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
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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Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Competitive pressure and creativity have made Chinese-designed and -built electric cars formidable competitors
4 min
China rocked the auto world twice this year. First, its electric vehicles stunned Western rivals at the Shanghai auto show with their quality, features and price. Then came reports that in the first quarter of 2023 it dethroned Japan as the world’s largest auto exporter.
How is China in contention to lead the world’s most lucrative and prestigious consumer goods market, one long dominated by American, European, Japanese and South Korean nameplates? The answer is a unique combination of industrial policy, protectionism and homegrown competitive dynamism. Western policy makers and business leaders are better prepared for the first two than the third.
Start with industrial policy—the use of government resources to help favoured sectors. China has practiced industrial policy for decades. While it’s finding increased favour even in the U.S., the concept remains controversial. Governments have a poor record of identifying winning technologies and often end up subsidising inferior and wasteful capacity, including in China.
But in the case of EVs, Chinese industrial policy had a couple of things going for it. First, governments around the world saw climate change as an enduring threat that would require decade-long interventions to transition away from fossil fuels. China bet correctly that in transportation, the transition would favour electric vehicles.
In 2009, China started handing out generous subsidies to buyers of EVs. Public procurement of taxis and buses was targeted to electric vehicles, rechargers were subsidised, and provincial governments stumped up capital for lithium mining and refining for EV batteries. In 2020 NIO, at the time an aspiring challenger to Tesla, avoided bankruptcy thanks to a government-led bailout.
While industrial policy guaranteed a demand for EVs, protectionism ensured those EVs would be made in China, by Chinese companies. To qualify for subsidies, cars had to be domestically made, although foreign brands did qualify. They also had to have batteries made by Chinese companies, giving Chinese national champions like Contemporary Amperex Technology and BYD an advantage over then-market leaders from Japan and South Korea.
To sell in China, foreign automakers had to abide by conditions intended to upgrade the local industry’s skills. State-owned Guangzhou Automobile Group developed the manufacturing know-how necessary to become a player in EVs thanks to joint ventures with Toyota and Honda, said Gregor Sebastian, an analyst at Germany’s Mercator Institute for China Studies.
Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specialising in the Chinese auto industry.
Back in 2011 Pony Ma, the founder of Tencent, explained what set Chinese capitalism apart from its American counterpart. “In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share,” he said, according to Fast Company, a technology magazine. “In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China—execution is.”
Thanks to that competition and focus on execution, the EV industry went from a niche industrial-policy project to a sprawling ecosystem of predominantly private companies. Much of this happened below the Western radar while China was cut off from the world because of Covid-19 restrictions.
When Western auto executives flew in for April’s Shanghai auto show, “they saw a sea of green plates, a sea of Chinese brands,” said Le, referring to the green license plates assigned to clean-energy vehicles in China. “They hear the sounds of the door closing, sit inside and look at the quality of the materials, the fabric or the plastic on the console, that’s the other holy s— moment—they’ve caught up to us.”
Manufacturers of gasoline cars are product-oriented, whereas EV manufacturers, like tech companies, are user-oriented, Le said. Chinese EVs feature at least two, often three, display screens, one suitable for watching movies from the back seat, multiple lidars (laser-based sensors) for driver assistance, and even a microphone for karaoke (quickly copied by Tesla). Meanwhile, Chinese suppliers such as CATL have gone from laggard to leader.
Chinese dominance of EVs isn’t preordained. The low barriers to entry exploited by Chinese brands also open the door to future non-Chinese competitors. Nor does China’s success in EVs necessarily translate to other sectors where industrial policy matters less and creativity, privacy and deeply woven technological capability—such as software, cloud computing and semiconductors—matter more.
Still, the threat to Western auto market share posed by Chinese EVs is one for which Western policy makers have no obvious answer. “You can shut off your own market and to a certain extent that will shield production for your domestic needs,” said Sebastian. “The question really is, what are you going to do for the global south, countries that are still very happily trading with China?”
Western companies themselves are likely to respond by deepening their presence in China—not to sell cars, but for proximity to the most sophisticated customers and suppliers. Jörg Wuttke, the past president of the European Union Chamber of Commerce in China, calls China a “fitness centre.” Even as conditions there become steadily more difficult, Western multinationals “have to be there. It keeps you fit.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
