Monday, April 28, 2008

Legendary Builder Eli Broad expects an additional 20% drop in home prices

Legendary Eli Broad, co-founder of KB homes, told Bloomberg today that he expects home prices to drop an additional 20% due to unsold inventory. Here are some of his comments from Bloomberg:

"Eli Broad, a philanthropist and co- founder of KB Home, the fifth-largest U.S. homebuilder by revenue, said he expects home prices to drop another 20 percent.

``I don't think we're anywhere near a bottom in housing,'' Broad told Bloomberg TV at the Milken Institute Conference in Beverly Hills, California. ``We're going to have a big inventory of unsold, unoccupied homes that's going to take three or four years to clear out.''

"``People were using their home equity as really an ATM machine,'' Broad said, referring to an automated teller machine. ``They were spending more money than they were earning by taking equity out of their home. That couldn't go on indefinitely. We're now paying a price for that.''

My Take:

Well I don't know of a guy that knows the housing market better than Eli Broad. He has built homes through several selling cycles and made billions doing it. Consider him the T. Boone Pickens of the housing world.

His expectations of a 20% drop did not surprise me. I have personally figured the number nationally would be right around there and worse in the bubble areas.

What shocked me was how long its going to take to sell off this inventory. 3-4 YEARS!!!! Prices will continue to fall as long as there is excess inventory. Anyone not selling a home thinking the market will come back is crazy.

Don't forget, there will be years of flat prices after the inventory is sold off because so many people will have gotten burned. It will take time for people to shake off the pain of their losses. It will also take time for them to get their credit back to buy a new house!

Japan is going on 20 years after their housing bubble crashed and they still haven't seen any serious appreciation in their housing market.

Bottom Line:

Eli Broad is a guy you should pay attention to. If its going to take 4 years to sell off this inventory then I have some advice for sellers and buyers.

Anyone who owns a home in a bubble area and is holding out thinking the market will come back needs to rethink their position. If you live in an area where there was not a lot of appreciation and your house is affordable for the income in the area then you can be more patient. By affordable I mean 3-4 x income.

If you live in a bubble area my advice is to get out now as fast as you can. Lower the price to where you start seeing traffic then sell it. The longer you wait the lower prices are going to go if we have 4 years of inventory.

If this means you have to short sell it at a small loss then you better do it now before it becomes a big loss later in the cycle. If you can't afford to short sell it then I would suggest you go talk to a bankruptcy attorney and take a look at your options.

Now some advice for the buyers. We have a long way down to go. 20% in Eli's opinion. I will trust him over the NAR any day of the week. As long as inventories stay high, prices will keep dropping.

Don't try to catch a falling knife. I am always a fan of industry experts who no longer are in business because they tend to tell you the truth versus talking their book. Eli gives his fortune away for a living now as a philanthropist. He has no agenda due to any business ties when he speaks his mind.

If he thinks we go down 20% from here then expect it.

Case/Shiller price index comes out tomorrow. Stay tuned!


Minton Mckarkquey said...

Once again, I find this fascinating that it's not headline news (although the Austrian-family-in-the-basement-thing is pretty awful).

20% PERCENT spells not only recession but downright destruction - goodbye to the last 20 years of growth. Think about the knock-on effects to lending, bonds and... well, everything.

On your comment about 'sell it now' - I agree, but it's probably too late. Most folk probably have to suck it up for the next five years if possible.

I'm thinking of working out a chart on a realistic recovery time, btw, since I suspect using the standard income-to-ratio formula could force recovery to more like 4-5+ years.

What do you think the GOP will do in their next term?

Jeff said...


I know its going to be ugly.

Good luck with the recovery chart. Let me know what you come up with. I have no idea how to predict that.

The only thing I can compare this to is Japan and they are 20 years and still not back to where they were.

The Nasdaq bubble is 40% from its highs 7 years later.

Its going to be at least a decade for housing to have legs and longer for prices to get back to where they are now IMO

Flipping is done and won't be seen again in my lifetime. The lending products that gave people the opportunity to flip are gone.

Any flippers that are left are the suckers buying falling knives.

Its gonna be ugly Minton!