Builders Say They’re Ready for This Housing Slowdown. ‘I’ve Learned My Lesson.’
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Builders Say They’re Ready for This Housing Slowdown. ‘I’ve Learned My Lesson.’

Meltdown of 2007-09 fostered less risky tactics; not as much debt

By NICOLE FRIEDMAN
Tue, Oct 25, 2022 8:38amGrey Clock 6 min

NORTH LAS VEGAS, Nev.—A year ago, business was booming for Touchstone Living Inc. The Nevada builder had a list of 639 qualified buyers who wanted homes in its development about 15 miles north of the Las Vegas Strip.

Today, that list has shrivelled to about 30. Many would-be buyers are unable to qualify for loans since mortgage rates have surged to 6.94%, their highest level since 2002 and more than double the rate of a year ago.

Little of this is good news for Touchstone or its owner, Tom McCormick. That said, in a potential indicator for how this slowdown could play out, it isn’t looking like the last time the Las Vegas market melted down.

Mr. McCormick said his new company has less debt and fewer lenders than his former company did heading into the 2007-09 recession, and has grown more slowly and bought less land.

“I’ve learned my lesson,” he said. Still, he said, “I’ve never seen it change this fast,” referring to the rapid decline in sales.

After a pandemic-fuelled buying spree that unleashed the most powerful U.S. housing boom in 15 years, demand has plummeted as mortgage rates have risen. Finished homes are sitting on the market, hundreds of thousands of new ones are expected to be completed in the coming months, and many builders are cutting prices. Existing-home prices are declining from their springtime peaks, and single-family home construction in September fell 18% from a year earlier.

During the earlier housing downturn, which was triggered in part by the collapse of the subprime-mortgage market, about half of all home builders disappeared. Home builders that lived through that said they learned some hard lessons, and that the current slowdown won’t lead to another industry implosion. Also, mortgage lenders have tightened underwriting standards in recent years, reducing the risk of a wave of foreclosures.

Mr. McCormick’s former home-building company stopped construction in 2009 after losing projects to foreclosure. Home builders have been more conservative in recent years about taking on debt and owning a lot of land, industry analysts said. Some home builders have increased their use of land banks or other third-party arrangements that give them the option to buy land only when they need it.

Some home builders who have completed single-family homes but not yet sold them have turned to the rental market to bring in revenue, and others are selling them in bulk to investors at discounted prices to use as rentals.

This year’s rising mortgage rates, said Mr. McCormick, slashed the number of would-be buyers for his homes. “They still had the good credit, they still had the good job,” he said. But rising home prices and rates, he said, “just squeezed them out of the market.”

Other prospective buyers have backed away from buying anything now because of economic uncertainty, real-estate agents said. Consumer sentiment toward the housing market fell in September to the lowest level since 2011, according to Fannie Mae.

“How rapidly things have deteriorated is pretty remarkable,” said Ivy Zelman, chief executive of real-estate research and advisory firm Zelman & Associates, a unit of Walker & Dunlop Inc. But “there’s a huge difference from the go-go days of exotic mortgage products and no money down,” she said, referring to the loose lending environment before the 2007 crisis.

During the first two years of the Covid-19 pandemic, home builders couldn’t build homes fast enough to meet demand. Supply-chain issues and labor shortages slowed the pace of construction. Builders limited sales so they didn’t sell more homes than they could build, and selected buyers off wait lists or through lotteries. Prices soared, and builders ramped up construction as much as they could.

Now that new-home sales have slowed, the risk of a glut is rising. About 800,000 single-family homes were under construction in September, on a seasonally adjusted basis, up 11% from a year earlier and 52% from September 2019, according to the Census Bureau. Many of those homes were started before the market slowed.

Some are already sold, but not all. In an effort to lure reluctant buyers or keep others from cancelling, builders are paying upfront fees to mortgage lenders to reduce buyers’ mortgage rates and offering other incentives, such as long-term rate locks. Builders also are canceling deals to acquire land.

There was an 8.1-month supply of new homes on the market at the end of August, according to the Census Bureau.

“They are sitting on a lot of inventory that’s under construction, and that’s the stuff that they’d like to move,” said Carl Reichardt, a home-building analyst at financial-services firm BTIG. “I think it’s going to get worse before it gets better.”

Lennar Corp., the nation’s second-biggest builder by volume, said in a September earnings call that new sales orders fell 12% in the third quarter from a year earlier. Its average sales price for new orders rose 1% from a year earlier, but fell 9% from the second quarter.

“It’s clear that there’s going to be more increase in interest rates that we’re going to be dealing with,” said Stuart Miller, Lennar’s executive chairman, on the call. Builders will need to cut prices and offer incentives, he said, or sales would decline.

Rising rates have hit the existing-home market, too. Between January and September, sales activity declined 27% on a seasonally adjusted annualised basis, a faster decline than during the subprime crisis.

Even so, existing-home prices are up from a year ago on a national basis. The number of existing homes for sale remains well below historical levels, and millions of millennials are moving into their prime home-buying years—both factors that could limit price declines, economists said.

New-home construction, which accounts for about 10% of overall home sales, faces a bigger risk of slowing sales and price declines in the near term because new homes typically are more expensive than existing homes, and because the supply is continuing to grow.

For Mr. McCormick, the summer’s slowdown was a scary reminder of how easily the market can turn.

He was the owner of Astoria Homes, one of the biggest privately owned home builders based in Nevada during the early 2000s housing boom. At its peak in 2004 and 2005, Astoria built about 1,000 homes a year.

“It was so good for so long,” Mr. McCormick said. “I just became overconfident.”

When the subprime-mortgage crisis erupted in 2007, the housing market collapsed and many builders went out of business. Las Vegas became one of the faces of the national foreclosure crisis. Home builders, who had built a surplus of homes during the boom, couldn’t compete with existing homes that were selling for far less than new ones.

Astoria shrank from 170 employees to three, including Mr. McCormick. A few of its lenders were taken over by the Federal Deposit Insurance Corp. Mr. McCormick, who had made personal guarantees on Astoria’s debts, spent years settling them.

Some home builders were so shell-shocked by the crisis that they were hesitant to increase their building for years.

“The great financial crisis, even though that was 15, 16 years ago, still feels very current and very raw to the builders in Las Vegas, because they took it on the chin as much as anybody in the country,” said Ken Perlman, managing principal at Irvine, Calif.-based John Burns Real Estate Consulting.

As a result, the supply of new homes isn’t as excessive as it was before the housing crisis.

Nationwide, the number of residential builders declined by 50% between 2007 and 2012, according to the National Association of Home Builders. Single-family housing starts, a measure of new-home construction, fell from 1.7 million in 2005 to 445,000 in 2009, according to the Census Bureau. Builders didn’t exceed one million single-family starts in a year again until 2021.

By 2012, Mr. McCormick was ready to dip his toes back in. He expected Las Vegas’s population to keep growing and home prices to rebound. He started buying land that year, and Touchstone sold its first home in 2014. It is the largest Nevada-based privately owned builder, and it had about 4.8% market share in the Las Vegas area last year, according to Builder Magazine.

The S&P Homebuilders Select Industry stock index is down 36% this year, outpacing the S&P 500’s 21% decline. A measure of U.S. home-builder confidence fell for the 10th straight month in October to the lowest level since May 2020, according to the NAHB. About one-quarter of builders surveyed by the association in September said they had reduced prices in the prior month.

In the Las Vegas area, new-home sales have slid from more than 1,000 a month in the first quarter to 488 in August, said Andrew Smith, president of Las Vegas-based Home Builders Research Inc.

Most Las Vegas-area builders surveyed in September had reduced prices that month from their August levels, once incentives such as interest-rate buy downs were factored in, Mr. Perlman said.

Mr. McCormick is hoping Touchstone’s prices give his company an advantage in a slow market. Touchstone’s homes sell for between about $315,000 and $433,000. The region’s median new-home closing price in August was about $492,000, according to Home Builders Research.

In September, Touchstone decided to start renting out some of its properties because it expects home-buying demand to stay low.

“People still want to own homes, but they simply can’t afford it,” Mr. McCormick said. “So the business plan has to change.”



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A Killer Golf Swing Is a Hot Job Skill Now

Companies are eager to hire strong players who use hybrid work schedules to schmooze clients on the course

By CALLUM BORCHERS
Fri, Jun 14, 2024 5 min

Standout golfers who aren’t quite PGA Tour material now have somewhere else to play professionally: Corporate America.

People who can smash 300-yard drives and sink birdie putts are sought-after hires in finance, consulting, sales and other industries, recruiters say. In the hybrid work era, the business golf outing is back in a big way.

Executive recruiter Shawn Cole says he gets so many requests to find ace golfers that he records candidates’ handicaps, an index based on average number of strokes over par, in the information packets he submits to clients. Golf alone can’t get you a plum job, he says—but not playing could cost you one.

“I know a guy that literally flies around the world in a private jet loaded with French wine, and he golfs and lands hundred-million-dollar deals,” Cole says.

Tee times and networking sessions have long gone hand-in-golf-glove. Despite criticism that doing business on the course undermines diversity, equity and inclusion efforts—and the fact that golf clubs haven’t always been open to women and minorities —people who mix golf and work say the outings are one of the last reprieves from 30-minute calendar blocks

Stars like Tiger Woods and Michelle Wie West helped expand participation in the sport. Still, just 22% of golfers are nonwhite and 26% are women, according to the National Golf Foundation.

To lure more people, clubs have relaxed rules against mobile-phone use on the course, embracing white-collar professionals who want to entertain clients on the links without disconnecting from the office. It’s no longer taboo to check email from your cart or take a quick call at the halfway turn.

With so much other business conducted virtually, shaking hands on the green and schmoozing over clubhouse beers is now seen as making an extra effort, not slacking off.

Americans played a record 531 million rounds last year. Weekday play has nearly doubled since 2019, with much of the action during business hours , according to research by Stanford University economist Nicholas Bloom .

“It would’ve been scandalous in 2019 to be having multiple meetings a week on the golf course,” Bloom says. “In 2024, if you’re producing results, no one’s going to see anything wrong with it.”

A financial adviser at a major Wall Street bank who competes on the amateur circuit told me he completes 90% of his tasks by 10 a.m. because he manages long-term investment plans that change infrequently. The rest of his workday often involves golfing with clients and prospects. He’s a member of a private club with a multiyear waiting list, and people jump at the chance to join him on a course they normally can’t access.

There is an art to bringing in business this way. He never initiates shoptalk, telling his playing partners the round is about having fun and getting to know each other. They can’t resist asking about investment strategies by the back nine, he says.

Work hard, play hard

Matt Parziale golfed professionally on minor-league tours for several years, but when his dream of making the big time ended, he had to get a regular job. He became a firefighter, like his dad.

A few years later he won one of the biggest amateur tournaments in the country, earning spots in the 2018 Masters and U.S. Open, where he tied for first among non-pros.

The brush with celebrity brought introductions to business types that Parziale, 35 years old, says he wouldn’t have met otherwise. One connection led to a job with a large insurance broker. In 2022 he jumped to Deland, Gibson Insurance Associates in Wellesley, Mass., which recognised his golf game as a tool to help win large accounts.

He rescheduled our interview because he was hosting clients at a private club on Cape Cod, and squeezed me in the next morning, before teeing off with a business group in Newport, R.I.

A short time ago, Parziale couldn’t imagine making a living this way. Now he’s the norm in elite amateur golf circles.

“I look around at the guys at the events I play, and they all have these jobs ,” he says.

His boss, Chief Executive Chip Gibson, says Parziale is good at bringing in business because he puts as much effort into building relationships as honing his game. A golf outing is merely an opportunity to build trust that can eventually lead to a deal, and it’s a misconception that people who golf during work hours don’t work hard, he says.

Barry Allison’s single-digit handicap is an asset in his role as a management consultant at Accenture , where he specialises in travel and hospitality. He splits time between Washington, D.C., and The Villages, Fla., a golf mecca that boasts more than 50 courses.

It can be hard to get to know people in distributed work environments, he says. Go golfing and you’ll learn a lot about someone’s temperament—especially after a bad shot.

“If you see a guy snap a club over his knee, you don’t know what he’s going to snap next,” Allison says.

Special access

On a recent afternoon I was a lunch guest at Brae Burn Country Club, a private enclave outside Boston that was the site of U.S. Golf Association championships won by legends like Walter Hagen and Bobby Jones. I parked in the second lot because the first one was full—on a Wednesday.

My host was Cullen Onstott, managing director of the Onstott Group executive search firm and a former collegiate golfer at Fairfield University. He explained one reason companies prize excellent golfers is they can put well-practiced swings on autopilot and devote most of their attention to chitchat.

It’s hard to talk with potential customers about their needs and interests when you’re hunting for errant shots in the woods. It’s also challenging if you show off.

The first hole at Brae Burn is a 318-yard par 4 that slopes down, enabling big hitters like Onstott to reach the putting green in a single stroke. But to stay close to his playing partners and keep the conversation flowing, he sometimes hits a shorter shot.

Having an “in” at an exclusive club can make you a catch. Bo Burch, an executive recruiter in North Carolina, says clubs in his region tend to attract members according to their business sectors. One might be chock-full of real-estate investors while another has potential buyers of industrial manufacturing equipment.

Burch looks for candidates who are members of clubs that align with his clients’ industries, though he stresses that business acumen comes first when filling positions.

Tami McQueen, a former Division I tennis player and current chief marketing officer at Atlanta investment firm BIP Capital, signed up for private golf lessons this year. She had noticed colleagues were wearing polos with course logos and bringing their clubs to work. She wanted in.

McQueen joined business associates on the golf course for the first time in March at the PGA National Resort in Palm Beach Gardens, Fla. She has lowered her handicap to a respectable 26 and says her new skill lends a professional edge.

“To be able to say, ‘I can play with you and we can have those business meetings on the course’ definitely opens a lot more doors,” she says.

MOST POPULAR
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This stylish family home combines a classic palette and finishes with a flexible floorplan

35 North Street Windsor

Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.

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