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When the builders start dropping like flies...

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  • When the builders start dropping like flies...

    From The Daily Reckoning (dailyreckoning.com)

    When the builders start dropping like flies...that’s when you know you have real trouble in the housing market, our friend Mish, over at The Survival Report , always warns.

    That’s not to say that withering mortgage application rates, skyrocketing foreclosures and falling home prices weren’t enough of a tip-off...but the demise of the builders is disconcerting to say the least.

    Like most things in the world, the connections here tell the story. Think about it. The demand for new homes has been unprecedented for the last few years, and in order to create these new homes, you’ll need...builders. And those builders will need supplies. And stores that sell those supplies will need more help. And so on and so forth. Millions of jobs were created in this boom. And millions will be lost in the bust.

    The AP reports: “Builders constructed more than 2 million housing units nationwide in 2005, the year the boom peaked. So far this year, housing starts have fallen to an annual rate of 1.2 million units through September, and economists expect the number to drop to an annual rate of 1 million by mid-2008.”

    Now that lenders aren’t so quick to lend, unsold homes are piling up and home values continue to plummet...and homebuilders are feeling the squeeze.

    The AP continues: “To move unsold inventory quickly, builders are staging flashy sales promotions of the kind common at used car dealerships. In particularly hard-hit housing markets, such as California and Florida, and even in less-devastated regions, such as the suburbs around Washington, D.C., developers are resorting to auctions to sell new houses, townhouses and condominiums.”

    In addition to slashing prices, some of the builders are cutting down on closing costs and throwing in things like golf carts with the purchase of a home. Yikes. Does anyone recall how ineffective these sorts of incentives were for GM? Sure, they moved some inventory, but saw very little profit doing so.

    But the faltering market, lack of buyers and chance of facing bankruptcy have some builders undeterred – they still think the market will see a rebound soon.

    “A[n] executive with Miami-based Lennar was quoted this week in The Wall Street Journal saying the company plans to finish more than 200 homes in Irvine Calif, but will hold off on selling them until the market improves. A company official declined further comment.”

    This sort of thinking has Mish scratching his head. “There is no rational basis for anyone to suggest the worst is right here right now. But that does not stop anyone from trying –and they have been trying for months on end,” he says.

    “Subprime resets peak this year, but Alt-A and option ARM problems are just as big. Those waves do not crest until 2011.

    “In addition, the overall economy is slowing dramatically. There is going to be a consumer-led recession to deal with. Unemployment has bottomed this cycle and is bound to rise dramatically. This will further pressure housing prices in a very significant way.”