Leslie Arnott's Real Estate Blog

Q&A: Former Centex boss in Sacramento area says housing has hit bottom

By Jim Wasserman - jwasserman@sacbee.com

Published 12:00 am PDT Monday, July 28, 2008
Story appeared in BUSINESS section, Page D2

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For two years and three months, Doug Pautsch ran a division of Centex Homes that routinely led the Sacramento region in sales of new homes.

On July 11, Centex ousted Pautsch and replaced him with the president of its Visalia-based Central Valley division.

Pautsch has called the move an apparent retaliation for his lawsuit against Centex, a publicly traded home builder based in Dallas. The lawsuit, filed in Placer Superior Court, alleges that Centex didn't pay Pautsch $355,000 in promised bonus money.

Centex says it doesn't comment on litigation.

Recently, the 16-year veteran of the region's home-building scene talked about his bird's-eye view of the housing downturn. He discussed the economics of building and growth patterns, and his belief that the Sacramento market cycle has bottomed out.

Pautsch started his building career in 1992 as a controller with Los Angeles-based KB Home. In 1997 he opened a Sacramento division for Greystone Homes, also based in Southern California. In 1998, he joined Centex as a controller and worked as director of land acquisition and chief financial officer before being named division president in April 2006. That was just as the housing market began to badly stumble.

Pautsch said he hopes to stay in the home-building industry in Sacramento.

"I'd like to be building something, like a company or a new division for somebody that can see Sacramento has bottomed out and it's time to step in," he said. "When everybody else is beaten and bruised, this is the time to say we should get into the market."

Q: Sacramento was one of the first U.S. housing markets to fall apart. Was it a problem communicating that to headquarters?

A: The first nine months everyone was in denial: "That's just a little cold that Sacramento has, just a little speed bump. We'll get through it. It's just Sacramento."

They didn't realize it was a flu that would become an epidemic. My local counterparts and I would talk about it. At their respective corporate offices, not just mine, people just didn't understand. Across the country everyone was full speed ahead. Money was flowing and sales were happening. It must just be Sacramento because it went up so quickly.

It was six to nine months before people realized this wasn't just a Sacramento issue. They'd say maybe it was just California or Florida, and maybe it was just Northern California. There was a lot of denial going on. But as we know, everybody caught the flu.

Q: A lot of big corporate builders appear to be wounded. Will we see some mergers?

A: Yes, out of necessity, not out of choice. As large publics (publicly traded firms) continue to shrink, their overhead structure won't support the volume. They're going to have to merge. You can't support a regional structure and a corporate structure with volumes that these builders are going to. They're shrinking faster and faster.

Q: Where is this market going?

A: I think we're at the bottom. We're going to bounce around a little bit. We moved through the foreclosures. They're being absorbed by the market. Inventory has been coming down so there's not a huge inventory issue anymore. I believe we're at the bottom.

I think it will be next year when we start to see recovery. I define that as prices starting to go up. The supply is shrinking really fast. It's overcorrected. As with anything, the pendulum swings too far to the correction side. That's where we are now.

Q: Wall Street builders have dominated Sacramento since the 1990s. Will they keep the edge as the market turns?

A: I think the local or regional builder will be able to react a lot quicker than the publics. The publics will be looking at the national picture. And that will be doom and gloom for a while.

Sacramento was one of the first, if not the first, to go into this downturn. So we'll start coming out sooner than everybody else. But the national press will still be talking about the housing drag when we're coming out of it. The publics will be looking at the national press.

Q: What keeps you up at night?

A: I think there's going to be a shortage of lots. The builders are not developing land. But neither are the developers. Everybody is going to work through what they own. There's finished lots that will get absorbed pretty quickly. When the herd leaves and the market has changed, they will chase the same lots. There will be a shortage of developable lots.

Q: There's plenty of talk about oil prices changing development patterns. Some say suburbs aren't going to work. How will oil prices change growth?

A: In all recoveries when the market is turning down it's always the fringe. It starts collapsing on itself.

The reason people would go out and drive 40 or 50 miles to their jobs was so they could afford a home. As this market recovers, the houses closer in will be first to recover. But it will ripple its way out again.

Even if gas prices are $5 a gallon, there will be a price where people will say it's worth $5 a gallon to save $100,000 on a house. But the fringe will be the last to recover. The price difference has to warrant it, and it will.

About the writer:

• Call The Bee's Jim Wasserman, (916) 321-1102. Read his Home Front blog at www.sacbee.com/blogs