Battling Back, Home Builders Cut Prices, Work Faster By James R. Hagerty and Dawn Wotapka Wall Street Journal 02-03-2010

Battling Back, Home Builders Cut Prices, Work Faster
By James R. Hagerty and Dawn Wotapka
The Wall Street Journal
February 3, 2010

Home builders have lost half their share of the U.S. housing market in the past two years, largely because of competition from cheap foreclosed houses. In 2009 only 7.6% of the homes sold were newly constructed, down from the average of about 16% over the previous two decades.

But home builders are fighting back, cutting prices, promising to complete homes faster, and warning about the risks of buying foreclosed property.

Their efforts may be starting to pay off. On Tuesday, D.R. Horton Inc., the second-largest U.S. builder, swung to a surprise quarterly profit, its first since the sector crashed, aided by improving business and a tax benefit. Donald R. Horton, the builder's chairman, said conditions remain challenging but he's optimistic as Horton focuses on low-priced housing for first-time buyers and controlling costs.

"If you want to be competitive with foreclosures, you've got to drive your prices down," says Steven Hilton, chief executive of Meritage Homes Corp. In Maricopa, Ariz., a boom town near Phoenix hit hard by foreclosures. Meritage is offering three-bedroom houses for as little as $99,900, less than half the price of a typical new home there four years ago.

Meritage is generally holding prices below $250,000 now in Florida, Arizona and Texas, Mr. HIlton says, and they're below $325,000 in California.

Builders can afford to lower their prices now in part because land is much cheaper. They're also able to squeeze their suppliers and subcontractors harder. Housing starts are running at less than a third of the 2005 level, making suppliers and subcontractors eager for orders and willing to work for less.

One of Meritage's big national rivals, KB Home, is cutting costs partly by standardizing window sizes and floor plans rather than allowing endless local variations. "We build this same product line across the U.S. now," says Jim Widner, regional president.

Most of the homes KB sells in Las Vegas now cost $150,000 to $170,000, he adds. During the housing boom, new-home prices were typically above $400,000.

Builders are also trying to complete homes faster for people who can't wait the typical four to six months required for a new home. A large share of today's buyers are first-timers who want to qualify for a federal tax credit that expires April 30.

Meritage says it will guarantee to complete homes in 99 days in some markets. That's possible, Mr. Hilton says, partly because only efficient subcontractors have survived the bust.

Special deals are also helping builders. Lancaster, Pa.-based Charter Homes & Neighborhoods offered 30-year mortgage rates in January that start at 2.87%, climb to 3.87% in year two, and then settle at 4.87%. In February, the starter rate increased to 2.99%, but it's still below current average mortgage rates of 5.10%. "People are definitely responding," says Rob Bowman, Charter's president.

In Las Vegas, Pardee Homes is using email blasts to tell potential home buyers about possible hazards of buying foreclosed homes. Banks are sometimes slow to respond to would-be buyers' offers, they warn, and former owners have often neglected or even trashed the houses. "Unapparent damage may include leaking water, rot, asbestos or rodent infestations," a Pardee email says.

Some buyers are also starting to suffer from "foreclosure fatigue," says Klif Andrews, Pardee's Las Vegas division president. as it gets more difficult to compete with cash-rich investors for foreclosed houses.

Still, in some cases the lure of real or imagined bargains remains strong. Jim and Penny Seawards used to buy a new home each time they moved. But in their most recent search, concluded in December, they lookd only at recent-vintage foreclosed houses. "We felt we could get more house for the money," says Mr. Seawards, the sales director at a Cadillac dealer.

The couple bought a 3,600-square-foot house in Scottsdale, Ariz., for $425,000. They expect to spend $50,000 more on landscaping and other improvements, but their real estate agent, Jim Sexton of Russ Lyon Sotheby's International Realty, figures a similar newly built house would have cost at least $625,000.

Some home owners avoid new homes for other reasons. Lew Reich, an agent with Keller Williams Realty in Plano, Texas, says buyers are sticking closer to downtown Dallas and the city's established suburbs, eschewing lengthy commutes. They also worry that some home builders won't stay in business long enough to finish construction or honor their warranties.

Economists expect the foreclosure crisis to drag on for at least a few more years. So can home builders get back to their former pace of accounting for one of every six sales?

"I think we will get back there," says Bernard Markstein, an economist at the National Association of Home Builders, but, he says, it will take a few years. The NAHB forecasts that new home sales will jump 38% to 517,000 this year as the economy improves. But that would still be only about 9% of expected total home sales.