Toxic buildup in slumping housing market

/ Source: CNBC

How do you deal with excessive supply? Add more supply!

Sounds like a head scratcher, but that’s exactly what home builders are doing.

The housing market hasn’t seen any light at the end of the tunnel: Home builders have built too many homes and they've had too many cancellations. There are too many existing homes on the market competing with them, and now here come the foreclosures adding to supply.

On Tuesday, D.R. Horton, the No. 1 U.S. home builder says for the one-year period ending June 30, its sales fell 40 percent to 8,559 homes, and the dollar value of the orders dropped 47 percent to $2.0 billion. The company expects to see its first quarterly loss in a decade when it posts earnings for this past quarter.

Though homes don’t sell, home builders are building fast in some places.

California's Central Valley is once the hottest housing pocket of the country, counting for one in every 25 homes built nationwide. Now it’s going through a painful contraction after the tremendous growth busted. Yet Standard Pacific Homes is piling up Spec homes in the town of Manteca.

Spec homes are single-family houses built by home builders in anticipation of finding buyers. In other words, they are built on the belief there will be enough market demand, not quite the situation we have right now. In fact, in the Standard Pacific development here in Manteca, we only found one “sold” sign.

You might wonder why home builders would dig larger holes for themselves.

Standard Pacific won't comment for the story, saying the company is in the quiet period before posting earnings.

But Ara Hovnanian, CEO of home builder Hovnanian Enterprise said recently that building Spec homes is about the only way to liquidate land these days.

"It's easier to sell land by popping a house on it than it is to just sell land because there are just not many buyers out there," he said.

When no one buys the homes, home builders slash prices.

Joe Anfuso, President of Floresheim Homes, a private smaller rival in Manteca’s local market, says the build-and-slash cycle has happened three times since October.

“At some point, some executive has got to stand up in the boardroom say, maybe we should just stop prostituting our best asset, and wait for the market to come back to us,” Anfuso said. “We know California land always pays off, and by giving it away, we're not doing the market or ourselves any good.”

Anfuso said intensified local competition has also forced him to slash prices several times. And that’s about the outcome of this spec home buildup: The big guys squeeze out the little guys in a price war.