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
Meltdown of 2007-09 fostered less risky tactics; not as much debt
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.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
How far can an electric car really go on a full charge? What can you do to make it go farther? We answer these and other questions that EV buyers might ask.
Many people considering an electric vehicle are turned off by their prices or the paucity of public charging stations. But the biggest roadblock often is “range anxiety”—the fear of getting stuck on a desolate road with a dead battery.
All EVs carry window stickers stating how far they should go on a full charge. Yet these range estimates—overseen by the Environmental Protection Agency and touted in carmakers’ ads—can be wrong in either direction: either overstating or understating the distance that can be driven, sometimes by 25% or more.
How can that be? Below are questions and answers about how driving ranges are calculated, what factors affect the range, and things EV owners can do to go farther on a charge.
The distance, according to EPA testing, ranges from 516 miles for the 2023 Lucid Air Grand Touring with 19-inch wheels to 100 miles for the 2023 Mazda MX-30.
Most EVs are in the 200-to-300-mile range. While that is less than the distance that many gasoline-engine cars can go on a full tank, it makes them suitable for most people’s daily driving and medium-size trips. Yet it can complicate longer journeys, especially since public chargers can be far apart, occupied or out of service. Plus, it takes many times longer to charge an EV than to fill a tank with gas.
Testing by Car and Driver magazine found that few vehicles go as far as the EPA stickers say. On average, the distance was 12.5% shorter, according to the peer-reviewed study distributed by SAE International, formerly the Society of Automotive Engineers.
In some cases, the estimates were further off: The driving range of Teslas fell below their EPA estimate by 26% on average, the greatest shortfall of any EV brand the magazine tested. Separately, federal prosecutors have sought information about the driving range of Teslas, The Wall Street Journal reported. Tesla didn’t respond to a request for comment.
The study also said Ford’s F-150 Lightning pickup truck went 230 miles compared with the EPA’s 300-mile estimate, while the Chevrolet Bolt EV went 220 miles versus the EPA’s 259.
A GM spokesman said that “actual range may vary based on several factors, including things like temperature, terrain/road type, battery age, loading, use and maintenance.” Ford said in a statement that “the EPA [figure] is a standard. Real-world range is affected by many factors, including driving style, weather, temperature and if the battery has been preconditioned.”
Meanwhile, testing by the car-shopping site Edmunds found that most vehicles beat their EPA estimates. It said the Ford Lightning went 332 miles on a charge, while the Chevy Bolt went 265 miles.
Driving range depends largely on the mixture of highway and city roads used for testing. Unlike gasoline-powered cars, EVs are more efficient in stop-and-go driving because slowing down recharges their batteries through a process called regenerative braking. Conversely, traveling at a high speed can eat up a battery’s power faster, while many gas-engine cars meet or exceed their EPA highway miles-per-gallon figure.
Car and Driver uses only highway driving to see how far an EV will go at a steady 75 mph before running out of juice. Edmunds uses a mix of 60% city driving and 40% highway. The EPA test, performed on a treadmill, simulates a mixture of 55% highway driving and 45% city streets.
Edmunds believes the high proportion of city driving it uses is more representative of typical EV owners, says Jonathan Elfalan, Edmunds’s director of vehicle testing. “Most of the driving [in an EV] isn’t going to be road-tripping but driving around town,” he says.
Car and Driver, conversely, says its all-highway testing is deliberately more taxing than the EPA method. High-speed interstate driving “really isn’t covered by the EPA’s methodology,” says Dave VanderWerp, the magazine’s testing director. “Even for people driving modest highway commutes, we think they’d want to know that their car could get 20%-30% less range than stated on the window sticker.”
The agency declined to make a representative available to comment, but said in a statement: “Just like there are variations in EPA’s fuel-economy label [for gas-engine cars] and people’s actual experience on the road for a given make and model of cars/SUVs, BEV [battery electric vehicle] range can exceed or fall short of the label value.”
Pick the one based on the testing method that you think matches how you generally will drive, highway versus city. When shopping for a car, be sure to compare apples to apples—don’t, for instance, compare the EPA range estimate for one vehicle with the Edmunds one for another. And view all these figures with skepticism. The estimates are just that.
Batteries are heavy and are the most expensive component in an EV, making up some 30% of the overall vehicle cost. Adding more could cut into a vehicle’s profit margin while the added weight means yet more battery power would be used to move the car.
But battery costs have declined over the past 10 years and are expected to continue to fall, while new battery technologies likely will increase their storage capacity. Already, some of the newest EV models can store more power at similar sticker prices to older ones.
The easiest thing is to slow down. High speeds eat up battery life faster. Traveling at 80 miles an hour instead of 65 can cut the driving range by 17%, according to testing by Geotab, a Canadian transportation-data company. And though a primal appeal of EVs is their zippy takeoff, hard acceleration depletes a battery much quicker than gentle acceleration.
It does, and sometimes by a great amount. The batteries are used to heat the car’s interior—there is no engine creating heat as a byproduct as in a gasoline car. And many EVs also use electricity to heat the batteries themselves, since cold can deteriorate the chemical reaction that produces power.
Testing by Consumer Reports found that driving in 15- to-20-degrees Fahrenheit weather at 70 mph can reduce range by about 25% compared to similar-speed driving in 65 degrees.
A series of short cold-weather trips degraded the range even more. Consumer Reports drove two EVs 40 miles each in 20-degree air, then cooled them off before starting again on another 40-mile drive. The cold car interiors were warmed by the heater at the start of each of three such drives. The result: range dropped by about 50%.
Testing by Consumer Reports and others has found that using the AC has a much lower impact on battery range than cold weather, though that effect seems to increase in heat above 85 degrees.
“Precondition” your EV before driving off, says Alex Knizek, manager of automotive testing and insights at Consumer Reports. In other words, chill or heat it while it is still plugged in to a charger at home or work rather than using battery power on the road to do so. In the winter, turn on the seat heaters, which many EVs have, so you be comfortable even if you keep the cabin temperature lower. In the summer, try to park in the shade.
Going up hills takes more power, so yes, it drains the battery faster, though EVs have an advantage over gas vehicles in that braking on the downside of hills returns juice to the batteries with regenerative braking.
Tires play a role. Beefy all-terrain tires can eat up more electricity than standard ones, as can larger-diameter ones. And underinflated tires create more rolling resistance, and so help drain the batteries.
The meters are supposed to take into account your speed, outside temperature and other factors to keep you apprised in real time of how much farther you can travel. But EV owners and car-magazine testers complain that these “distance to empty” gauges can suddenly drop precipitously if you go from urban driving to a high-speed highway, or enter mountainous territory.
So be careful about overly relying on these gauges and take advantage of opportunities to top off your battery during a multihour trip. These stops could be as short as 10 or 15 minutes during a bathroom or coffee break, if you can find a high-powered DC charger.
Fully charge the car at home before departing. This sounds obvious but can be controversial, since many experts say that routinely charging past 80% of a battery’s capacity can shorten its life. But they also say that charging to 100% occasionally won’t do damage. Moreover, plan your charging stops in advance to ease the I-might-run-out panic.
Yes, an EV battery’s ability to fully charge will degrade with use and age, likely leading to shorter driving range. Living in a hot area also plays a role. The federal government requires an eight-year/100,000-mile warranty on EV batteries for serious failure, while some EV makers go further and cover degradation of charging capacity. Replacing a bad battery costs many thousands of dollars.
Your EV likely provides software on the navigation screen as well as a phone app that show charging stations. Google and Apple maps provide a similar service, as do apps and websites of charging-station networks.
But always have a backup stop in mind—you might arrive at a charging station and find that cars are lined up waiting or that some of the chargers are broken. Damaged or dysfunctional chargers have been a continuing issue for the industry.
Be sure to carry a portable charger with you—as a last resort you could plug it into any 120-volt outlet to get a dribble of juice.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’