Home builders' foundations shift with shaky market

Stuart Miller, CEO of Miami-based Lennar, says he thinks some builders' price cuts have been "unrealistic, maybe even ridiculous." Lennar reported the worst quarterly financial results in the company's history and a surge in cancellation rates.

Miller says he walked away from 15,000 home sites the company had planned to develop and has laid off 35% of his staff. "August seemed to be a melting pot of all things negative," Miller says.

Some laid-off employees have managed to find jobs in commercial real estate, which so far hasn't been affected as much by the turmoil in the credit markets. But the magnitude of the downsizing among builders is exerting a drag on the economy that could, in turn, further dampen demand for new homes.

"We have hundreds of thousands of jobs to lose over the next six to 18 months," says Mark Zandi, chief economist for Moody's Economy.com. "Housing employment accounts for 10% of all jobs nationwide and 15% of the economy."

In Naples, Fla., Zandi says, 20% to 25% of the area's jobs are housing-related. "I'd be surprised if in Florida the economy isn't already in recession," he says.

Rising foreclosures

Adding to the home builders' troubles are the rising number of foreclosures. The foreclosure rate is expected to rise through next year as 2 million homeowners must begin making higher payments on their adjustable-rate loans. Though only a portion of them will ultimately lose their homes, lenders tend to price foreclosed homes very aggressively to get them off their books.

"The clampdown on borrowing is happening when borrowers are facing their first reset and looking for a way out," Zandi said. "And there's no way out."

Congress and the Bush administration have made proposals to help some homeowners through tax relief and the Federal Housing Administration. But it's still unclear how many people will be helped. The relief to the building industry will likely be minimal.

In northern Mississippi and Shelby County, Tenn., Reeves Williams ended its $20,000 incentive program on Monday. Even though David Smith, who bought one of the builder's homes in June, didn't get as many freebies as the company was just offering, he said they swayed his decision to buy.

Smith, 63, an avid bridge player and an editor at Bridge Bulletin magazine, received $4,500 off the price, $4,000 in closing costs, and said, "The fact that I could get a house and not have to buy a fridge, washer or dryer, it was significant to me."

Fondren, the vice president of sales, says even its more-generous program didn't draw in enough buyers. Now, she'll negotiate with buyers on a case-by-case basis. The company also will lower prices by building less-expensive homes — without the granite or tile, for example, that used to be standard.

"If the option was all hardwood floors in the house, we might put them in the dining room but put carpet in the great room and bedrooms to shave a little off the price," Fondren says. "People aren't qualifying for as much."

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