April 29, 2008
Founder of Top U.S. Homebuilder Says We Are Nowhere Near Bottom
Eli Broad, the “B” in KB Home, was quoted yesterday at a conference in Beverly Hills as saying, among other things, that he expects prices to drop another 20%:
“I don’t think we’re anywhere near a bottom in housing. We’re going to have a big inventory of unsold, unoccupied homes that’s going to take three or four years to clear out.”
“People were using their home equity as really an ATM machine. They were spending more money than they were earning by taking equity out of their home. That couldn’t go on indefinitely. We’re now paying a price for that.”
What Broad is saying is nothing new or exciting, but it is news to hear something so deeply pessimistic from someone in his position. Though I do take exception — as do some readers over at Calculated Risk, one of my favorite blogs — to that last quoted sentence. He says “we” are now paying the price. This coming from a man who has made billions from the low-quality tract homes Kauffman & Broad became known for before the name change to KB Home. I don’t know about you, but I just don’t see him paying much of a price now compared to what he has accumulated. He was worth nearly $6 billion according to Forbes in 2006 - could be much more now since homebuilders saw near-record profits into 2007.
So how does this relate to the San Francisco or Bay Area real estate market? Well, it does and it doesn’t. As most know, KB Home and the big homebuilders don’t build in San Francisco, at least nothing I have ever known about. They build in suburbia and stack homes pretty much on top of each other as much as they can. But factors that are largely affecting suburbia and the outlying areas all over the country are also having effects on cities like San Francisco - highly-leveraged mortgages, resetting interest rates now and in the future, and the current recession almost all economists now believe started in December of last year.
Will every city see a 20% drop in prices from here? No, of course not. Some will see more, some less. I don’t see San Francisco as a whole declining more than 20%, other than some of the outlying areas in the southern and western districts, and possibly the condo supply issues looking in downtown/SOMA.
But the fact remains that a billionaire homebuilder founder is calling for these big declines and that speaks fairly loudly to me. At least this billionaire isn’t like fellow RE billionaire Sam Zell, who said yesterday that existing commercial real estate prices will be just fine.
David said:
How ’bout them Case Schiller numbers this morning. Great for potential buyers;)
April 29, 2008 8:31 AM
david gordon said:
Yep, brutal again. San Francisco MSA leading the nation in one-month decline @ 5%, and the 12 month decline is @ 17.2%. Ouch.
http://www2.standardandpoors.com/spf/pdf/index/CS_HomePrice_Release_042952.pdf
April 29, 2008 10:21 AM
David Gordon said:
Yup, I did see them. SF MSA down 5% in one month (leading the nation) and down 17.2% year over year. Ouch!
April 29, 2008 12:20 PM
David said:
Looking forward to an uglier summer.
Hope to see some decent inventory, though. lately it’s been pretty nasty (falling down bad REOs, ex-flipper houses, etc).
April 29, 2008 1:04 PM
David Gordon said:
Absolutely!
I think it was you who said Oak/Berk/EBay inventory may peak later this year and be slightly down next year as people who can afford to just hold off on selling.
When do you think supply will peak here in SF proper? Care to prognosticate?
April 29, 2008 1:19 PM
Leigh said:
Boy oh boy would I like to see the Berkeley inventory increase. It’s been nothing short of depressing how little there is out there.
April 29, 2008 2:42 PM
David Gordon said:
Hopefully this summer the nicer hoods in Berk and Oak will get some nice supply to choose from, and then not enough quality/qualified buyers to match that supply.
April 29, 2008 6:46 PM
David said:
Yeah, I think the inventory will peak later this year, maybe in spring of ‘09 at the latest, especially in the subprime ‘hoods. Subprime was over as of mid-07, and given a usual foreclosure timeframe of 12-15 months, these things will be hitting the market (along with the last, desperate discretionary sellers) in the second half of 08. There will probably be some “bleed” over into early ‘09.
As for SF, they seem to be on a 2 year lag, so 2011?
I worry that the nicer areas of the East Bay are also lagging. So I’ll be either buying a hopefully decent REO in a subprime ‘hood in late ‘08 or early ‘09, or maybe waiting it out for another year or two (I hope not, but if it doesn’t pencil out, it doesn’t pencil out…I can only torture the numbers so much).
Looking at REOs though, man, is grim, especially since I’m not a contractor, nor do I play one on TV. There was this one I looked at…I still have no clue what the prior “owners” were thinking…and then I saw what it looked like when it last sold (the miracle of Google), and I couldn’t believe it was the same house, it was perfectly pleasant. The horror.
Oh well. Here’s to finding something reasonable in the next 12-18 months (need to decide on what we’re going to do with school for the boy).
April 29, 2008 9:27 PM
David Gordon said:
My lease is up in Nov this year and I figure a couple months before that may be about the time to really starting bidding aggressively (minimum 10% below ask as you often say) in the east bay hoods I like. If the supply isn’t there by then, I’ll go month-to-month til the spring and go from there.
I definitely see the nicer areas of Oak/Berk lagging a little. Only recently are “decent” asking prices showing up in Montclair, Crocker, etc. IMO.
I hear you on torturing the numbers, we know it is truly a constantly moving target to hit. But then again, we don’t have to be perfect to still make a great timing decision.
I feel like I have some vision when looking at nasty properties and that helps me over most buyers who really want/need a turnkey property in order to place a bid. Bit it can be tough, esp with some of those that might offer the best potential when said and done.
Good luck, David. Who knows? Maybe we will bid on the same place sometime over there. And maybe both of our bids will be so low (correctly) they will accept neither!
April 29, 2008 10:56 PM