When a homebuilder goes bankrupt, the company's creditors aren't the only ones who suffer. Often, so do those who have paid sometimes hefty deposits for houses that remain unbuilt and new homeowners living in a development with half-built homes and incomplete amenities.
In the past year, the tumbling housing market has claimed such large builders as Fort Lauderdale, Fla.-based Levitt & Sons, a unit of Levitt Corp., Elliott Building Group in Pennsylvania, Turner-Dunn Homes Inc. in Arizona, Kara Homes Inc. in New Jersey and Neumann Homes Inc. in Illinois.
When these builders file for bankruptcy, subcontractors stop working, unfinished homes in various stages dot the communities, crippling liens are placed on occupied homes, clubhouses are incomplete and swimming pools and parks are never built.
People who have placed deposits on homes either never get their money back or face delays of months or years before it is returned.
"The houses sit until someone comes in and decides to complete them," says Tracy Cross, of Tracy Cross & Associates, a Schaumburg, Illinois-based real estate research firm. The buyers "can't move in, they can't get their deposit back and they can't get out of the contract."
In November, Levitt and Sons became the nation's largest builder to file for bankruptcy. In its bankruptcy filing, the company lists assets of less than $1 million and debts of more than $100 million.
Some home builders such as Centex Corp. and Pulte Homes Inc. aim to survive by selling houses at bargain prices, scrapping growth plans and slashing jobs. But as the housing market continues its downward slide, other home builders could find their companies in jeopardy.
Problems for homeowners and buyers
Attorney Brian Meltzer, of Meltzer, Purtill & Stelle LLC, in Chicago, Ill., has represented home builders for more than 30 years. He notes that these bankruptcies create numerous problems for homeowners. One of the most pressing issues will be warranty service issues on their homes.
Cross believes that homeowners living in a bankrupted new home community have few options when their home has a major problem. If the foundation has cracks, the floors aren't level, the roof is leaking or the foundation is shifting, the homeowner will have to pay for the repairs. If a new entity takes over the development, it can help the homeowner -- but it has no obligation to do so.
As for the houses partly under construction, what most likely happens is that the lenders or another entity step in and hire the trades to finish those houses. The home buyer will then get the house he or she contracted for. In the meantime, the home buyer is "stuck" and can't get out of the legally binding contract.
How can potential buyers protect themselves?
Both Cross and Allen C. Balk, at Meltzer, Purtill & Stelle LLC, recommend checking out the builder before purchasing a home. Look at the progress in the subdivision. Drive around. Is anyone working? If it looks like there isn't that much production, it may be indicative of other issues.
Knock on doors and ask people if they are happy with their home. If you decide you want to live in that community, purchase a completed inventory home, which eliminates much of the risk.
Look up the company on the Internet. If it's a public company, you'll be able to find out how it's doing in different markets. Find out if land is being revalued.
Buyers should also make sure that their earnest money is in a third party escrow account because if there is a bankruptcy there is a right to terminate the deal.
"If the money is not in such an account, you become an unsecured creditor," he added. However, this provision can vary from state to state so it's up to the buyer to find out if this is done in their state.
Buyers sometimes can add a "springing provision" to their contract. This is a clause in the contract that allows the buyer to walk away if the builder files for bankruptcy protection. Most contracts don't contain them. This clause only "springs" into effect with a bankruptcy filing.
"There is nothing wrong with asking your lawyer to put this in the contract," says Balk. "It's important to check with your state to see how enforceable this clause is."
Showing posts with label Centex. Show all posts
Showing posts with label Centex. Show all posts
Thursday, October 9, 2008
Thursday, July 24, 2008
Builders Dislike Taste of Own Medicine
Turnabout, apparently, isn’t fair play.
After years of graft, deceptive lending and millions in profits on shoddily built houses, homebuilders are getting their just desserts.
The Wall Street Journal reports that banks, under pressure from regulators and shareholders to reduce their exposure to the housing market, are backing out of construction loans en masse. Builders, for their part, are crying foul.
Construction loans are like credit cards for big development projects: As the building goes up, developers draw on the loan to buy materials, pay employees and settle up with contractors. Banks like KeyCorp (KEY), Bank of America (BAC) and now-defunct IndyMac were active in the space, particularly in boom areas like southern California.
Recently, however, plummeting home prices have called the value of such projects into question. Banks are now refusing to honor their end of the bargain. If ground hasn’t been broken or the project is only partially complete, developers are left in the lurch: They're forced to repay the loan, post cash or sell the property. If they refuse, banks can push the project into foreclosure - and developers into bankruptcy.
Construction loans often carry personal guarantees, obligating builders to pony up their own assets if a deal goes sideways. In turn, builders are taking lenders to court, arguing that they have no cause to renege on their commitments. Banks, on the other hand, argue that property values have fallen to such an extent as to make many projects uneconomical.
As long as it can find an appraiser willing to value the property at a level that supports this claim, the bank has the upper hand. Finding an appraiser to do their bidding isn’t hard, since appraisers value properties based on what their clients (i.e. banks) want.
The fact that builders are being forced into financial shackles by questionable appraisals does have a touch of morbid irony. During the boom, big developers like Centex (CTX), KB Home (KBH) and Lennar (LEN) built homes, then lent borrowers money to buy them. Since they controlled the loan origination process, they ordered appraisals from cronies who inflated the prices. Builders reaped the benefits, while homeowners got stuck with a home they paid far too much for.
Now that they’re on the other side of the fence, developers don’t find the game quite as fun. "If banks want to get out of residential lending, that's fine; let's sit down and figure it out," said one builder. "But that isn't being done. The rug is literally being pulled from under us and games are being played."
While banks may be acting in bad faith, minimizing their exposure to risky loans by any means necessary, it's doubtful that courts will find against them. Judges are already buried under foreclosure filings stemming from the irresponsible actions of builders gone wild.
So builders shouldn't expect much by way of sympathy.
After years of graft, deceptive lending and millions in profits on shoddily built houses, homebuilders are getting their just desserts.
The Wall Street Journal reports that banks, under pressure from regulators and shareholders to reduce their exposure to the housing market, are backing out of construction loans en masse. Builders, for their part, are crying foul.
Construction loans are like credit cards for big development projects: As the building goes up, developers draw on the loan to buy materials, pay employees and settle up with contractors. Banks like KeyCorp (KEY), Bank of America (BAC) and now-defunct IndyMac were active in the space, particularly in boom areas like southern California.
Recently, however, plummeting home prices have called the value of such projects into question. Banks are now refusing to honor their end of the bargain. If ground hasn’t been broken or the project is only partially complete, developers are left in the lurch: They're forced to repay the loan, post cash or sell the property. If they refuse, banks can push the project into foreclosure - and developers into bankruptcy.
Construction loans often carry personal guarantees, obligating builders to pony up their own assets if a deal goes sideways. In turn, builders are taking lenders to court, arguing that they have no cause to renege on their commitments. Banks, on the other hand, argue that property values have fallen to such an extent as to make many projects uneconomical.
As long as it can find an appraiser willing to value the property at a level that supports this claim, the bank has the upper hand. Finding an appraiser to do their bidding isn’t hard, since appraisers value properties based on what their clients (i.e. banks) want.
The fact that builders are being forced into financial shackles by questionable appraisals does have a touch of morbid irony. During the boom, big developers like Centex (CTX), KB Home (KBH) and Lennar (LEN) built homes, then lent borrowers money to buy them. Since they controlled the loan origination process, they ordered appraisals from cronies who inflated the prices. Builders reaped the benefits, while homeowners got stuck with a home they paid far too much for.
Now that they’re on the other side of the fence, developers don’t find the game quite as fun. "If banks want to get out of residential lending, that's fine; let's sit down and figure it out," said one builder. "But that isn't being done. The rug is literally being pulled from under us and games are being played."
While banks may be acting in bad faith, minimizing their exposure to risky loans by any means necessary, it's doubtful that courts will find against them. Judges are already buried under foreclosure filings stemming from the irresponsible actions of builders gone wild.
So builders shouldn't expect much by way of sympathy.
Monday, May 5, 2008
Housing Slump Hits Detroit Builders - Detroit Housing Market
Metro Detroit's dismal residential housing market -- gridlocked and stagnant amid a global mortgage loan crisis, consumer sentiment at a 26-year low and a glut of unsold and foreclosed homes -- has cast a pall over local builders who only a few years ago were enjoying boom times.
Now, half-built subdivisions dot the region, construction workers are fleeing south and companies from family-owned shops to global firms like Pulte Homes Inc. are bracing for what could be their worst year yet.
One national player, Dallas-based Centex Corp., has decided to leave Michigan altogether. The company has built 4,400 homes in Metro Detroit since 2001 but no longer sees prospects here.
Said Centex spokesman Eric Bruner: "We are in the middle of the worst housing market in modern history."
Pulte Homes Inc. on Wednesday posted a $696 million loss for the first three months of the year; the Bloomfield Hills-based builder has lost more than half a billion dollars in each of the past four quarters.
Last year, Pulte closed on 499 homes in Michigan, less than half the number of the previous year. The company laid off 1,900 employees, 16 percent of its U.S. work force, in 2007.
"The difficult housing environment continued to erode during the first quarter of 2008," Richard J. Dugas Jr., president and chief executive, said in a statement. "Buyer demand for new homes continues to be soft, home prices remain under pressure, and overall buyer confidence is weak."
Small builders who rely on a warm-weather boost aren't getting it in Michigan this spring.
One is Jack Traggel, a roofing contractor formerly of Allen Park. In the early 2000s, he worked on about 50 homes a year. Last year, it was 15. This year, he found two jobs; two weeks ago, he moved to New Orleans.
"I've got three jobs lined up," said Traggel, 38. He hopes to move his wife and son to New Orleans later this month -- which, in turn, will likely result in another empty home in Metro Detroit. In Louisiana, "I've met about four guys I knew back in Michigan," he said.
Signs situation may worsen
There are dark signs that 2008 could be the toughest year this decade for builders.
In 2007, a paltry 5,556 permits to build new homes were filed in the nine counties that make up southeastern Michigan, according to Clawson-based Housing Consultants Inc. That was nearly half the number of permits filed in 2006 and 20,994 less than in 2004, the best year this decade.
In the first three months of 2008, fewer than 1,000 permits have been filed, a 25 percent drop from the same period last year.
"You're finding skeleton crews everywhere," said Mark Kwolek, co-owner of Planned Home Improvement in Westland. "You go to a supplier and the business is closed with no warning. You try to call a contractor and you find he's moved out of state."
About 69,000 jobs directly related to the home building industry have vanished since 2000, according to the state's Department of Labor & Economic Growth.
Stalled subdivisions abound -- a boon for companies such as Pinnacle Homes of Farmington Hills, which step in to buy unfinished subdivisions from banks and attempt to build homes for much less than just a few years ago.
Pinnacle is run by a former Pulte executive, Howard Fingeroot.
"I knew the market well enough to know that this was an overall downturn and one that was going to be around for a while," said Fingeroot, standing amid the empty lots of Kirkway Estates in Lyon Township. "The only way to compete with the foreclosures was to get closer to their prices."
In a venture with AmTrust Bank of Cleveland, Pinnacle will build 85 houses in the 100-lot development. The homes will be from 2,800 to 3,400 square feet and will list for around $330,000, Fingeroot said.
The 15 homes already standing, he added, sold for more than $450,000 each just a few years ago.
"There are still plenty of people who want to buy, and now is the time," Fingeroot said. "I think this is good news for the consumer."
Most home builders have already cut prices in an effort to boost sales. Prices on new dwellings already are down about 15 percent from their peak, according to Deutsche Bank analyst Nishu Sood.
The big worry is that existing home prices might fall further.
The National Association of Realtors says the median home price fell 1.7 percent last year and may hold even in 2008.
But many analysts contend homeowners might be forced to sell at lower prices as millions of mortgages reset to higher interest rates later this year.
Lombard Street Research analyst Gabriel Stein expects house prices nationally to fall for another year, off more than 10 percent or possibly even more than 15 percent, from their peaks.
If existing home prices start to plunge, home builders and the many companies that rely on new homes could feel even more pain.
"The adjustment process will shrink demand further for the builders," analyst Sood writes.
He predicts orders for new homes could fall another 10 percent to 15 percent nationally in 2008.
Now, half-built subdivisions dot the region, construction workers are fleeing south and companies from family-owned shops to global firms like Pulte Homes Inc. are bracing for what could be their worst year yet.
One national player, Dallas-based Centex Corp., has decided to leave Michigan altogether. The company has built 4,400 homes in Metro Detroit since 2001 but no longer sees prospects here.
Said Centex spokesman Eric Bruner: "We are in the middle of the worst housing market in modern history."
Pulte Homes Inc. on Wednesday posted a $696 million loss for the first three months of the year; the Bloomfield Hills-based builder has lost more than half a billion dollars in each of the past four quarters.
Last year, Pulte closed on 499 homes in Michigan, less than half the number of the previous year. The company laid off 1,900 employees, 16 percent of its U.S. work force, in 2007.
"The difficult housing environment continued to erode during the first quarter of 2008," Richard J. Dugas Jr., president and chief executive, said in a statement. "Buyer demand for new homes continues to be soft, home prices remain under pressure, and overall buyer confidence is weak."
Small builders who rely on a warm-weather boost aren't getting it in Michigan this spring.
One is Jack Traggel, a roofing contractor formerly of Allen Park. In the early 2000s, he worked on about 50 homes a year. Last year, it was 15. This year, he found two jobs; two weeks ago, he moved to New Orleans.
"I've got three jobs lined up," said Traggel, 38. He hopes to move his wife and son to New Orleans later this month -- which, in turn, will likely result in another empty home in Metro Detroit. In Louisiana, "I've met about four guys I knew back in Michigan," he said.
Signs situation may worsen
There are dark signs that 2008 could be the toughest year this decade for builders.
In 2007, a paltry 5,556 permits to build new homes were filed in the nine counties that make up southeastern Michigan, according to Clawson-based Housing Consultants Inc. That was nearly half the number of permits filed in 2006 and 20,994 less than in 2004, the best year this decade.
In the first three months of 2008, fewer than 1,000 permits have been filed, a 25 percent drop from the same period last year.
"You're finding skeleton crews everywhere," said Mark Kwolek, co-owner of Planned Home Improvement in Westland. "You go to a supplier and the business is closed with no warning. You try to call a contractor and you find he's moved out of state."
About 69,000 jobs directly related to the home building industry have vanished since 2000, according to the state's Department of Labor & Economic Growth.
Stalled subdivisions abound -- a boon for companies such as Pinnacle Homes of Farmington Hills, which step in to buy unfinished subdivisions from banks and attempt to build homes for much less than just a few years ago.
Pinnacle is run by a former Pulte executive, Howard Fingeroot.
"I knew the market well enough to know that this was an overall downturn and one that was going to be around for a while," said Fingeroot, standing amid the empty lots of Kirkway Estates in Lyon Township. "The only way to compete with the foreclosures was to get closer to their prices."
In a venture with AmTrust Bank of Cleveland, Pinnacle will build 85 houses in the 100-lot development. The homes will be from 2,800 to 3,400 square feet and will list for around $330,000, Fingeroot said.
The 15 homes already standing, he added, sold for more than $450,000 each just a few years ago.
"There are still plenty of people who want to buy, and now is the time," Fingeroot said. "I think this is good news for the consumer."
Most home builders have already cut prices in an effort to boost sales. Prices on new dwellings already are down about 15 percent from their peak, according to Deutsche Bank analyst Nishu Sood.
The big worry is that existing home prices might fall further.
The National Association of Realtors says the median home price fell 1.7 percent last year and may hold even in 2008.
But many analysts contend homeowners might be forced to sell at lower prices as millions of mortgages reset to higher interest rates later this year.
Lombard Street Research analyst Gabriel Stein expects house prices nationally to fall for another year, off more than 10 percent or possibly even more than 15 percent, from their peaks.
If existing home prices start to plunge, home builders and the many companies that rely on new homes could feel even more pain.
"The adjustment process will shrink demand further for the builders," analyst Sood writes.
He predicts orders for new homes could fall another 10 percent to 15 percent nationally in 2008.
Tuesday, January 8, 2008
Homebuilders Stocks Tumble further - KB, WCI, Centex, Pulte Report Losses
Homebuilder stocks tumbled Tuesday after KB Home reported a $773 million quarterly loss and new data showed pending home sales fell more than expected in November.
KB Home's fourth-quarter loss resulted from ongoing weak demand and plummeting margins, as land impairment charges and tax expenses came in higher than analysts projected.
KB Home shares were down 8.6% to $16.89 in midday trading, hitting a 52-week low Other builders tumbled on the reports as well, with Meritage Homesdropping 11.9% to $10.11 -- also a 52-week low -- and WCI Communities falling 8.8% to $3.34.
KB Home's quarterly loss amounted to $9.99 a share, compared with a loss of $49.6 million, or 64 cents a share, a year earlier. Analysts expected a loss of $1.08 a share.
The Los Angeles-based builder said revenue fell 31% to $2 billion, reflecting the ongoing difficulties of getting buyers to close on their new home purchases. KB Home also said 2008 will be "another tough year" for the homebuilding industry.
Also on Tuesday, the National Association of Realtors said its pending home sales index fell 2.6% in November from October -- worse than the 0.5% decline that economists expected, according to Reuters estimates. The index measures contracts of existing home sales.
"The disappointing data show that record levels of home inventories will take a while to burn off, which means that homebuilders may have to cut prices even further to sell homes.
We expect further modest declines in pending sales in the coming months as buyers continue to wait for home prices to bottom, although further price cuts should begin to lure some buyers off the sidelines," Bank of America analyst Daniel Oppenheim said in a research note.
KB Home's bottom line was slammed by $403 million of land impairment charges. The company also recorded a $373.7 million income tax expense, even though the company lost money on a generally accepted accounting principles basis.
This charge mostly relates to a reserve allowance against KB Home's deferred tax assets -- meaning the company must create an accounting entry to allow for the chance that it cannot carry unused tax deductions into the future.
"The inventory impairment charges we incurred during the housing downturn have produced substantial deferred tax assets," KB Home CEO Jeffrey Mezger said. "To the extent that we generate sufficient taxable income in the future to utilize the tax benefits of the related deferred tax assets, we expect to see a reduction in our effective tax rate as the valuation allowance is reversed."
The company's new orders in the quarter fell 32% to 2,574 units. The cancellation rate on previous orders measured 58% -- the same level as a year ago, but up from 50% in the third quarter.
KB Home's fourth-quarter loss resulted from ongoing weak demand and plummeting margins, as land impairment charges and tax expenses came in higher than analysts projected.
KB Home shares were down 8.6% to $16.89 in midday trading, hitting a 52-week low Other builders tumbled on the reports as well, with Meritage Homesdropping 11.9% to $10.11 -- also a 52-week low -- and WCI Communities falling 8.8% to $3.34.
KB Home's quarterly loss amounted to $9.99 a share, compared with a loss of $49.6 million, or 64 cents a share, a year earlier. Analysts expected a loss of $1.08 a share.
The Los Angeles-based builder said revenue fell 31% to $2 billion, reflecting the ongoing difficulties of getting buyers to close on their new home purchases. KB Home also said 2008 will be "another tough year" for the homebuilding industry.
Also on Tuesday, the National Association of Realtors said its pending home sales index fell 2.6% in November from October -- worse than the 0.5% decline that economists expected, according to Reuters estimates. The index measures contracts of existing home sales.
"The disappointing data show that record levels of home inventories will take a while to burn off, which means that homebuilders may have to cut prices even further to sell homes.
We expect further modest declines in pending sales in the coming months as buyers continue to wait for home prices to bottom, although further price cuts should begin to lure some buyers off the sidelines," Bank of America analyst Daniel Oppenheim said in a research note.
KB Home's bottom line was slammed by $403 million of land impairment charges. The company also recorded a $373.7 million income tax expense, even though the company lost money on a generally accepted accounting principles basis.
This charge mostly relates to a reserve allowance against KB Home's deferred tax assets -- meaning the company must create an accounting entry to allow for the chance that it cannot carry unused tax deductions into the future.
"The inventory impairment charges we incurred during the housing downturn have produced substantial deferred tax assets," KB Home CEO Jeffrey Mezger said. "To the extent that we generate sufficient taxable income in the future to utilize the tax benefits of the related deferred tax assets, we expect to see a reduction in our effective tax rate as the valuation allowance is reversed."
The company's new orders in the quarter fell 32% to 2,574 units. The cancellation rate on previous orders measured 58% -- the same level as a year ago, but up from 50% in the third quarter.
Tuesday, November 20, 2007
Lotsa Layoffs - WCI Layoffs - Mostly Due to Issues in Florida
Wow, Southwest Florida seems to be getting hit particularly hard with the layoffs. WCI, Centex, Lennar Bonita Bay Group all announce major layoffs and restructuring...Stories of more homebuilder layoffs follow:
Bonita Springs-based builder WCI Communities Inc. has eliminated 575 jobs as part of a restructuring plan announced last week amid the continued housing slump. About 80 percent of the cuts are due to restructuring in Florida — the core of the company's operations — and the rest come from changes to operations in the Mid-Atlantic states and the Northeast, said Jim Dietz, chief financial officer."In Florida, we've combined our tower and traditional homebuilding teams," Dietz said.
Many of the jobs cut were division leaders and managers whose jobs were redundant when the two operations merged, Dietz said.The move will cut the company's work force to about 2,100 jobs — down about 46 percent from a 2006 peak of 3,889 — and generate annual savings of about $46 million in salaries and benefits. One-time costs of the restructuring, including severance, are about $5.4 million.
"This prolonged downturn requires that we continue to assess our overhead and make reductions in order to remain viable through the trough of this cycle," President and Chief Executive Jerry Starkey said in a statement.The cuts are the latest in a wave of job losses that have hit the home-building industry in Southwest Florida since the real-estate boom fizzled:• First Home Builders in Fort Myers, which two years ago was Lee County's biggest residential contractor with almost 1,200 employees, will be down to about 50 following its layoff — announced Oct. 29 — of 200 workers effective Dec. 28.
• The Bonita Bay Group, based in Bonita Springs, has trimmed about 60 jobs since May.
• On Sept. 4, Lennar Homes announced the layoff of 72 people from its Southwest Florida division, from Naples to Manatee County.
• In March, Centex Homes laid off 141 employees from Naples to Sarasota.WCI reported a net loss of $33.2 million in the quarter ended June 30 and is expected to announce quarterly results today. Alex Perez, an advertising director in the marketing department, was among those let go. Perez said he was notified when he got to work."They give you a severance package you can take and they are paying for the week, but they basically tell you to gather your things and leave," Perez said. Perez, 42, had been with the company for about 18 months. He said his severance package offers six weeks pay and some extended medical coverage."I came just after the last cuts and you kind of wonder if that is it," Perez said.WCI cut about 600 jobs in July 2006, citing the slowdown in construction.
The company also announced David Fry will assume the post of chief operating officer and will be responsible for WCI's Florida tower homebuilding in addition to his previous responsibilities for the company's traditional homebuilding, real estate services and amenities lines of business. In the new organizational structure, the Northeast and Mid-Atlantic traditional homebuilding regions will be combined, reporting to Fry. The Northeast and Mid-Atlantic Tower
Homebuilding divisions also will be combined and will report directly to Starkey.
The company's board also announced that seven members will take no compensation for the rest of 2007 and all of 2008 and the remaining two members — Hilliard M. Eure III, chairman of the audit committee, and Jonathan Macey — will accept reduced compensation of $50,000 each.
Board members earned between $140,000 and $180,000 in 2006.The move will save the company about $1 million, Dietz said. Billionaire investor Carl Icahn was elected to the board of directors in August and then was named chairman, ending months of a proxy fight for control of the company. In March, Icahn had offered $22 per share for the company, but the move was blocked by the board at the time.
WCI Layoffs, Centex Layoffs, Lennar Lay offs, Bonita Bay Group Layoffs
Saturday, October 27, 2007
Is Now the Time to Invest in Homebuilders Stock? Um, no...
National home builders are suffering from lower stock prices right now and some investors might think it's time to buy buy buy.
Forget it. While Centex, KB Homes and Lennar Corp., all of which have developments in Polk County, are suffering, now might not be the time to invest."Any time you start sector betting, you're concentrating your risk in one area," said Laura Hawley, a financial planner and vice president of Allen & Company in Lakeland.
On a national level, the home market isn't showing any signs of rebounding.Just 5.04 million homes were sold in September, down 19.1 percent from 6.23 million in September 2006.
This past week's home sales reports, released by the National Association of Realtors on Wednesday, sent builder stock prices tumbling.
Centex shares dropped 37 cents to $24.27. DR Horton Inc., one of the nation's largest builders, fell 49 cents, or 3.9 percent, to $12.22, while Lennar Corp. slid 37 cents to $22.07. Beazer Homes USA Inc. had shares decline 11 cents to $9.69."It is really just buyer beware," she said.Hawley likened the scenario to the dot com market bust in 2000."A lot of those companies that were blue chip stocks never recovered," she said. "It doesn't mean these companies are going to come roaring back like they were."
And when it comes to building new homes, it doesn't get much better. The Commerce Department reported Wednesday that construction of new homes fell 10.2 percent in September to a seasonally adjusted annual rate of 1.191 million units. The decline was more than double the 4.2 percent drop that analysts had been expecting and it pushed activity down to the lowest level since March 1993.
"I think the real estate market in general isn't done," Hawley said. "I think we still have a lot of weakness there."But Polk County, Florida is some ahead of the building bust curve. Contractors across the county pulled 271 new home permits last month, which is an 8.1 percent decline from 295 permits in September 2006. And while it is still the 19th consecutive month permit totals have declined, the lower decrease is encouraging. For more than a year, builders have sought some relief to the sluggish housing market.
Forget it. While Centex, KB Homes and Lennar Corp., all of which have developments in Polk County, are suffering, now might not be the time to invest."Any time you start sector betting, you're concentrating your risk in one area," said Laura Hawley, a financial planner and vice president of Allen & Company in Lakeland.
On a national level, the home market isn't showing any signs of rebounding.Just 5.04 million homes were sold in September, down 19.1 percent from 6.23 million in September 2006.
This past week's home sales reports, released by the National Association of Realtors on Wednesday, sent builder stock prices tumbling.
Centex shares dropped 37 cents to $24.27. DR Horton Inc., one of the nation's largest builders, fell 49 cents, or 3.9 percent, to $12.22, while Lennar Corp. slid 37 cents to $22.07. Beazer Homes USA Inc. had shares decline 11 cents to $9.69."It is really just buyer beware," she said.Hawley likened the scenario to the dot com market bust in 2000."A lot of those companies that were blue chip stocks never recovered," she said. "It doesn't mean these companies are going to come roaring back like they were."
And when it comes to building new homes, it doesn't get much better. The Commerce Department reported Wednesday that construction of new homes fell 10.2 percent in September to a seasonally adjusted annual rate of 1.191 million units. The decline was more than double the 4.2 percent drop that analysts had been expecting and it pushed activity down to the lowest level since March 1993.
"I think the real estate market in general isn't done," Hawley said. "I think we still have a lot of weakness there."But Polk County, Florida is some ahead of the building bust curve. Contractors across the county pulled 271 new home permits last month, which is an 8.1 percent decline from 295 permits in September 2006. And while it is still the 19th consecutive month permit totals have declined, the lower decrease is encouraging. For more than a year, builders have sought some relief to the sluggish housing market.
Thursday, October 18, 2007
Builders and Their Own Mortgage Companies Fueled Housing Collapse
What is a homebuilder's #1 marketing tool in this new, soft, housing market? Enticing you with mortgages and deals that ONLY apply when you finance through the Mortgage company that they own. Just about all of the big builders own their own mortgage companies. It is what got them in trouble in the first place. It was in their best (SHORT-SIGHTED) interest to make sure potential homebuyers qualified for a loan on the houses they were selling. Henceforth overstating income, falsifying loan documents etc. Hundreds have been jailed for it.
Now, they are still using their mortgage companies. This time to offer sweet-looking deals, still getting underqualified buyers into homes with loans that will balloon in just a short year or two. It is a huge gamble as a new homebuyer. Be cautious. Do your homework.
Ruth Simon, Wall Street Journal Thinking of buying a new home in this softer market? Chances are your builder is going to try to sell you a mortgage. Builders have long encouraged their customers to use their mortgage affiliate for financing, and not just to make a little extra money. It also gives them control of the transaction, making it less likely that a mortgage snafu will create problems at closing. Now, as sales slow and cancellations rise, builders are increasingly rolling out special deals that may be tied to using their affiliated lender.
But you may well be able to find a better deal on your own. Builders' mortgage offers "clearly are worse in all the cases I've seen," says Jack Guttentag, professor emeritus at the University of Pennsylvania's Wharton School and founder of the mortgage-advice Web site www.mtgprofessor.com. When Randy Gowler, a Olathe, Kan., architect, wanted to buy a new four-bedroom home this year, the builder offered to pick up the first $8,500 in mortgage payments.
The catch: Gowler had to use the builder's affiliated lender and pay the full $287,000 asking price. Gowler crunched the numbers and turned down the deal. Instead, he went with an outside lender that offered a lower interest rate and paid $274,000.Unlike Gowler, most home buyers stick with the builder's lender. Pulte Homes Inc. says Pulte Mortgage provides financing for 90 percent of its buyers who need a mortgage. Centex Mortgage finances 80 percent of Centex Corp. customers. Most builders either have a mortgage affiliate or preferred lenders they work with.
Builders say their rates are competitive and that their mortgage affiliates give them more control over the sale. Indeed, getting a loan through your builder can be a plus if construction is delayed, says Greg McBride, a senior financial analyst with Bankrate.com, because a builder's mortgage unit is more likely to be flexible if there are construction delays. As the housing market has cooled, many builders have sweetened the pot with special deals. A September survey conducted by the National Association of Home Builders found sharp increases from last year in the number of builders offering to pay closing costs and other fees and in those reducing home prices.
In many cases, home buyers must use the builder's financing arm to qualify for these offers. That's particularly true if the incentive is mortgage-related, such as when the builder pays closing costs or picks up several months of mortgage payments. Buyers may also be required to use the builder's mortgage unit to qualify for a reduced purchase price, builder upgrades or other concessions. Some competitors say that these requirements put buyers at a disadvantage." They prevent consumers from shopping to see if there's a better deal out there," says Marc Savitt, vice president of the National Association of Mortgage Brokers. The savings from incentive programs are often illusory, he says, because the home buyer is charged a higher mortgage rate or more in fees and closing costs by the builder's mortgage affiliate.
The builders disagree. "This is really about special interests trying to limit competition - and increase their profits - by legislating home builders out of the mortgage business," the National Association of Home Builders said in a statement. Federal rules prohibit builders from requiring that home buyers use their mortgage affiliates. The rules also require that any discounts offered to buyers who use these affiliates must be true discounts and not made up through higher charges elsewhere.
The Department of Housing and Urban Development says it is getting more complaints not only from mortgage brokers, but also from consumers. One builder canceled a purchase contract and refused to return an $11,845 down payment after the buyer decided to use an outside lender. After HUD intervened, the builder's mortgage company agreed to buy down the rate to make the loan more competitive. Another builder agreed to waive $5,360 in mortgage-origination fees that a buyer was being required to pay in order to qualify for $13,450 in incentives.
To make sure you're getting a good deal, ask the builder not only for the mortgage rate, but also for details on closing costs, points, any fees that will be paid to the lender or third parties, and the terms of the loan. Prof. Guttentag advises comparing that offer to a quote for the same mortgage obtained on the same day from an online lender. He also suggests shopping for financing at the same time you look at houses. Whether the builder's deal is worth taking can also depend on how long you plan to stay put.
A slightly higher mortgage rate may not be a problem if you plan to move in a few years, but it could wipe out the benefits of any incentives if you plan to stay in your home longer. You should also check what comparable homes are selling for to determine whether the builder is offering a real discount. It can pay to negotiate. When Scott Lazaroff, an engineer, bought a new home in Lyons, Colo., in September, the builder offered to knock an extra $15,000 off the price if Mr. Lazaroff used its affiliated lender. He decided to use his own lender, but still convinced the builder to reduce the price by $10,000. Dan Gracey, another Colorado home buyer, said his builder came back with a lower mortgage rate after he "pushed back" on its original offer, which was higher than the competition.
Now, they are still using their mortgage companies. This time to offer sweet-looking deals, still getting underqualified buyers into homes with loans that will balloon in just a short year or two. It is a huge gamble as a new homebuyer. Be cautious. Do your homework.
Ruth Simon, Wall Street Journal Thinking of buying a new home in this softer market? Chances are your builder is going to try to sell you a mortgage. Builders have long encouraged their customers to use their mortgage affiliate for financing, and not just to make a little extra money. It also gives them control of the transaction, making it less likely that a mortgage snafu will create problems at closing. Now, as sales slow and cancellations rise, builders are increasingly rolling out special deals that may be tied to using their affiliated lender.
But you may well be able to find a better deal on your own. Builders' mortgage offers "clearly are worse in all the cases I've seen," says Jack Guttentag, professor emeritus at the University of Pennsylvania's Wharton School and founder of the mortgage-advice Web site www.mtgprofessor.com. When Randy Gowler, a Olathe, Kan., architect, wanted to buy a new four-bedroom home this year, the builder offered to pick up the first $8,500 in mortgage payments.
The catch: Gowler had to use the builder's affiliated lender and pay the full $287,000 asking price. Gowler crunched the numbers and turned down the deal. Instead, he went with an outside lender that offered a lower interest rate and paid $274,000.Unlike Gowler, most home buyers stick with the builder's lender. Pulte Homes Inc. says Pulte Mortgage provides financing for 90 percent of its buyers who need a mortgage. Centex Mortgage finances 80 percent of Centex Corp. customers. Most builders either have a mortgage affiliate or preferred lenders they work with.
Builders say their rates are competitive and that their mortgage affiliates give them more control over the sale. Indeed, getting a loan through your builder can be a plus if construction is delayed, says Greg McBride, a senior financial analyst with Bankrate.com, because a builder's mortgage unit is more likely to be flexible if there are construction delays. As the housing market has cooled, many builders have sweetened the pot with special deals. A September survey conducted by the National Association of Home Builders found sharp increases from last year in the number of builders offering to pay closing costs and other fees and in those reducing home prices.
In many cases, home buyers must use the builder's financing arm to qualify for these offers. That's particularly true if the incentive is mortgage-related, such as when the builder pays closing costs or picks up several months of mortgage payments. Buyers may also be required to use the builder's mortgage unit to qualify for a reduced purchase price, builder upgrades or other concessions. Some competitors say that these requirements put buyers at a disadvantage." They prevent consumers from shopping to see if there's a better deal out there," says Marc Savitt, vice president of the National Association of Mortgage Brokers. The savings from incentive programs are often illusory, he says, because the home buyer is charged a higher mortgage rate or more in fees and closing costs by the builder's mortgage affiliate.
The builders disagree. "This is really about special interests trying to limit competition - and increase their profits - by legislating home builders out of the mortgage business," the National Association of Home Builders said in a statement. Federal rules prohibit builders from requiring that home buyers use their mortgage affiliates. The rules also require that any discounts offered to buyers who use these affiliates must be true discounts and not made up through higher charges elsewhere.
The Department of Housing and Urban Development says it is getting more complaints not only from mortgage brokers, but also from consumers. One builder canceled a purchase contract and refused to return an $11,845 down payment after the buyer decided to use an outside lender. After HUD intervened, the builder's mortgage company agreed to buy down the rate to make the loan more competitive. Another builder agreed to waive $5,360 in mortgage-origination fees that a buyer was being required to pay in order to qualify for $13,450 in incentives.
To make sure you're getting a good deal, ask the builder not only for the mortgage rate, but also for details on closing costs, points, any fees that will be paid to the lender or third parties, and the terms of the loan. Prof. Guttentag advises comparing that offer to a quote for the same mortgage obtained on the same day from an online lender. He also suggests shopping for financing at the same time you look at houses. Whether the builder's deal is worth taking can also depend on how long you plan to stay put.
A slightly higher mortgage rate may not be a problem if you plan to move in a few years, but it could wipe out the benefits of any incentives if you plan to stay in your home longer. You should also check what comparable homes are selling for to determine whether the builder is offering a real discount. It can pay to negotiate. When Scott Lazaroff, an engineer, bought a new home in Lyons, Colo., in September, the builder offered to knock an extra $15,000 off the price if Mr. Lazaroff used its affiliated lender. He decided to use his own lender, but still convinced the builder to reduce the price by $10,000. Dan Gracey, another Colorado home buyer, said his builder came back with a lower mortgage rate after he "pushed back" on its original offer, which was higher than the competition.
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