Aggressive Builders at Risk in Downturn

For many home builders, these are the best of times. Buyers are plentiful and new-home prices rank among the nation’s highest. But at some point the region’s bubble probably will burst, raising the question of whether home builders should be preparing for the next downturn.

Builders tend to take a near-term outlook of the economy, rather than a longer view. Some, for instance, have bought several years’ worth of lots at current prices, which have soared in value. To turn a profit, the builder would have to assume housing prices will climb even higher in the future. But at some point, new homes could be priced “beyond the reach of the broadest segment of consumer demand,” said Dave Chapman, a housing analyst at Haskell & White LLP, a Newport Beach accounting firm.

The median price of new homes in the county--meaning half cost less and half cost more--has been as high as $354,000. Last month, the typical new home sold for $328,000, a reflection of the type of new homes on the market rather than an overall decline in value.

Chapman suggests that builders should be reviewing marketplace trends at least quarterly, allowing them to walk away from potential projects that could put them at higher risk in case of an economic downturn.

“The solution is to behave more like the larger land developers who have a formal quarterly process for gathering and analyzing economic, demographic and housing data,” Chapman said.