Banned from the bagel shop

I was out of town last week on a client assignment looking at two smaller markets in the Mid-Atlantic region.  To suggest that the housing markets there are “interesting” is an understatement and details will probably be provided in a future blog.  But today I wanted to share some thoughts on a more topical subject.

This week I was back in town and resumed my normal “at-home” schedule of having breakfast with my wife at our local bagel shop, a place we have been frequenting since the day it opened.  The food and service are pretty good (in my opinion they have the best bagels in south Florida).  As I spend a great deal of time out of town, I enjoy the comfort and familiarity of a routine and a place where I can relax and visit with my wife before we both head off to work. And possibly most important (and familiar to those who have dined with me), I truly appreciate not having to ask three times to get enough lemons with my iced tea.

Early on weekday mornings the crowd in the bagel shop is typically sparse, usually just five or six familiar faces with whom we will exchange “good mornings” and possibly engage in brief chats.  One of those familiar faces, a daily fixture in the morning, was noticeably absent on Monday and Tuesday morning and again on Wednesday so my wife asked our server if something was wrong with “Brenda”.  The response was a quick glance over to “Andy”, the owner, and a whispered and somewhat ominous reply that we ask Andy which I was more than willing to do but my wife, not wishing for me to cause any trouble, prevailed.  The next morning just as we were about to enter the bagel shop the server from the day before walked outside, pulled us aside, and explained that there had been an “incident” the previous week and Andy had told  Brenda that she no longer was welcome as a customer.    

How sad that for the rest of her life, Brenda will now be known as “the woman who was banned from the bagel shop” – kind of sounds like a Seinfeld episode, doesn’t it?

Seinfeld, the American television sitcom was a critical favorite, commercial blockbuster and cultural phenomenon, leading the Nielsen ratings in its sixth and ninth seasons and finished among the top two every year from 1994 to 1998. In 2002, TV Guide named Seinfeld as the greatest television program of all time.  The difference between Seinfeld and all other prior sitcoms is that the principal characters never learned a single moral lesson;  they effectively were isolated from and indifferent to the outside world.

What does the foregoing have to do with the homebuilding industry?

Several years ago I was driving around the St. Petersburg, Florida marketplace and pulled into a Lennar community of $300,000 homes and stopped dead at the entry where a huge sign proclaimed “$100 moves you in”.  My immediate thought was that a homeless person with a decent corner could make $100 on a good day, move into one of these homes and live there for six months or more before they were evicted.  Little did I know that day that what I saw was, in my opinion, the opening salvo of the sub-prime fiasco which still impacts the housing market around the country.

I knew at that time that the new home market in St. Pete had softened substantially.  One year previously I had seen all of the major homebuilders respond to unnaturally strong demand by limiting sales and even reservations so that they did not, according to one of the builders, “give their houses away” as they had been raising prices every month.  At that time I had suggested to one of my clients in that market that the current level of demand was unsustainable, that a substantial correction was coming shortly, and that he should adjust his operation accordingly, first by securing every possible sale (he did include a recommended purchase provision escalating the price in the event of construction cost increases) and second by selling off some of his excess land.  Six months later, that demand had almost totally disappeared.  Fortunately, my client had followed my advice and is still in business today.

Back to the Lennar strategy, it appeared obvious to me and, I believed to anyone who would look at the facts, that offering homes with $100 total move-in cost could not overcome a basic lack of actual demand.  All I thought it could do was sell homes to unqualified buyers and while sales momentum might appear to be maintained for the short term, the end result would be to dissuade “real” buyers from purchasing while substituting phantom sales that would soon disappear or worse.  The reality is that with this same philosophy permeating home lending, the “worse” came to be with 7,000,000+ foreclosures nationwide and South Florida becoming one of the hardest hit housing markets with values in some areas declining by almost 50%. 

Saturday morning I opened my local newspaper, the Sun-Sentinel, and upon turning to the real estate section almost fell out of my chair from the vertigo brought about by a pervasive feeling of déjà vu.  Sticking out of that section was a four color glossy oversized insert from Lennar advertising 18 communities in South Florida under the headline: “ZERO DOWN!    ZERO CLOSING COSTS!    ZERO WORRIES!    ZERO TIME TO WASTE!” 

Does Lennar truly believe that although they and every other major homebuilder in the country failed to create a market with a similar offer in the last decade that this will work now?  

According to the insert, this scheme is not just being used to liquidate standing inventory and close-out developments as it is valid at three new communities.  Will there not be a negative impact in those communities upon the qualified prospects who might have purchased with a “real” down payment?   

What about the potential negative impact on appraised values if the home prices can only be justified with 100% financing?

Finally, what is the long-term impact on these communities, the home values therein and the existing and future purchasers, when new homebuyers have a substantially reduced investment in their new homes and community?

This is just my opinion, and I may be way out in left field here, but is this not the lesson of Seinfeld, in this case a homebuilding company that failed to learn a business lesson and is apparently isolated from and indifferent to the outside world?  

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