March 21, 2007 - Homebuilder Demands Money Back On Work Already Done
Residential homebuilder Lennar Corp., which lost $196 million in its last quarter, has sent letters to its trade contractors in Southern California demanding that they either cut the price of work already completed by as much as 20 percent or be barred from bidding on other Lennar work for at least six months.
The Sacramento Business Journal reported the cost-cutting move earlier this month. While contractors in Northern California hadn’t received letters, Brad Diede, executive director of the California Professional Association of Specialty Contractors, said his members had received at least the same money-back request by phone or face-to-face meeting.
The Journal quoted Marc Chasman, president of Lennar’s Northern California/Northern Nevada region as saying the price reductions were voluntary. “We gave them the option to give us a rebate. If they chose not to participate, we didn’t have a precondition on any future work with us.”
Chasman added there is no company-wide policy regarding the issue, but that each region has a corporate edict to cut costs. Other subcontractors quoted in the article said other Sacramento builders are following suit. “I’ve been in business for 25 years, and this is the first time I’ve ever seen retroactive pricing,” said one contractor who wanted to remain anonymous.
Chasman said a majority of local contractors had accepted the pricing policy. “There’s disappointment on our side, too, that the market isn’t better.”
The most recent housing data further added to the disappointment. Housing starts released by the Department of Commerce on March 20 rose 9 percent in February to a seasonally adjusted annual rate of 1.53 million units. However, February results are still 28.5 percent below the February 2006 rate of 2.13 million.
Meanwhile, builders’ application for new permits, considered a more reliable gauge of future activity, fell 2.5 percent for the month, the 12th time they’ve fallen in the past 13 months. That leaves permits down 28.6 percent compared with February 2006. Permits for single-family homes fell to a nine-year low.
In addition, The National Association of Home Builders reported March 19 that its survey of builder sentiment fell in early March, reflecting worries about the financing troubles in the subprime mortgage market. The builder confidence index dropped to 36, down from a February reading of 39. A reading below 50 means most respondents view conditions as poor. The index reached a high of 68 in October 2005.