Home builders' foundations shift with shaky market

ByABC News
October 8, 2007, 10:35 PM

— -- Even as home buyers were being offered a free washer, dryer, refrigerator and window blinds, plus 5% off the price or in cash to pay closing costs, business was dragging at Reeves Williams' communities.

So at the end of July, Reeves Williams, a home builder in the South, began offering $20,000 in incentives or cash assistance. In the first week, 22 buyers had signed contracts for new homes. Then the mortgage market fell into a tailspin.

"We lost 17 of them. It was a huge hit," says Martha Fondren, vice president of sales. "It was a credit issue. They did not have horrible credit. But they didn't have the credit scores to get (a loan), and six months ago they would have."

Since early August, the real estate market has sunk deeper into recession. Forecasts of a recovery have been pushed back to the middle of 2008 at the earliest. For home builders, market conditions are already worse than in the last housing recession, in 1991-92.

And depending on how the subprime mortgage debacle plays out in coming months, this recession could be more painful for the industry than the wicked one in 1980-82.

Sales of new homes fell in August to their slowest pace in 12 years, and the median price fell 7.5%, the sharpest annual drop in 37 years. The confidence level of builders has fallen to its lowest since the last housing recession.

"Who can't be concerned, with what we're looking at right now?" Toll says.

Many builders, of course, are partly to blame because they overbuilt in some of the most torrid markets and slapped together homes on speculation that the party would go on. Those are the companies now bearing the brunt of the contraction.

But few builders even the conservative ones have escaped unscathed. Most of them face wrenching decisions about whether and by how much to reduce headcounts, lower prices, delay or abandon developments and write off and sell assets. And the builders are affecting the health of the broader economy, according to the Federal Reserve.

Short of cash, several builders have renegotiated with their banks to avoid defaulting on the terms and conditions of their credit lines and loans. Builders are squeezing subcontractors and suppliers for discounts. They're also redesigning homes to be smaller or offer less expensive features.