Builders downsize during slow market
The slowing housing market is beginning to rear its ugly head in just about every aspect of our economy, whether real estate related or not.
The effects of the housing market’s downturn are most apparent in the fact that there is such an overwhelming surplus of un-bought homes that are for sale on the market. This is because during the boom there was such a demand for homes to be built, and then things slowed down and now there are way too many newly-built homes and developments on the market.
Builders are now realizing the fact that they need to scale-down and downsize their companies in the face of the slowing market and low demand for their products.
An August 30, 2006 article by Annette Haddad of The Los Angeles Times, “KB home cuts holdings as market cools,” discusses the downsizing of one of the nation’s largest homebuilding companies.
“KB Home has started pruning its land portfolio in Southern California, a byproduct of a slumping housing market that is forcing big builders to reevaluate their property holdings. The Westwood-based builder said Tuesday that it had sold its 49% stake in the massive Anaverde master-planned community in the Antelope Valley to the majority owner, Empire Cos. of Ontario.”
This sale shows that builders are realizing the severity of the slowdown and need to streamline their inventory and products. In the past few years when the real estate market was booming, many major builders invested in a lot of development land and are now finding that they do not have much use for it.
“KB, the nation's fifth-largest home builder, in recent years has beefed up its land-development business to capitalize on rising property values amid a six-year housing boom. Land developers typically profit by acquiring property and increasing its value by upgrading it into lots ready for construction.”
“But now with demand for new homes declining, major builders are under pressure from Wall Street to justify their ownership of land that isn't already primed for building and that doesn't have a prospective buyer lined up.”
Home sales are declining by the day, so it makes prefect sense for big companies to sell land that is not spoken for yet or not even built on.
“Less demand for new homes mirrors the soft demand for land in the area, said Michel Faris, a land broker with Park Place Partners, which specializes in Antelope Valley real estate. ‘A lot of the market is psychological,’ he said. ‘Buyers are not willing to take risks now, whether with raw land or finished lots.’”
During this downturn, home building companies have to be extra conscious of the business decisions they make since even one wrong move could severely injure a company.