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Builder Mentality Question
Old 12-23-2007, 03:47 PM   #1
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Builder Mentality Question

I see locally a phenomenon that virtually everyone who reads this blog is observing, the continued building of residential and commercial structures.
My question is, what motivates a builder to continue throwing bad money after good? We have been sliding into a disastrous time for construction, yet they build on, be it spec house or entire development.

Are these guys idiots? Cock-eyed optimists? Do they have a way to game the system and come out ahead after all?

It would seem to be a case, to misuse Brewer's colorful metaphor, of pitching meringues down a black hole. Overall, the first loss really is the best. Why double down? Why not cut and run?

Any builders on this site who could enlighten us about whats up?

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Old 12-23-2007, 03:59 PM   #2
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I'm not a builder but I did recently see something totally counter to your initial post, something I've never seen before.

There are 7 or 8 new subdivisions going up in the 15 mile area between my location and the city. One of them, a DR Horton development, just got started earlier this year and the first three houses (model homes I'd guess) started going up in October. The roads weren't even paved yet, but there were big signs saying "Reserve Your Homesite Now!" in front of a temporary sales office fronted by a huge flagpole with a big DR Horton flag flapping in the breeze.

When I went by a couple of weeks ago the sales office was closed, the signs were gone, the flagpole bare, and the three homes under construction were being bulldozed! No changes I can see in the pace of construction in any of the other subdivisions, but looks like this was a cut & run situation.

Numbers is hard.

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Old 12-23-2007, 04:38 PM   #3
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Originally Posted by REWahoo View Post
I'm not a builder but I did recently see something totally counter to your initial post, something I've never seen before.
A couple local land plats, destined to become the Koa Ridge neighborhoods, have been mired in environmental impact statements, lawsuits, and land/natural resources controversy for over two years now. These situations used to be reconciled fairly quickly at the local/city govt level but people appear to have had enough with sewer, water, school, and traffic problems. The local hospital has backed out of the development plan, leading to more a la carte legal action.

Meanwhile the former sugarcane/pineapple land is being used for marijuana corn & papaya and the erosion is starting to wash a lot of topsoil down into the local stream. So the builder, one of the state's largest, is facing and initiating legal action from all sides.

Turtle Bay's resort hotel has spent the last year trying to proceed with development or possibly sell into a partnership. They just had a $280M foreclosure lawsuit filed by their lender.

2008 tax assessments are down 8% in our neighborhood and a half-dozen homes have been on the market for over a month, something quite unusual around this part of the island even at this time of year.

I was talking to a local car sales exec last night who was getting ready to upgrade from a middle/upper-class neighorhood to deluxe Kahala. He had two buyers for his $800K home but the more he and his wife contemplated their $1.3M purchase the less they felt they were gaining. So they bailed on the sale contract and spent $75K on kitchen/back deck upgrades.

I think we'll find anecdotal evidence at both ends of the bell curve. The challenge is finding out where the median is going.

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Old 12-23-2007, 04:53 PM   #4
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In SoCal, big projects are being scaled way back. I think builders reacted much more quickly this time than they did 18 years ago. Maybe that's due to the fact that SoCal builders learned their lesson last time.

In my area of the PacNW, it's mostly small builders. They are nervous. They know that architects are a good leading indicator, so they keep asking the architects how business is going.
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Old 12-23-2007, 06:05 PM   #5
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This old firehorse is hearing the bell: bought a bunch of #1 or better Doug Fir 12' 2x4 a couple days ago. $2.84 each. When wood's that cheap and tradespeople are starving it's hard to see how building is a bad idea!
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Old 12-23-2007, 06:43 PM   #6
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builders in my area (Minneapolis Mn) tend to have a couple of models and then build only as they are contracted to build.
So I am not seeing what you are. However, I suppose the builders that rely on high quantity may still be building before selling.
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Old 12-23-2007, 08:25 PM   #7
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In the city of Seattle there are almost no buildable lots. If you want to build a house, you buy an overpriced junker on a little lot, get a million permits, clear it, hire an overpriced architect, then use a very expensive one-off builder to put up your very expensive dream home.

Consequently what mass building that goes on is mostly high rise and mid-rise condos. I guess after you have spent millions of $ on design, permitting, digging a giant hole in the ground, driving pilings and building a very expensive steel superstructure, you tend to finish the project. It can always be rented if you can't sell it, providing your financing is flexible.

So sometime before long we are going to have a hell of a lot of condos! If this should happen to coincide with hiring slowdowns at MS, Google, Amazon, Starbucks or even enough of the smaller economic engines around here there should be some cheap condos available.

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Old 12-24-2007, 07:59 PM   #8
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In the DC area we are seeing major scaling-back on new home construction. Things are still going up, but much slower than last 7 yrs or so. Commercial building seems to not be affected. A builder's major cost in this market is the land, so once a builder is locked into purchasing the land, some will keep the construction going to recoup thier costs. SFHs are only built after being sold. All the builders have 'inventory' meaning someone walked away from thier deposit. Condo's and THs are much riskier as they seem to build when x% of units are sold. The biggest builder in the area got burned last bubble and got out of the land business. They require thier developer to purchase the land and builder only buys finished lots from the developer....4-10 lots at a time.
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Old 12-25-2007, 04:21 AM   #9
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Dublin Ohio: Number of homes going up has decreased but they are still building really large (over 5K sf) 3 level, 3 to 4 car attached garages and in the $500-600K and more price range. Most are not sold when they dig the basements but do not stay on the market long past completion either. Proves all RE is local. Ballantrae Park and Residential Golf Community in Dublin Ohio
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Old 12-25-2007, 05:35 AM   #10
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In my old Northeast US city, there seems to be a new story every week about the conversion of an old warehouse, mill, school, etc., into condos, usually upscale. We joke here that we're about 15 years behind the start of trends in other regions. I haven't heard any stories of a conversion effort going bankrupt. The thinking seems to make sense, too. Most condos here were new construction in the past. I'm sure the state is helping with this in some way with financial incentives.

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