Confidence in U.S. Homebuilding Market Hits All Timee Low - Credit Markets May Worsen

Bloomberg says:

Confidence among U.S. homebuilders slid in October to the lowest level since record-keeping began in 1985, a sign the crisis in credit markets may deepen the worst housing recession in a generation.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 14, less than forecast, from 17 in September, the Washington-based association said today. A reading less than 50 means most respondents view conditions as poor.
The meltdown in worldwide financial markets that has clogged credit and sent U.S. stocks plunging is likely to worsen the economic slump. Home sales and construction will probably keep dropping as access to loans is restricted, weighing on growth well into 2009.

"Tight credit standards, rising unemployment and the potential for further home-price declines will continue to dampen housing demand and the still significant housing inventory overhang will continue to weigh on construction activity,'' Stephen Stanley, chief U.S. economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, said before the report.

The builder confidence index was forecast to fall to 17 this month from an originally reported reading of 18 for September, according to the median estimate of 41 economists surveyed by Bloomberg News. Projections ranged from 15 to 20.
Wall Street

Today's report "reflects builders' assessments of the recent events on Wall Street, the rapid deterioration in job markets and the corresponding weakness in consumer confidence,'' NAHB chief economist David Seiders said in the statement. "The impacts of the record-breaking housing contraction have spilled over to other key sectors of the economy and weighed heavily on financial markets.''

Other reports earlier today showed the credit crisis is taking a toll on other parts of the economy. Industrial output fell 6 percent in the third quarter, the most since 1991, and a factory index for the Philadelphia region hit an 18-year low this month.

The builders' confidence gauge, which was first published in January 1985, averaged 27 last year. The confidence survey asks builders to characterize current sales as "good,'' "fair'' or "poor'' and to gauge prospective buyers' traffic. The survey also asks participants to gauge the outlook for the next six months.
The group's index of current single-family home sales fell to 14 this month from 17 in September.

Expectations Plunge
The index of buyer traffic decreased to 12 from 14. A measure of sales expectations for the next six months plunged to 19 from 28.

Confidence deteriorated in all four regions, led by declines in the South and Northeast.
U.S. foreclosure filings rose to a record in August as falling home prices made it harder to sell or refinance homes to pay off mortgages, RealtyTrac Inc., an Irvine, California-based seller of foreclosure data, said on Sept. 12.

The Commerce Department may report tomorrow that builders in September began work on 870,000 homes at an annual rate, the fewest since 1991, according to the median estimate in a Bloomberg survey. Building permits probably also fell.

Combined sales of new and existing homes have fallen 36 percent from their peaks in mid-2005. Home construction has declined 61 percent from a peak in January 2006. The supply of unsold homes on the market remains above 10 months' worth of sales, signaling homebuilding is likely to continue falling.

Lennar Corp., the second-largest U.S. homebuilder, on Sept. 23 reported its sixth straight quarterly loss as potential buyers struggled to get mortgages and rising foreclosures increased the supply of homes on the market.

"The weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards,'' Chief Executive Officer Stuart Miller said in a statement.

How will the credit crisis affect the homebuilding industry?

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.

Lennar Dumps Thousands of Lots in FLorida - 8,300 To be Exact

Lennar has sold nearly 8,300 home sites in Pasco, Hillsborough, Polk, Sarasota, Lee, DeSoto and Brevard counties to Metro Development Group.
The purchase - which was completed on Friday for undisclosed terms - was part of "long-range acquisition strategies developed" by the company, said Rob Ahrens, spokesman for Tampa-based Metro Development. The deal increases Metro's land inventory by nearly 40 percent, and brings the company's total land holdings to 30,000 home sites.
"We have tremendous confidence in Florida and the resiliency of the state's residential real estate market," Ahrens said in a release. "We know that current concerns about homebuilding will be resolved in the coming months, and when they are, we plan to be a major player in providing finished home sites to builders who will need them."
The purchases include 3,905 home sites covering 1,700 acres at Epperson Ranch in Pasco County, 530 home sites on 140 acres at Waterleaf in Hillsborough County, 393 home sites on 94 acres at Leomas Landing in Polk County, and 98 home sites on 41 acres in Sarasota County.
Lennar (NYSE: LEN) was looking to convert many of its land holdings to cash in the midst of the slowdown in the housing market, Ahrens said.
Also Friday, Lennar partnered with Morgan Stanley Real Estate Fund II LP, an affiliate of Morgan Stanley & Co. (NYSE: MS), to form a new corporation, MSR Holding Co., according to documents filed by Lennar with the Securities and Exchange Commission. Lennar then sold more than 11,000 home sites from 32 communities located throughout the country to MSR for $525 million, half of the reported net book value of $1.3 billion.
MSR was designed to "acquire, develop, manage and sell residential real estate," according to documents filed with the SEC.
It was unclear if the 8,300 home sites sold to Metro Development the same day MSR was announced were related.
"The combined expertise and resources provided by the Lennar/Morgan Stanley team will allow us to maximize the value of this portfolio and provide a footprint to capitalize on inefficiencies in today's residential real estate market," said Stuart Miller, president and chief executive officer of Miami-based Lennar Corp., in the filing. "This transaction provides us with increased liquidity and flexibility at an opportune time."
Lennar had a homebuilding operating loss of $787.7 million in the third quarter, which resulted in an overall loss of $513.9 million, or $3.25 a share, on revenue of $2.3 billion, according to documents filed with the SEC. That was down from the $206.7 million, or $1.30 a share, the company earned on revenue of $3.9 billion for the same period in 2006.
Metro Development has offices in Orlando and Jacksonville, and last year generated sales of $200 million.
Lennar shares closed up 44 cents to $16.25. The 52-week high was $56.54 on Feb. 2. The 52-week low was $14 on Nov. 27.

Orlando New Home Market Gets Worse

Nov 1 - Orlando Sentinel Reports:

Home builders continued cutting back in the Orlando area this summer, as new-home starts plunged 47 percent in the third quarter compared with the same period a year ago.

MetroStudy, a Texas-based real-estate-research company, also said in its latest survey that the July-to-September home construction in Metropolitan Orlando was down 20 percent from the previous quarter.But the number of home buyers closing on their purchases, and moving into their new houses, in the four-county metro area slipped only 5 percent from the second to third quarters.

Economists and industry experts said the sharp drop in housing starts is painful in the near term but helpful in the long run because it means the inventory of unsold homes can be absorbed faster. It also means a rebound in the region's housing market might begin sooner, and perhaps be even stronger, than after previous downturns, they said."They are anxious to work their way through the inventory.

Now is not the time to be building," said Terry Eckert, a longtime Orlando-area home builder. Builders are smart enough to know the cyclical nature of the market, Eckert said, and most builders are not starting work on any homes unless it involves a confirmed sale with lender-approved buyer.

Eckert, a former president of the Home Builders Association of Metro Orlando, worked for years for major-production builders -- the companies that fill subdivisions rather than erecting custom homes on single sites. He recently became director of construction for Habitat for Humanity-Orlando, the charity that builds for families who ordinarily could not qualify for a regular home loan. In contrast to the area's conventional builders, Eckert's nonprofit group is on pace to build a record 17 single-family homes in the region by the end of its fiscal year next June 30.

But only the major commercial builders have the scale and financing to build homes in the volume required to meet overall demand, and the MetroStudy report released Wednesday showed that housing starts in the Orlando area during the third quarter fell 46.9 percent year-over-year to 4,851 units.Anthony Crocco, director of MetroStudy's Central and Northeast Florida divisions, said the sharp decline in Metro Orlando -- which comprises Orange, Seminole, Osceola and Lake counties -- is a reflection of "the slow sales paces and high cancellation rates of late summer and early fall." His survey of subdivisions showed that the number of homes sold and occupied in the third quarter totaled 3,850, down 29.8 percent from the same period in 2006 but off only 5 percent from this year's second quarter.

Orlando economist Hank Fishkind told builders, developers and Realtors last week that this housing downturn does appear to be different in Central Florida when compared with past housing slumps, in that home builders have slammed on the brakes harder than ever.That should help clear out the inventory of unsold homes and set the stage for a more robust rebound in sales of both new and used homes, perhaps in 2009, Fishkind said during his quarterly forecast for Stirling Sotheby's International Realty Global Gallery.

MetroStudy's report did, in fact, show a drop in the area's new-home inventory. Total inventory -- homes under construction, finished-but-vacant units and model homes -- totaled 10,412 at the end of the quarter, down 36.3 percent from a year earlier.But at the recent slow sales pace, that still amounted to a 6.6-month supply. And the critical finished-but-vacant category fell just 9.9 percent from a year ago, to 5,264 homes -- still, a sign that the large stockpile of homes is finally starting to get whittled down.

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.

Lennar Homes Cuts Jobs, Posts Q3 Loss. Realtors Report Lennar Cuts Commissions to $10,000 Flat

In late septeermb, Miami-based Lennar Corp. reported a third-quarter loss of more than $510 million dollars. Lennar said it had cut its work force by 35 percent and warned it expected further job cuts.

The nation's second-largest homebuilder said on Sept. 25 that its results swung to a net loss of $513.9 million, or $3.25 a share, for the three months ending Aug. 31 from a profit of $206.7 million, or $1.30 a share, a year ago. Revenues from home sales fell 44% -- mostly on a 41% drop in the number of home deliveries and a 6% decline in the average sales price of homes sold. Lennar had to suck it up financially to move a lower number of houses. Gross margins fell to 14.0% from 19.5% a year ago due to a $10,100 hike in sales incentives to $46,000 per home, which was responsible for the lower average sales price.

And sagging home sales weren't the only nightmare for Lennar. The Miami-based company took an $847.5 million pretax impairment charge to write down the value of its assets. That included a $344.7 million loss on land sales, of which $242.5 million was for write-offs of deposits and pre-acquisition costs related to 15,000 home sites under options that Lennar decided not to buy.

This was the biggest writeoff Lennar has taken since the housing slump began and added to the $1.05 billion in write-offs the company has taken since 2006, Banc of America Securities said in a research note (BAS does investment banking with Lennar.)

New orders deteriorated from a 31% year-over-year decline in the second quarter and were worse than the 22% drop that BAS had expected, probably due to more challenging market conditions overall and tough comparisons with the high sales volume Lennar maintained throughout 2006.

One Realtor said "I stopped taking buyers to Lennar Homes, they cut off commissions to realtors. $10,000 flat commission, as opposed to the 5% other builders were offering. Bad move."