Home Builders Meet Dr. Phil

Posted by: Chris Palmeri on September 5, 2007

With homebuilders in the middle of a major slump, it’s worth taking a look back at something called the Public Home Builders Council of America. Not to pick on them, of course. It’s really a lesson for all of us in why we shouldn’t get too carried away with ourselves when times are good.

Rewind three years ago. With their home sales going through the roof, but their stocks still trading at the kind of earnings multiples afforded utilities, banks and other cyclical investments, thirteen of the nation’s largest builders got together to form the Public Home Builders Council in January 2004.http://www.phbca.org Even though the share prices of many of the builders had done spectacularly well there was still a feeling among some investors that previous real estate busts in the 1980s and 1990s would occur again. The council wanted to lay those fears to rest.

dr. phil

The group hired a public relations firm and began sending out press releases with statements such as this: “Over the past decade, public homebuilders have demonstrated themselves to be predictable growth companies.” Those words came from James Zeumer, then president of the council and also the head of corporate communications at Pulte Home Inc., one of the nation’s largest builders. Today’s he’s got a similar job as senior vice president of public affairs at Allied Waste Industries, a large trash hauler.

The council argued that builders today were larger, better capitalized and more geographically diversified. There were also profound demographic shifts that made this market different, including more Baby Boomers looking for second homes and immigrants looking to buy their first. Land was scarce, particularly on the coasts. America’s housing stock was aging—at an average of 33 years old—and thus in need of replacing. Smart folks like Harvard University’s Joint Center for Housing Studies were suggesting that the number of new households formed would continue at 1.2 million a year, from 800,000 in the decade prior.

Meanwhile, the builders were getting smarter too. Speculate by building a home without a signed contract? No more. The council noted that 75% of all homes were sold before they were finished, up from 50% in 1974. Builders were optioning land these days, not buying it outright, a far more expensive proposition. The council even featured essays on its Web site under the following theme: “Why is the run-up in housing prices not a bubble.”
Pop! The housing slump which began for new homebuilders in late 2005 has only accelerated this year. In July new housing starts fell 6% to 1.38 million, their lowest rate in ten years. On August 15, the National Association of Home Builders, the industry’s more established trade group, said that its index of builder sentiment had fallen to the lowest level since the first Gulf War.

Builders are reporting sales reductions, increased cancellations, and taking write-offs, hundreds of millions of dollars worth, on that land they only optioned. The national association’s chief economist estimates that housing starts will not begin to recover until the third quarter of 2008. Donald Tomnitz, chief executive of D.R. Horton, the nation’s largest homebuilder, has been even less sure, telling investors in late July: “We’re not projecting when there will be a recovery because we don’t see one on the horizon.” Sounds like the builders have listened to TV host Dr. Phil’s prescription to “Get Real.”

Reader Comments

Cindy

September 8, 2007 2:15 PM

Another Dr.-Phil-ism coming back to haunt the builders is that phrase, "own your choices." The builders and others in the housing industry CHOSE to run up prices, appraisers were pressured to bring in the high price, and prices were raised because they COULD. Many buyers threw caution to the wind and jumped in, and many also fell hook, line, and sinker for the toxic loans this industry created, to get them into these houses they could not afford. Of course, some buyers were deceived or defrauded, too.

Add to that that many new homes are poorly built, and you have the housing disaster predicted years ago by consumer groups and savvy investors who were REALLY doing their homework and paying attention to the phony stuff going on. Wall Street, the industry, and the government did NOT pay attention to warnings or to consumer complaints. Only when banks and investors got burned did anyone say, "Oh, yeah, prices CAN go down...these loans WERE toxic...this DID cause a big problem!"

It would be amusing to have some big builder CEO's on the Dr. Phil show along with oh, say, some consumer advoacy group representatives. But, I wonder...because wasn't Dr. Phil previously a corporate consultant who advised big companies how to behave in trials, etc? If I recall, Oprah hired him when the Beef industry sued her for saying she would not eat beef because of the threat of Mad Cow Disease, and Phil McGraw was launched into fame from that case. If I'm wrong correct me, but it'd be interesting to see how a former corporate person would respond to corporate irresponsibility.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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