Greenspan Says Major Homebuilders Face Chapter 11 Bankruptcy in 2008, 2009

The collapse of the subprime mortgage market may push some big U.S. home builders toward Chapter 11 bankruptcy protection starting next year, according to bankruptcy advisers and lawyers who specialize in the real estate industry.

The weakest publicly held builders are staying out of bankruptcy by relying on the profit they made when sales boomed, and on the public debt they sold in those years, said Ronald Greenspan, a lawyer and financial adviser to the creditors of four bankrupt subprime mortgage lenders. Home builders issued $3.6 billion in public debt in 2005 and 2006, though only $600 million of that comes due this year, he said.

"There is no sword over the industry's head yet," Greenspan said Saturday at a conference of the American Bankruptcy Institute in Washington. "That doesn't mean the industry is not wounded. Instead, the breaking point could come in 2008 or 2009."

The real estate market has been powered in recent years by subprime homebuyers, who typically have shaky credit histories. Now that such loans are no longer being made, demand for new homes will plunge, pushed down even further by the more than one million homes now in foreclosure, Greenspan said. At least 30 home lenders have halted operations or sought buyers in the past 12 months, including 5 that went bankrupt since November.

None of the major, publicly traded home builders have declared bankruptcy, though there are signs that many are in financial trouble, Greenspan said, declining to name specific companies. The value of shareholder equity for some companies equals or exceeds the value of the undeveloped land that the companies have under contract, Greenspan said. As the housing downturn continues, that land will fall in value.

Today in Marketplace by Bloomberg
Bank of America moves quickly to cut jobs after earnings disappointSony profit helped by camera sales, but game console still trailing rivalsMicrosoft profit soars 23 percent, beating expectationsThe perceived risk of owning the bonds of some of the biggest U.S. home builders has risen since a wave of bankruptcies hit the mortgage industry that caters to homebuyers with poor credit histories. Credit default swaps have more than doubled in price since Feb. 1 for two of the four biggest builders, D.R. Horton and Pulte Homes, and for Toll Brothers, the big luxury-home builder.

Credit default swaps are financial instruments based on bonds and loans that are used to speculate on a borrower's ability to repay debt, and were created to shield bondholders from default.

Kara Homes, a New Jersey builder, was one of the first major, closely held home builders to file for Chapter 11 bankruptcy protection, in October. Such regional builders are likely to precede any of the big public companies into insolvency, said Kara's bankruptcy lawyer, David Bruck.

By 2008 or 2009, some of the larger companies will have to restructure as the housing crunch continues, he said, adding, "It's only a matter of time."

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.

Mercedes Homes (Melbourne, Florida) Layoffs and Implosion Continues - Headquarters for Sale

Anyone want to but an office building? Mercedes Homes' brand new shiny headquarters is for sale. The remaining troops moved into the top two floors of a building they mistakenly built just a year ago and now don't fill half of.

Palm Beach County Real Estate Statistics

Numbers dismal but better balanced
By Linda Rawls
Palm Beach Post Staff Writer
Monday, November 05, 2007
In Palm Beach County's new-home developments there is evidence that supply is working its way toward a better balance with demand, according to a study released last week.
There were 755 single-family move-ins during the third quarter of this year - the fewest in more than a decade, according to MetroStudy, a West Palm Beach-based housing consultant.

That's also 52 percent fewer than the same quarter last year, when there were 1,585 move-ins. There were 1,135 move-ins in the second quarter of this year.

There were 486 single-family home starts in Palm Beach County developments in the third quarter of this year, MetroStudy said, a 52 percent drop from the third quarter of 2006, when there were 1,017 starts. There were 408 in the second quarter of this year.
In the peak construction year of 2003, MetroStudy noted, starts averaged more than 2,600 a quarter as builders throughout the county feverishly pounded nails to feed the boom.

Brad Hunter, an analyst at MetroStudy, said the move-in pace (755) was greater than the starts pace (486) in the third quarter of 2007. That's a healthy situation, he says.
Another good sign, Hunter said, is that total new-home inventory in Palm Beach County dropped to 2,989 units in the third quarter from 3,258 units in the second quarter.
The number of units under construction fell to 1,464 units in the third quarter from 1,776 in the second quarter.

Here's some good news for Port St. Lucie house hunters, especially first-time buyers.
Mercedes Homes' Treasure Coast Division, reacting to the still-slumping housing market, has introduced The Cottage Series, with two designs that can be built on your lot or on a Mercedes Homes lot.

The Paige, a three-bedroom, one-bath home, has 1,212 square feet of living space and starts at $103,990, the builder says. The Nicole Deluxe has 1,404 square feet and starts at $109,900. It has three bedrooms and two full baths.

Both have two-car garages and open kitchens that flow into "great rooms."
Got more money? There are plenty of options.

"I believe we've got the lowest prices in town," said Robert Smithwick, division president.
Log on to mercedeshomes.com if you don't believe him. Or even if you do.
Many other local builders are offering incentives to attract buyers in what has become the worst housing slump in 16 years.

Some of them are impressive indeed, although to date Mercedes takes the prize for most affordable. Truth be told, we don't have room to list them all in this column.
We see news releases from CentexHomes and DiVostaHomes on our desk, for instance. It's a trend we expect to continue well into next year as builders seek to work off their bulging inventories homes and condos.

Linda Rawls writes about residential real estate. Contact her at The Palm Beach Post, 2751 S. Dixie Highway, West Palm Beach, Fla. 33416-4700; (561) 820-4722; e-mail: linda_rawls@pbpost.com.

Love Homebuilder Postioning amd Marketing - Frey Homes and Mercedes Homes

Gotta love this one. Perfect example of two marketing strategies at work. The first one is not bad..someone seems to have done research and knows what homebuyers want. The other is typically pompous. Oooooh Mercedes Homes has a new designer showroom by appoinment only. Builders would throw a ticker-tape parade to have someone show up in their design center (wait, they can't afford it!) yet they position it as by appointment only. The only way that is true is if they don't have staff in the design center and need to call them in for the appointment.

Kati Trisler, director of marketing for America's First Home, an active builder in Central Florida, helped create an interactive Web site for the company's new Frey Homes line. "With so many people starting their home search online, we recognize the importance of giving them the tools they need," Trisler said. The builder's 11 new luxury-home styles, designed for move-up buyers, are in two communities: Eagle Pointe Estates in Groveland and a project in Cape Coral. The Web site will soon include an interactive floor plan and furniture spacing option. . .

Mercedes Homes has a new designer showroom in Altamonte Springs. Ann Marie Meyer, design center coordinator, said visits are by appointment only.