Builders Weighed Down by Houses and Land

Trouble in the mortgage market threatens to add to an already long list of worries for home builders this year.

Since the real estate market softened, builders have been stuck with too many houses and too much land, in part because jittery buyers canceled contracts at a frantic pace last year. The cancellations kept coming at the beginning of this year.

In the Washington region, the cancellation rate for new homes hit 11.4 percent in January, up from an already high 9.3 percent at the same time last year, according to Hanley Wood, a research firm that tracks construction of new and proposed homes. The number of contract closings dropped 33.3 percent that month to 947, from 1,419 in January 2006.

"There's a growing willingness to trim prices and offer other kinds of incentives" to lure more people to buy, said David Seiders, chief economist at the National Association of Home Builders. "That's been a theme, and there's no doubt it's continuing."

Builders are also watching the problems plaguing the mortgage industry, namely the subprime market that caters to risky borrowers, including people with impaired credit or little money for down payments.

As the real estate market cooled, a growing number of subprime borrowers started missing payments and defaulting. That could create a new set of problems for builders by adding to the already large supply of homes for sale and by prompting lenders to crack down on the types of borrowers they finance.

"That means less demand for housing, because borrowers who got loans last year won't get them this year," said Mark Zandi, chief economist at Moody's Economy.com. "It also means more supply of housing, because there's going to be a surge in foreclosures and those properties will be thrown into the market at a discount."

Already, the percentage of subprime loans in the foreclosure process jumped to 4.53 percent from 3.86 percent in the fourth quarter of 2006, according to a national survey by the Mortgage Bankers Association. The percentage of loans that entered foreclosure in the quarter increased to 2 percent from 1.82 percent.

"From the builders' point of view, that makes things tougher than they've been, which I presume means more [downward pressure] on pricing," Seiders said.

Builders are doing more than just cutting prices or offering incentives, said Todd Vencil, a home building industry analyst at BB&T Capital Markets. They're also ridding themselves of land.

They've done this mostly by dropping options that gave them the right to buy land in the future in exchange for a small down payment, Vencil said.

"They're generally not spending money on new land right now. So they're generating quite a bit of cash," Vencil said. "They're trying to generate cash and pay down their debt so that they're ready to take advantage of any opportunities to buy land when the market turns back up."