How to Fix Housing, Employment and The Economy (Part 3)

In the first two part of this series we talked about the Government needing to take an active role followed by the Banks needing to be the oil or grease that kept the system functioning.  

Well the Builders need to become change agents in the short term. I call them change agents as most builders should change their traditional business model in the short term (2-4 years). Builders need to stop building new properties if we are to turn housing around, lower unemployment and produce a stronger economy.

I have no idea how new construction can pencil in our current market with relatively new REO’s going for 30%-40% of the cost of new construction.  How can builders compete against these prices???  The short answer is they can’t and they should stop trying or they will burn through capital quickly and be in a world of hurt eventually.  

From where I sit builders either need to take the next 2-4 years off completely or change their business model. It is that simple.  I propose that builders should actively look into purchasing distressed properties in communities they once built.  Think about it.  Who could remodel a unit quicker and more cost effectively than the one who built it???  If this proves to be too small a market for a builder they should look to pick up other distressed assets and create value by turning ugly ducklings into beautiful swans.  

I have seen homes go for land value and a builder with their skill and experience could create a nice business model buying at 30 cents on the dollar and creating a new and finished product sold at 80 cents on the dollar.

If Builders stopped building and instead focused on the distressed inventory we currently have what would happen? Well first competition would go up slowly, which would raise prices and most importantly we would burn through our shadow inventory.  The sooner we reduce supply the quicker we get back to replacement cost where builders can start to pencil new construction.

Think about all the new jobs, tax revenue, etc that would be created by turning builders into remodelers for the next 2-4 year period???  Things could get real interesting really quickly.

So why won’t builders do this?  Well I hope some do but the chances are not many as they are wired to do one thing and what I propose is just too outside the box for them.  That is unfortunate as they would earn more money for their shareholders by buying distressed assets and turning them into functioning properties.

So if builders became change agents with the tax benefits offered in Part One and the Financing offered in Part Two we would turn prices around quickly, we would add a lot more jobs and the economy would be a lot stronger!!!

In the final part we will discuss the role of the investors and how they are the most critical part.

Good Investing