Very interesting article...Still predicting 1-2 bankrupt homebuilders over the next 12-18 months. Homebuilders Liquidate Assets as Threat to Survival Spurs Sales By Bob Ivry Enlarge Image/Details Oct. 5 (Bloomberg) -- When D.R. Horton Inc., the second- biggest U.S. homebuilder, couldn't sell the one-bedroom condominium in San Diego it listed for $349,800, the property was auctioned as a last resort for 37 percent less. D.R. Horton, with annual revenue of about $11 billion, and Hovnanian Enterprises Inc. now face the worst choice in the worst residential real estate slump since the 1930s. They're selling homes at any price they can get. ``It's desperation time and some companies may not make it,'' said Alex Barron, an industry analyst at Agency Trading Group Inc. in Wayzata, Minnesota. ``At this point in the housing cycle, if you have too much debt, it's hard to get out from under it.'' Homebuilder profits depend on the cost of land, said John Burns, president of John Burns Real Estate Consulting in Irvine, California. Companies can still make money building on land purchased before the 2005 peak of the five-year U.S. housing boom, though price declines of as little as 10 percent might wipe out those profits, he said. ``They are all losing money,'' Burns said. ``They'll talk in terms of gross margin and it sounds like they made money, but they actually lost money because they didn't make their costs.'' `Really Stinks' The average cost to build a 3,340-square-foot home in the U.S. is $403,925, according to the National Association of Home Builders in Washington. That includes $219,015 for construction costs, $45,507 for the price of undeveloped land, $65,969 to prepare the land for building, marketing expenses of $11,258 and a sales commission of $19,499. During Hovnanian's ``Deal of the Century'' promotion last month, the company sold a 2,900-square foot five-bedroom, three- bathroom house at the Greenwood Manor development in Royal Palm Beach, Florida, for $525,000, said Kathy Bell, who bought a house with the same floor plan down the street for $575,000 in March 2006. ``It really stinks,'' said Bell, 50, a medical billing specialist who lives in Hovnanian's development in Royal Palm Beach, Florida. ``We were here in the beginning and we didn't get any deals. It's very upsetting.'' Construction costs alone for a house that size would be about $435,000, according to the Florida Home Builders Association. That doesn't include the cost of land, or preparing the lot. Debt Load Hovnanian's Web site said that model was available ``starting from $530,000s.'' Hovnanian spokesman Jeff O'Keefe said the company offered discounts as high as 30 percent. O'Keefe said he wouldn't comment on the prices paid for properties sold during the promotion, which ran from Sept. 14 to Sept. 16. Chief Executive Officer Ara Hovnanian had said the company sold 2,100 homes in the three days, more than double expectations. The 15 largest homebuilders are saddled with $7.75 billion in debt due to be repaid through 2009 and the companies' bonds trade as if they were junk, according to credit-default swap data. At least five of the top 15 homebuilders by revenue are burdened with too much debt, Agency Trading's Barron said. They are Hovnanian in Red Bank, New Jersey; Irvine, California-based Standard Pacific; WCI Communities Inc. of Bonita Springs, Florida; Atlanta-based Beazer Homes USA Inc.; and TOUSA Inc. in Hollywood, Florida. WCI will reduce its debt with the completion this year of a luxury condominium tower in Bal Harbour, Florida, said Chief Financial Officer Jim Dietz. Nationwide Auctions ``We might discount a home 20 percent if the profit margin was 30 percent, but we haven't discounted any properties 40 percent, which some homebuilders are doing to raise cash,'' Dietz said. Officials from Standard Pacific and Beazer didn't return calls seeking comment. ``We're not focused on growth,'' Ian McCarthy, Beazer's chief executive officer, said at a homebuilding conference in New York on Sept. 18. ``We're very much focused on today and getting through this downturn.'' Beazer has conducted three national sales since June, the latest called ``Smart Homes Savings Event.'' TOUSA withdrew its forecasts for 2007 and 2008 on Wednesday, blaming what it called worsening market conditions, the company said in a statement. Generating Cash The company will focus on generating cash to pay down debt, CEO Antonio Mon said in the statement. TOUSA Vice President for Investor and Corporate Communications Hunter Blankenbaker, reached by phone, said he had no further comment. Pulte Homes Inc., the third-largest homebuilder by revenue, ran a newspaper advertisement in September in which the Bloomfield Hills, Michigan-based company offered to pay buyers' mortgages and taxes for six months if they bought homes at its developments in suburban Chicago. Pulte's national sale in June, called ``The Perfect 10 Event,'' was a success, according to spokesman Mark Marymee, who wouldn't specify what profit margins were or how many homes the company sold. ``The builders are very hush-hush about the prices they're selling new homes for,'' said Andres Wilken, who writes the South Florida Housing Bubble blog in Tamarack, Florida. Plasma Television Ryland Group Inc., based in Calabasas, California, offered suburban Chicago buyers a free finished basement and a plasma television in a September newspaper advertisement. Miami-based Lennar Corp., the biggest U.S. homebuilder, put 16 homes in Palm Springs, California, up for auction on the Internet in April, selling 11, according to Tony Isbell, president of RealtyBid.com in Rainbow City, Alabama, which conducted the auction. ``A lot of people see it as desperation,'' Isbell said. D.R. Horton of Fort Worth, Texas, overcame qualms about its image with the Sept. 29 auction of 56 unsold San Diego condominiums. The 200 bidders who filed into a tent on the grounds of the Doubletree Hotel in Mission Valley, California, needed a $5,000 cashier's check to prove they were serious, said Steven Moran, an agent with Century 21 Award in San Diego, who attended with 11 clients. ``I ran the numbers and the condos sold for between 68 cents and 74 cents on the dollar based on the original asking prices,'' Moran said.
Indoor Parking A condo with an enclosed balcony and an indoor parking spot was originally listed at $349,800 and sold for $220,000, Moran said. D.R. Horton also threw in a washer-dryer and $2,500 toward closing costs, Moran said. ``Adding a credit toward closing costs still allows them to show the highest selling price they can,'' Moran said. D.R. Horton spokeswoman Jessica Hansen did not return calls seeking comment. The company did not allow members of the media into the auction and has not released sales information. About 57 percent of builders offered incentives to buyers in August, up from 37 percent in September 2005, the last month of the national housing boom, according to a survey by the National Association of Home Builders. Fifty-two percent of builders said they cut prices in August, compared with 19 percent in September 2005, the builders group said. The typical incentive was worth about $5,000 and the median price reduction was about 5 percent, said Stephen Melman, director of economic services for the builders association. Pinched by Discounts ``Our company has intensified the focus on generating cash and keeping inventories low,'' Lennar Chief Executive Officer Stuart Miller said in a Sept. 25 conference call. ``We have rigorously pursued this objective by using incentives and price reductions to sell homes and to backfill cancellations.'' Pinched by competitors' discounts, Los Angeles-based KB Home saw gross margins fall to negative 28 percent in the third quarter from 21.1 percent in the same period last year, the company said in a regulatory filing Sept. 27. ``We anticipate the pricing and margin pressure will continue until the inventory levels of unsold homes is back in balance with demand,'' KB Home Chief Executive Officer Jeffrey Mezger said on a conference call that day. To achieve a balance between the number of buyers and sellers, homebuilders need to cut current inventories in half, said Michelle Meyer, an economist at New York-based Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm by market value. Meyer's outlook calls for sales to drop until the third quarter of 2008 and for housing starts to decline until 2009. Insolvency It would take 8.2 months to sell off the current inventory of unsold new homes, according to the U.S. Census Bureau. The average over the last six years is 4.9 months. ``We would not be surprised to see one or more of the larger homebuilders become insolvent if current pricing trends persist into 2008,'' Mark A. Morgan, senior equity financial analyst with New York-based Rochdale Securities LLC, wrote in a note to clients on Sept. 27. At least seven publicly traded homebuilders have asked their banks for more lenient lending terms in the past four months, according to New York-based research firm CreditSights Inc. They are Pulte, on June 29; D.R. Horton, on July 6; Beazer, on July 25; Dallas-based Centex Corp., on July 18; KB Home on Aug. 17; Lennar, on Aug. 21; and Standard Pacific on Sept. 14. ``It's important for any business to have positive cash flow,'' said Calvin Boyd, vice president for investor relations at Pulte. ``In this environment, that need is enhanced a bit.'' The five biggest homebuilders by revenue -- Lennar, D.R. Horton, Pulte, Centex and KB Home -- wrote off a combined $3.3 billion in the third quarter on land they own and will not build on or options to buy land they are choosing not to exercise. Shares of the companies have declined between 46 percent and 53 percent this year. The ``devastating impact'' of those losses could make banks less inclined to grant builders more lenient lending terms in the future, Frank Lee and Sarah Rowin of CreditSights said in a Sept. 26 report. ``The banks are in the drivers' seat and will determine the future of the homebuilders,'' Lee said in an interview.