Interesting...Weyerhaeuser exec in charge of building homes

[victorchai]

http://seattletimes.nwsource.com/html/b ... yco14.html

As the guy in charge of one of the nation's largest homebuilders, Larry Burrows should be a whiz at picking real-estate bargains — especially at a time when some sellers are dropping prices as aggressively as if they were CDs on sale at Wal-Mart.

So did Burrows, the new chief executive of Weyerhaeuser Real Estate Co. (WRECO) who recently relocated here from Washington, D.C., snag a deal?

Hardly. Burrows and his wife paid $1.85 million for a 5,000 square-foot Mercer Island residence built in 1987 for $463,000.

"I picked the one place in the country that has little price flexibility," Burrows said ruefully.

The purchase price, however, is a minor pain compared to Burrow's other real-estate woes. Along with builders across the country, his company is getting walloped by a glut of unsold homes that has curtailed new constructions and hammered home prices.

Much of WRECO's fortunes are staked in the formerly sizzling markets of Southern California, Las Vegas and Phoenix — places that now lead the nation in hemorrhaging home equities. Desperate sellers are slashing prices so drastically that according to Zillow.com, more than half of the existing single-family homes today are selling for below the previous purchase price.

What's more, WRECO compounded its problems by expanding into Arizona in early 2006, acquiring its first homebuilder in almost three decades. That turned out to be the precise peak of the national home-construction frenzy.

Many housing experts now predict that it will take more than a year — and even steeper price drops — before the surplus housing stock in Phoenix and other overheated markets return to equilibrium.

All this means that Burrows is taking the helm at WRECO during an era of austerity and challenge.

Sinking land values and other charges have wiped $355 million from WRECO's balance sheet through the first half of this year. The company's operating profit margin has plummeted from an average of more than 17 percent between 2003 and 2007 to minus 47 percent.

Perhaps most ominously, almost a third of WRECO's customers during the second quarter of 2008 canceled their purchases after putting down deposits.

The company has responded by slashing home production, shrinking house footprints and skipping high-end touches, such as granite counters. In Seattle, for instance, Quadrant Homes, one of WRECO's five subsidiaries and the state's largest homebuilder, has slowed its construction pace to three homes a day. Just nine months ago, it was building seven homes daily.

Distressed markets

WRECO is the nation's 17th largest homebuilder, with nearly 5,000 single-family home closings in 2007. Aside from Washington state, it builds homes in California, Nevada, Texas and the Washington, D.C., area.

Burrows acknowledges that the company is unloading some homes, including those in severely distressed markets, such as Riverside, Calif., for less money than they cost to build.

Even in such lesser-hit areas as Washington, D.C., buyers remain wary. Winchester Homes, a WRECO subsidiary there, is struggling to sell $400,000 town homes near Dulles International Airport. Three years ago, comparable Winchester town homes built a half-mile away sold out at $600,000 apiece, Burrows said. He was Winchester's president until his recent promotion.

Houston remains WRECO's sole bright spot, with home prices rising modestly instead of falling. Seattle has fared better than much of the country. But even here average home values have fallen by 7.3 percent to $384,000 in the second quarter from a year ago, according to Zillow.com. That pulled prices back down to their levels in early 2006.

But Burrows is already looking beyond the gloom. After all, he has lived through a few real-estate upheavals during his 32 years in the business. And he sees no reason why this bust won't eventually be followed by another boom.

"The outlook for WRECO is tremendous," Burrows said. "We are going to be a survivor."

Corporate upheaval

Burrows is a genial 55 year old whose gleaming lapis cufflinks contrast with his unruly gray hair. He took the top job at WRECO when his boss, Dan Fulton, succeeded Steve Rogel upon his April retirement as chief executive of WRECO's parent, Federal Way-based timber giant Weyerhaeuser.

WRECO's descent into red ink comes at a particularly inopportune time. Weyerhaeuser is in the midst of a corporate upheaval that has whittled away half of its forest-products business. WRECO now accounts for almost a quarter of Weyerhaeuser's total revenue, nearly double its share in 2002.

Paul Latta, an analyst with McAdams Wright Ragen in Seattle who has tracked Weyerhaeuser for 15 years, said investors are still pressuring the company to make changes to boost the value of their stakes. Those changes could include converting Weyerhaeuser from a corporation to a real-estate investment trust (REIT), which would require divesting some of the company's diversified businesses.

"WRECO is a big loss contributor right now," Latta said. If Weyerhaeuser becomes a REIT, WRECO "probably would be spun off or sold or partnered away."

Burrows, for his part, insists that WRECO's fortunes will rebound. The company chose to build in cities such as Las Vegas and Phoenix because they're magnets for newcomers.

"These markets have great long-term potential," Burrows said.

But before recovery can begin, Burrows said, the backlog of unsold homes must be whittled down. The inventory stands at about 11 months nationally, double the usual volume.

Elliott Pollack, a real-estate economic consultant in Scottsdale, Ariz., contends that WRECO and other builders can blame themselves for that surplus.

In January 2006, for instance, WRECO announced that it was acquiring the privately owned Maracay Homes in white-hot Phoenix.

WRECO didn't know it, but the Phoenix market had begun to cool by then and construction permits were already tapering off. Average home prices in Phoenix peaked in the second quarter of 2006, Pollack said. They have since fallen by 26 percent.

"In 2006, (WRECO) should have known that the bubble was popping," said Pollack, founder of Elliott D. Pollack & Co. "But there was no way they could have known the extent."

Burrows declined to comment on the timing of the Maracay purchase, which was made under Fulton. But Burrows concedes that many builders may be guilty of what in hindsight turned out to be unwarranted optimism.

"We were hoping that there would be customers," Burrows said.

Prices falling

Yet it may be months, or even years, before those customers return in full force, said Mark Boud, founder of Real Estate Economics, a residential real-estate research firm in Irvine, Calif.

Homes prices are still falling in many parts of the country, discouraging would-be buyers and paralyzing sellers. In Southern California, where WRECO's Pardee Homes operates, average single-family home prices topped out at $515,000 in early 2007. It now stands at $405,000, with the descent accelerating during the past six months.

Boud expects prices to fall still further, below even the $402,000 that he calculates as the "supportable" price based on income levels and economic conditions. Such overcorrections, Boud said, are inevitable when former boomtowns get saddled with a slew of foreclosed homes and reluctant lenders.

Burrows acknowledges that an even more painful shakeout for WRECO is likely in Southern California and Las Vegas. But he thinks markets invariably recover. When it does, he intends to make sure WRECO is ready.

Already, WRECO is scouting for land it might buy at depressed prices. It is scaling down the size and design of its homes to better match the new buyers' sensibilities. And it's learning new ways to build houses cheaper.

"I understand the challenges," Burrows said. "But I'm very bullish."




"I picked the one place in the country that has little price flexibility"...
Now I understand why Sellers are holding...