At the Mercy of the Market

Buyers turn sellers, but no one's interested.


COMMERCE CITY, COLO.—At least the pounding hammers have stopped for now. Until a few weeks ago, the relentless whack, whack, whack of the construction crews down the street from Randy and Lacy Sullivan's Colorado home was a constant reminder of the competition the father and daughter face as they try to sell her three-bedroom house before the bank forecloses on it. "Why are you people still building?" Randy, 62, asked the construction supervisor for Richmond American Homes recently. "You've already got all these houses on the market."

Lacy paid $312,000 last year for the home in the 12,000-lot Reunion development northeast of Denver, and her father moved in with her. Brand-new versions of the same house now sell for about $280,000—"and that's with the finished basement and the granite countertops," says Randy. Unable to make the $2,200-a-month payments, he and his daughter had to lower their asking price to $255,000. "I told them, 'You're nuts! You're just cutting your own throats in the end!'"

As the housing downturn deepens, such bloodletting is becoming commonplace in formerly fast-growing communities across the nation. With few prospects for the undeveloped land that builders hold, "the only way to stay in business is to build a house on it, then sell it at cost," says mortgage banker Lou Barnes.

Fire sale. To lure new buyers, builders like Richmond, a subsidiary of publicly traded MDC Holdings, have little choice but to undercut their recent customers. That, in turn, leaves buyers turned sellers like the Sullivans in a trap: Not only do they owe more on their mortgages than their houses are worth; they must now compete in the marketplace against the very people who sold them their houses in the first place.

The fire sales have helped push the median home price in neighborhoods like the Sullivans' down by more than 10 percent since the beginning of the year. And while builders have cut back on housing starts by nearly a third over the past year, new-home sales are so poor that the Commerce Department reports there is still an unsold inventory of 8½ months.

As a result, the delinquency rate on more than $303 billion in single-family construction loans nationwide has doubled over the past year to about 4.3 percent, according to real-estate research firm Foresight Analytics, and could soon rival the 1-in-15 consumer home loans now teetering on default. Under intense pressure to make their own monthly payments or meet the same fate as customers like the Sullivans, builders are "eating their young to stay alive," says Barnes.

In fact, upwards of 10 percent of homeowners in the Reunion area now face foreclosure and eviction. That introduces an even lower priced competitor into the market: banks desperate to unload foreclosed homes for whatever they can get.

The result, as in similar developments across the nation, is a trail of empty houses, unkempt yards, and abandoned lots, along with a corrosive database of depressed "comps"—neighborhood home sales comparisons that drag down property values even further and force those who remain, from equity-deprived neighbors to increasingly property-tax-poor local governments, to prepare for the worst.

Trouble in suburbia. Drive past the faux silo emblazoned with a capital "R" at Reunion's grassy entrance, and there's little sense of the trouble brewing within. Touted as a model of "new surburbanism," it combines the front-porch intimacy of traditional urban neighborhoods with a state-of-the-art rec center, a 52-acre park, and other amenities typical of a master-planned community. Until recently, the lead developer, Shea Homes, was praised by both residents and outsiders for delivering on its promise of "creating neighborhoods, not subdivisions."

Fashioned from 3,400 acres on Denver's northeastern plains, Reunion's relatively modest land costs allowed Shea and its handpicked list of builders to offer homes for about $70,000 less than similar ones closer to town. Prices range from about $250,000 for a tidy starter home to as much as $2 million for a house in the grand "Parade of Homes" along the Buffalo Run Golf Course.