken to secure discounts.
4. Lightly subsidized and/or teaser interest rates. This seems to be a favorite of Laing, and I don’t understand it on two levels. Consumers have learned they can refinance if rates fall, and they know they pay taxes forever on the sales price of the house. Also, weren’t teaser rates the huge contributing factor to the current pickle the market finds itself in? With increased consumer wariness of any “you can afford it for the first XX years” arrangement, it seems unlikely these woudl prove popular.

Observation of the housing market in the months since last August’s meltdown in the secondary mortage market shows increasing signs of stress among the homebuilders. In addition to numerous further postponements, some builders have started throwing in the towel on certain communities. Here is a summary of what is updated and new since my initial post on this subject in October of 2007.

One source of particular interest and discussion is Orchard Hills. Originally slated for opening in late 2007, this was officially pushed back to 2009, and only a few months later the website is showing 2011.

Although a dissappointment to some Irvine Housing Blog

May 2007 saw the reasonably-well publicized departure of David Lereah as “Chief Economist” of the National Association of Realtors. To understate the point, Mr. Lereah has been the object of plenty of attention in the housing blog community. Most of the attention was negative, and resulted from the frustration of repeatedly seeing and hearing him quoted in the mainstream media as something of an impartial expert regarding the condition of the housing market. Perhaps not surprisingly, Mr. Lereah tended toward the positive in his interpretation of housing sales data and future predictions, even when signs of weakness began to appear in the market. This must-see graph captures some of his better quotes, and when he offered them.

For those that didn’t explore the first link, Mr. Lereah published a book in early 2005 entitled “Are you missing the Real Estate Boom? Why home values and other real estate investments will climb through the end of the decade- and how you can profit from them.”

In 2006, this book was retitled “Why the Real Estate Boom will not bust- and how you can profit from it. How to build wealth in today’s expanding real eastate market.”

It is therefore interesting and amusing to see Mr. Lereah change the spin on his way out the door, and begin to apply some revisionist history. In this interview with Bob Brinker from early May, he even goes so far as to chastise the “speculators who strayed from fundamentals…and got us in trouble.”

David Lereah Interview

[audio:https://www.irvinehousingblog.com/wp-content/uploads/2007/06/DavidLereah.mp3]

If you want to skip ahead, his comments regarding Southern California arrive just after the 13 minute mark. Here are the highlights:

“L.A., San Diego, they are all out of whack right now. Prices got too high for the median household…there’s going to be a long period here, of recovery. Homesellers have been stubborn, they haven’t been reducing their prices as fast as their Northeast counterparts. Home sales are way down right now, and it will take price decreases- sellers lowering their prices- to bring buyers back to the marketplace. I suspect we’re not going to see any type of recovery there until at least 2008.”

While these decidedly negative comments may not sound particularly surprising to many of us, they are coming from the most prominent market cheerleader of the past several years, bar-none. The ‘soft landing’ holdouts may find this particularly sobering (and they should).

Despite this apparent dose of rationality, David still makes some bizarre remarks that are worth listening for:

1. If speculators wouldn’t have come in to Vegas…
2. Commissions are Commissions
3. The baseball team the could save D.C. real estate
4. Fingers and toes crossed, X2

Bob didn’t exactly give him a tough interview, but having David on the hook for more than a glib, obfuscated single quote was worth it to me.

It will be interesting to see how David’s heir apparent, Lawrence Yun, does carrying the torch as the market continues to correct, unwind, fall apart, or whatever you want to call it. Donning the skirt and waving the pom poms will require even more gumption in the months ahead.