Downturn may leave builders bankrupt

Housing woes bringing job cuts, discounted prices

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Associated Press / November 15, 2007

Home builders such as Centex Corp. and Pulte Homes Inc. aim to survive an industrywide unraveling by selling houses at bargain prices, slashing jobs, and scrapping growth plans.

But as the housing downturn worsens, experts say at least a few major US home builders may end up bankrupt.

Builders constructed more than 2 million housing units nationwide in 2005, the year the boom peaked. So far this year, housing starts have fallen to an annual rate of 1.2 million units through September, and economists expect the number to drop to an annual rate of 1 million by mid-2008.

Some analysts foresee a shakeout similar to that of the early 1990s, when numerous builders went through bankruptcy, including Reston. Va.-based NVR Inc. and US Home Corp. of Houston, now part of Miami's Lennar Corp.

A consolidation of weaker players may also be on the horizon.

The industry is "going to be a shadow of itself once we get through this downturn," said Mark Zandi, chief economist at Moody's, who predicts home prices won't rebound until late 2009 or early 2010. "Everyone was too optimistic."

Developers are reeling from sharp increases in loan defaults, which force lenders to be far more cautious about new mortgages. The result: sinking home prices, surpluses of unsold homes, and a spike in canceled orders.

Even speculators who snatched up new homes during the bubble years, hoping to turn a quick profit, can't sell - meaning more properties compete for a limited pool of buyers.

To move unsold inventory quickly, builders are staging flashy sales promotions of the kind common at used car dealerships. In particularly hard-hit housing markets, such as California and Florida, and even in less-devastated regions, such as the suburbs around Washington, D.C., developers are resorting to auctions. For example:

In Alexandria, Va., last month, 30 two- and three-bedroom condominiums were auctioned off in an hour for average prices of $300,000 to $350,000, a discount of around 10 percent from preauction prices. Some builders are bound to lose money through auctions, said Jon Gollinger of Accelerated Marketing Partners, which ran the Alexandria auction, but they see the benefit in cashing out.

In California, Kennedy Wilson Auction Group typically fetched bids 40 percent below the asking price on houses it sold in about a dozen auctions of residential developments this year, said Rhett Winchell, president of the Beverly Hills company.

In Baltimore, new town houses with granite countertops and rooftop decks that commanded $600,000 or more two years ago were advertised in October for as low as $480,000 during Pulte's Halloween-themed "Monster Sale."

Nationwide, Pulte cut prices $10,000 to $50,000 during the sales event, offering discounted closing costs and free golf carts in communities catering to seniors. The company would not provide sales figures from the event.

Home builders also have moved away from buying land outright and instead buy less-expensive options to do so, said Elliot Eisenberg, a senior economist with the National Association of Home Builders.

Still, some big builders "are in fairly decent shape," said David Goldberg, who follows the industry for UBS AG, citing Toll Brothers Inc. and KB Home as examples of those with healthier balance sheets.

"Nobody is saying that demand is in good shape," Goldberg said. "But there is demand."

There are numerous signs, though, that most builders' woes are mounting.

This month, credit rating agency Standard & Poor's downgraded three of the four largest home builders by market value - D.R. Horton Inc., Pulte, and Lennar - to noninvestment grade, or "junk" status.

The ratings picture is even worse for struggling WCI Communities Inc., Standard Pacific Corp., and Tousa Inc., which last month retained advisers from Lazard Freres & Co. "to conduct a comprehensive review" of its finances.

In another ominous sign, many investors are placing bets that homebuilders' stock prices will continue to fall.

Traders are especially negative about Beazer Homes USA Inc., which faces federal investigations of its business practices and is planning to restate financial reports after an internal probe found employees in its mortgage unit violated federal lending rules.

As the housing industry shakeout continues, smaller companies with less access to capital and those that took on too much debt could be the first to go down.

On Friday, Levitt and Sons, a subsidiary of Florida-based Levitt Corp., filed for Chapter 11 bankruptcy protection, citing "unprecedented conditions," particularly in the Southeast.

Neumann Homes Inc., a large privately held home builder in the Midwest and Colorado, did the same last month. New Jersey's Kara Homes did so in 2006 and, after finding new investors, reorganized this fall under a new name, Maplewood Homebuilders.

Industry veterans say the bigger players are better positioned to ride out this downturn than the one 15 years ago because they are not as concentrated in any particular region.

And builders, if they are convinced the market will rebound soon, can always hold off on putting completed projects up for sale.

An executive with Lennar was quoted this week in The Wall Street Journal as saying the company plans to finish more than 200 homes in Irvine Calif., but will hold off on selling them until the market improves.

A company official declined to comment further.

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