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.
Yet the seeds of Reunion's troubles were planted early on. Its first homes went on the market in 2002, just as mortgage rates began their descent to historic lows and a new breed of exotic loans offered almost anyone the chance to buy in.
"We should have walked away sooner and quit selling to some of them," Shea's president, Chetter Latcham, says of a number of buyers approved by the developer's mortgage arm. "But it's just so hard. We can counsel them and say, 'We really think you should borrow 30-year paper.' But they're responsible for their own decisions, and some of those were wrong."
Some of the sales also went against Shea's policy of selling only to buyers who promised to live in them. Although its sales contracts stipulate that homes must be owner occupied, some were bought by speculators. "There are people out there who are willing to lie because they think they're making a great real-estate deal," says Latcham. "We try to avoid those, because they wreak havoc on the community." One builder, Lennar, sold a dozen houses in Reunion to a single investor. This month, it also signed a deal to sell thousands of undeveloped lots in Colorado and elsewhere to Morgan Stanley Real Estate at 40 cents on the dollar, infuriating neighbors and competitors alike.
Go with Plan B. "The minute Lennar does a deal like this, it could lower the benchmark for everyone," says Ivy Zelman, a housing researcher. "So now the banks have to call all the builders and say, 'Hey, we've reappraised the land, and we need you to put up more equity.'" If they can't, the whole development begins to unravel. "You end up with half-built houses and empty lots and a master plan that isn't finishing the amenities that people were promised," says Zelman, "which makes for some very unhappy homeowners."
That isn't how builder Scott Carter figured things would play out. Impressed by Shea's master plan and projections that Reunion would draw up to 500 new home buyers a year, the co-owner of Brookline Homes poured his all into La Grande Cannoli, a $2.2 million, 8,750-square-foot, Tuscan-style farmhouse that won "Best in Show" in Denver's 2006 Parade of Homes. Despite the acclaim, Carter's Cannoli was the last of the six homes in the competition to find a buyer.
"I would have sold first, but I won't sell to real-estate speculators or buyers who aren't qualified," Carter says. "People were getting a 100 percent loan on a million-dollar house with no income verification. But it doesn't help the community to have someone come in who can't afford it."
It certainly didn't help his next-door neighbor, Doreen Jaress. An entrepreneur and real-estate investor from California, Jaress figured she and her husband would live for a while in the Tuscan-style home she bought last year for $1.6 million, then sell at a profit. But her "city boy" husband "could never get his arms around living out here," Jaress says. She put the house on the market in August—plenty of time before her three-year-option adjustable-rate mortgage resets.
Unfortunately, that was shortly after Jaress's other next-door neighbor tried to short-sell the 6,500-square-foot home he had bought for $1.8 million. Meanwhile, a builder down the street listed a comparable home for just $1.17 million. Last month, Jaress planted a "for sale by owner" sign in her front yard and offered owner financing. "I don't believe discounting is the answer," she says of her $1.7 million asking price. "It's the terms."
Of course, it's precisely the terms that got folks like Lacy Sullivan in trouble. Approved for 100 percent financing by Richmond American's mortgage arm, the 27-year-old didn't even have a job at the time. After the closing, when her dad sat down to read the fine print and eyed the 13.5 percent interest rate, "I just about choked," Randy says sheepishly. "As a father, I wasn't a good adviser to Lacy. But the average person doesn't know squat about this stuff; they depend on the Realtor and the mortgage company and the builder to do right by them. But they had dollar signs in their eyes."
Ironically, it's that same pursuit of a fast buck that may help the Sullivans avoid foreclosure. Last week, Lacy finally received an offer on her house—from an investor.