Foreclosure Double Whammy For Homebuilders

Quotes of the Day

“We want to present our homes as a better asset than necessarily a foreclosed asset.” - Ian J. McCarthy, President, CEO and Director, Beazer Homes. On a conference call, McCarthy was explaining how Beazer was competing with all those foreclosures out there. (Beazer Homes USA, Inc. F1Q08 (Qtr End 12/31/07) & F2Q08 (Qtr End 3/31/08) Earnings Call Transcript in Seeking Alpha, June 3rd)

“We’ve seen a couple… where we’ve been outbid by the players that have raised the funds for this specific purpose. And I hope everything works out for them… But if it doesn’t, you may see that this prolongs for quite a bit of time the problems that we’ve got.” – Toll Brothers CEO Robert I. Toll, on highly capitalized hedge funds and private equity competing with homebuilders to buy up land at cheap prices now. (Toll Brothers F2Q08 (Qtr End 4/30/08) Earnings Call Transcript in Seeking Alpha, June 3rd)

"In some regions, the supply coming to the market from home builders is now smaller than the supply coming from foreclosures." - Deutsche Bank senior economist Torsten Slok. (Reuters, June 4th)

Homebuilders and the Foreclosure Crisis

NVR May See More Pain Before Gain. “[Foreclosures] have led to a sharp decline in housing prices, which has in turn led to even more foreclosures [in] NVR's (NVR) [previously safe] areas of business - the MidAtlantic and MidWest regions… Q1 profits fell to $43.5 million while new orders fell 30%... Less than most… but a disturbing trend. NVR executives have been selling shares... Chairman Dwight Schar sold 41,000 shares in May… CEO Paul Saville sold 14,000 shares in April… NVR currently trades with a P/E of just 11x earnings. However, even if we assume that the company sees no further downside (ie. earnings $7/share for the next three quarters), the forward P/E ratio immediately jumps… to 20x earnings.” (Investerms, June 4th)

Homebuilders Offer Bleak Outlook And Post Losses. “Homebuilder D.R. Horton (DHI) said Tuesday the industry could face tough times until 2010… Don Tomnitz, D.R. Horton's president and CEO: "2010 will be the earliest we get a more solid homebuilding environment." Homebuilders are struggling to sell their homes at a time when many buyers remain reluctant to enter the market because they expect home prices to keep falling. A glut of unsold homes has also hurt builders, forcing many to step up incentives and discounts, shrinking their profits. Tomnitz said home prices may still have more to drop in many of the hardest-hit markets, like Florida, California, Las Vegas and Arizona.” (AP, June 4th)

Toll Brothers F2Q08 (Qtr End 4/30/08) Earnings Call Transcript. David Goldberg – UBS: “Are [you] seeing more distress (at high end) and [are] you seeing the bank start to act to possibly reclaim those assets, or do forced sales or something like? Toll Brothers (TOL) CEO Robert I. Toll: "We’re seeing a little bit of bank activity, not much...We have seen in certain cases some negative impact from foreclosure bus tours, realtors offering a bus ride for those would-be investors or new home buyers… while the impact of that has been very, very slight so far, we’d like not to see it increase, of course, and we fear that it probably will.” (Seeking Alpha, June 3rd)

Pulte Homes: "The Problem Is Demand"; No, the Problem is Pulte Homes. “New homes are now selling at a 10%-15% discount to resale in most areas of the country. Historically, that ratio has been reversed. Richard Dugas, Pulte Homes (PHM) CEO: "We clearly need resale pricing to correct, and correct dramatically… Existing buyers are telling us they would like to buy our homes, but need to sell their existing homes." But if Dugas gets his wish for dramatically lower home prices, [then] Fannie Mae (FNM) and Freddie Mac (FRE) are underestimating coming price declines. Fannie recently relaxed downpayment rules so borrowers approved by Fannie’s automated underwriting program will now be able to borrow up to 97% of the value of their homes. At the current pace of decline using the Case-Shiller composite, it would take just four months to be underwater on your mortgage with a 3% down payment.” (Minyanville, June 4th)

Builder Taylor-Morley Shuts Its Doors. Illinois: “One of the largest and oldest local homebuilders, Taylor-Morley Homes Inc., has gone out of business. [In] 2006, Taylor-Morley was the area's fifth largest builder… In 2004, Taylor-Morley built more than 400 houses and employed 300 workers... By summer of 2006, sales fell 20% over the previous year and 50% by 2007. Liens for unpaid work by subcontractors were also piling up as the company laid off people and sold lots to cut costs. Over the last 18 months, at least two of Taylor-Morley's major lenders have foreclosed on hundreds of lots owned by the builder as repayment for outstanding debt.” (Big Builder Online, June 3rd)

Lull In Gwinnett Foreclosures Is Misleading. Georgia: “A few striking foreclosures remained to illustrate the depth of the problem in Gwinnett's housing market Tuesday. Builders gave up dozens of lots in new subdivisions near Grayson. Lowell Pratt Residential LLC lost to foreclosure 35 plots of land in the Wilshire Manor subdivision near Grayson. The foreclosure represented an $8.76 million loss for the builder. Twenty lots and a handful of homes in the Georgetown Commons subdivision also went up for auction Tuesday. Homes had been listed for more than $600,000 in the Grayson-area development. About $10.5M in residential property was lost to foreclosure Tuesday at Georgetown Commons.” (Atlanta Journal Constitution, June 3rd)

Home Builders Up Against It Try To Unload Land. “Real Capital Analytics: Nationally, land prices were down 9% in 2007. In April, Moody's reported that since Q1’06, the 19 publicly traded home builders had written off $19.3 billion in land [charges]… Accounting rules require homebuilders to write down the value of their land, and the resulting hit to shareholder equity could trip key loan covenants… Hedge funds, private opportunity funds and other distressed-assets investors have been snapping up some of the land and unfinished projects... Paul Prescott, leader of Deloitte Tax's national home-building practice: The proceeds may not be enough to keep builders from violating their debt repayment requirements or covenants, which banks are less likely to waive or amend because of the ongoing credit crunch.” (Financial Week, June 2nd)

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Comments

[PrudentMan,CFA]

Anyone who doesn't already know and understand his shouldn't be investing.

[Jason T]

I shorted TOL back in August of 2005, but covered 3 months later. Been very bearish on housing since.

People need to remember that house prices and starts declined every year from 1925-1933. But the steepest declined occured after the stock market crash. We are basically revisiting that cycle. We peaked in late 2005 and have declined every year since. Once the stock markets crash, and I believe they will once the commodity bubble bursts, house prices will have their bigget fall yet.

It's all in the cycles... predictable stuff

[billddrummer]

Here in Northern NV, several large builders have been foreclosed upon on projects that were in progress in late 2007. One such project includes 7 partially completed homes out of a 128 lot subdivision. The model complex is also for sale. The realtor representing the bank makes it clear that any purchaser will have to qualify for a construction loan to complete the houses. There's a problem, though: More than 100 liens filed against the project, some encompassing all the lots, some on specific lots, some on the homes themselves. They range from unpaid HOA dues to liens from plumbing, electrical and cabinet supply firms who haven't been paid.

It looks like this project will sit uncompleted for a long time.