Concerns about homebuilding

The earlier post about all that new housing in L.A. County raises some uncomfortable questions about overbuilding. Alex Barron, a JMP analyst, sees worrisome similarities between Southern California's housing market and the one in Florida. Especially ominous, he told Dow Jones, is that builders are responding to slack demand by offering more incentives, steep price cuts and shockingly small deposits - in some cases less than one percent. That makes it a lot easier to walk away from a purchase. Here's another reason for worry:

A key difference between the two states is that Florida's woes were driven primarily by speculative investors and flippers who flooded the market and drove up prices over the past few years. Many of those same investors were forced to dump the homes they purchased back onto the market at fire-sale prices when the market softened. By contrast, speculative investors were never as big in California. Instead, homebuilders themselves have been driving the inventory buildups in the Golden State, according to Barron.

Not everyone is that gloomy. Michael Carliner, an economist with the National Association of Home Builders, points out that the number of housing starts per 1,000 people in California is much lower than in Florida. But what strikes Barron and others is the number of home builders who have built on spec and could now be holding a bunch of unsold inventory. Barron downgraded two builders that have large exposures to California - Standard Pacific Corp. and Beazer Homes USA Inc.

Sign of the times: Toll Brothers, one of the nation's biggest homebuilders, lowered its full-year guidance today to a range of $4.41 to $4.63 per share, from a previous range of $4.69 to $5.16 per share. "The continuing malaise in the housing market, we believe, is the result of an oversupply of inventory and a decline in confidence," said Robert I. Toll, the company's chairman and chief executive. "The speculative buyers of 2004 and 2005 are now sellers; builders that built speculative homes are trying to move them by offering large incentives and discounts; and some anxious buyers are cancelling contracts for homes already being built."