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Delusional Home Builders

Despite the developing stress lines, home builders retained their congenital optimism about the housing market. Most could afford it; they still had plenty of cash and bank lines built up during the boom. So they kept on building, putting up a record number of homes through summer 2006. The home-building industry had been transformed during the previous decade, as large, publicly traded firms took market share away from smaller, privately held builders. The big builders now did most of the construction in the largest markets. Observers thought this would mean more disciplined building; the large builders would have better market information, and shareholders would demand that builders pull back at the first sign of weakness. That, too, turned out to be a delusion.

The big publicly held builders and their stockholders showed no such discipline. They ignored the weakening market, putting more shovels into the ground and projecting future sales growth to keep their stock prices up. When challenged by investment analysts or reporters, construction executives proffered theories about why the housing market would remain strong. Some said lots of immigrants were coming to the U.S. and would keep buying no matter what; unfortunately, after 9/11, there were fewer immigrants. There were also variations on the old saw about land—that they’re not making more of it. True, in some places developable land was in increasingly short supply; many beachside resorts are short on spare lots. But, of course, developers don’t need much vacant land to put up a condo tower, many of which were sprouting skyward along much of the nation’s coasts.

Undaunted, some builders even established their own mortgage lending affiliates to ensure that credit kept flowing even if traditional lenders became skittish. These affiliates were particularly aggressive, even offering down payments to buyers as gifts. (They recouped the cost in a higher house price.) And if that still failed to entice purchasers, the builders could offer a marble counter top, a bigger deck, or a built-out basement to close a deal. Yet despite all their efforts, as spring 2006 turned to summer, fewer deals closed and cancellations ballooned.

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