Prisoner’s Dilemma - Homebuilder Style
Chuck Ponzi June 1st, 2007
Calculated Risk today had a lively discussion about Hovnanian’s utterances on Briefing.com. titled Many Builders building Spec Homes to Liquidate Land.
To quote CR’s quotes:
[Land sales have] “just really slowed to a complete trickle with very few buyers of any type out there”
and
“that’s part of the reason why you do see many home builders resorting to selling spec homes because there’s really a way of liquidating the land portfolio.”
Conventional wisdom reported for the past few years that homebuilders had learned their lessons with building spec homes and that the bankruptcies of homebuilders from the 1990’s was not to be repeated again. I even went so far as to say that all of that speculation was taken up by individual investors; a kind of democratization of speculation. I believe now that this was not correct and that homebuilders would in fact, repeat their same mistakes.
It might be a good time to revisit Ara Hovnanian’s prediction that 2007 would be the turnaround for housing. See it here. He even went so far to say that prices were rising in some areas already in 2006.
The first thing that made me rethink this was Ara Hovnanian’s comments to Bob Toll when first suggested that builders would throw a house on a piece of land just to move the land inventory off the books. That was at a builder’s conference.
If looks could kill, Bob Toll would have committed first-degree murder that day.
In the meantime, Ara has confirmed that this is their practice.
Which brings me to the prisoners’ dilemma. Basically, a prisoner’s dilemma is created when groups can better themselves as a whole only when they supress their own individual benefit. (Nash equilibrium theory plays in here).
Will the two prisoners cooperate to minimize total loss of liberty or will one of them, trusting the other to cooperate, betray him so as to go free?
This is the place that homebuilders find themselves. They can maintain prices as long as all of them restrict supply. As soon as one of them breaks ranks, the rest will too. Builders are breaking ranks… and in a big way.
Southern California builders have begun to influence the markets in a dramatically negative way regarding prices to move product. There are some scenarios where builders are already undercutting recent home buyers by more than $100K. In the near future, I will dig a little deeper to get more information on this practice and provide a compelling argument to show what is happening and how it will impact the local pricing in an area.
For now, enjoy the weekend.
See my previous comment about KHOV in the Sage community in North Rancho Cucamonga… the single story model has been reduced in price by about 70,000. also, Meritage home builder reduced the price on a couple of “left over homes” in Phase 1 of their Rancho Etiwanda Estates by 100,000. I toured both of them. It is interesting how you go into a model and then into one of their spec homes (or homes that fell out of escrow) and see the bare floors, the cheap-looking base model cabinets and then get depressed as they look like “nothing special.”
We’ll have to see what they do, but to date their efforts to move homes in this market have not been successful. ONE builder might close ONE home >1million in this area once or twice a month. There are over 250 homes between 500 and 800K in Rancho Cucamonga right now. I saw a foreclosure in Masterpiece that is still way over priced, brown grass and all.
There is good evidence that much of what has been predicted on this blog over the past 8 months is coming to fruition, but I’m hoping it is just the start of price declines.
Still waiting to pull the trigger and my little daughters are looking forward to someday having a “permanent house” so they can get a puppy…
Move out of CA and have a life…seriously!
I have to agree. Moving from California would be the best choice for your young family… the taxes are too high and the schools are way underfunded. Too many children of illegals admitted into the school systems here… it deprives the American kids of a good standard education. I’m originally from Virginia and we made the move to California in 2005 for a job transfer. If I had to do it again… I’d look for another job in my home state of Virginia. The housing is much better and the schools are excellent. My daughter has learning nothing about U.S. History and her math skills have worsened since joining the public school system here. I’m resorting to hiring tutors now to help us play “catch-up” so she won’t seem like an under-educated idiot around the rest of family whose children are getting first-class teachers in Virginia and Maryland.
Living in the East, we always thought that California was the Avant-Garde state when it came to education… now, I tell everything it just a Pig with glossy lipstick.
Also, the state income taxes are a killer… in Virginia you could earn the same but never pay more than 6% in state income tax… CA taxes can be as high as 10%! Then, the Gas prices are higher… another “ouch” to our wallets. Add to that, vehicle registration fees are higher!
I’m actually earning less in CA eventhough my salary is higher than my last job in VA!
Andy,
The schools are not underfunded, that is a myth. Yes, many of the schools are poor performers and even the best schools are IMO merely acceptable but they are not underfunded.
In topic; the prisoners dilemma does not apply as the participants get multiple feedback cues and are allowed to cooperate outside the rules of the game. Liars poker except with $1m bills?
Hahaha, funny you mention the school thing. We lived in Dallas and moved to San Diego, my step-daughter is getting stupider by the day. In Texas she was hammered with reading, math, science…now she gets homework like doing jumping jacks and the family gluing a bunch of shapes on paper to make art. She’s also gaining weight since there’s so little activity now in schools, and any kids she’s met out here are too stuck up to play with her. If I can find work back in Dallas and get a decent moving budget we are out of here. If you have the means get out of here while you can, this place sucks.
Willow,
I am confident I am not alone in wishing you the best in your future endeavors. California is not for everyone and that has been one of its problems. You’ve no doubt heard the NYC slogan; “If you can make it here…” Something similar goes on in SoCal. I say SoCal because California is far too diverse to talk about in unitarian terms. Even then SoCal is several distinct regions and beyond that it is comprised of many more distinct overlapping social constructs. Rent a nice house, in a nice school district and put away so much every month that you can pay for Harvard and a house in Austin after 10 years. Thank you for your efforts. Goodbye and good luck.
I grew up here, I thought Texas was going to be full of a bunch of dumb hicks; I was pleasantly surprised. Seeing the quality of life being so much better in Dallas I knew why the rumors about the south were so over-the-top, to keep the population down. I’ve lived in Lakewood, Long Beach, Irvine, San Diego and El Cajon in SoCal. I lived in Plano and Dallas in Texas. I can say without hesitation that the Dallas area is by far a much better place to live in than SoCal, but I’m not 17 anymore looking to see some obscure British rock band play in downtown LA or San Diego. So it is for some people, but not all. I’ve noticed that I had much more financial freedom in Texas than SoCal, which screwed us when we moved back. We were used to not worrying so much about money, we figured the raise I got moving back would help, but not nearly enough. We’ve toned down purchases and doing things, but it kind of defeats the purpose of living here if it’s too expensive to do anything. I figure as more people leave SoCal it will be a lot better, but for now we will have to suffer and see what happens.
Just noticed the game the hedges and banks are playing. I’d guess the next set of CDOs or insurance are going to be written much tighter. Or perhaps not get written at all.
So unexpected consequence will be the hedge fund guys will not be covering this shyet up in the future.
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