<p>hardwareguy: <em>"builders are very flexible in their pricing when times are bad"</em></p>
<p>Absolutely the truth! They are like any other profit making business in our capitalist society. As long as they are cash flow positive (i.e. have a profit margin) on every deal they make, they will continue to have the incentive to build. Let's say the average pure cost of building in Irvine is $125/ sq ft (building supplies + cost of labor + selling/general/administrative expenses). Add to that a pretax profit margin of say 25% (to yield a post-tax profit margin of 15% at the effective tax rate of 40% to the business), i.e. $160/ sq ft.</p>
<p><em>As long as the builder can continue selling at a rate of $<u>160/ sq ft or more</u>, it will continue to have the incentive to build and sell.</em></p>
<p>Now compare this to the average price of a new condo/TH/yard-free SFR which is around $400/sq ft down to about $375/sq ft for larger sq ft plans!</p>
<p>You can easily tell that they still have a HUGE incentive to keep building and selling. As the prices trend down over the next few months (or years), you will see builders slowing down the construction and adjusting their prices gradually downward until they hit the bare minimum profit margin of $160/sq ft. <em>Even</em> at that point they can continue to make fewer units and work through the dip below that price point just to stay in business (and be somewhat cashflow negative for a short while) until demand picks up again and pushes the price point above the margin rate to start building up again.</p>
<p>This is basic Econ 101. As long as the profit motive is there, they will keep building. <em>That is the absolute truth in business and there's nothing wrong or unethical about it.</em></p>
<p>In an efficient and liquid marketplace with lots of competition, this adjustment and testing of the bottom margin rate would be quick and effortless, i.e., a hard painful correction followed by a time of stagnation (Think back to NASDAQ 5000 in March 2000). The housing market though, is a slowly deflating bubble.</p>
<p>But, I digress. Let me focus on Irvine: I think the builders out here essentially constitute a monopoly (or a tightly-run oligopoly) run by the Irvine Company (TIC). (You can find this information elsewhere, some in this blog about how builders need TIC approval before lowering prices.) So circling back to my earlier point - the profit margins are still VERY high, therefore, a continued incentive to build, and somewhat regulated prices make this a very inefficient marketplace in Irvine. So do not be surprised to see the prices being lowered very gradually, and (since there's a sucker born every minute), people will continue to remain enthusiastic about new model homes and new phase releases and will continue to flock to the release events.</p>
<p>BUT, people who read these forums are VERY SMART. They will see through the veil of lies and deceit and through their inaction in buying these new homes, will force the builders to drastically cut their prices in the coming months, and thereby cause a faster "return to mean" in the housing market here! <em>Viva la revolucion! </em></p>
