As the U.S. housing slump enters its third year, there
is no sign of dawn in the darkness that is paralyzing home building, home buying and home lending. Standard & Poor's 15-member Supercomposite Homebuilding Index tumbled 62 percent this year as of yesterday, the largest drop since the benchmark was started in 1995. The companies have lost about $35 billion of market value.
The outlook is bleak with new home sales projected to fall 13 percent, according to estimates from the National Association of Realtors in Chicago, even as interest rates drop. Losses at Fannie Mae and Freddie Mac, the two biggest U.S. providers of mortgage financing, may restrict the availability of home loans, and chief executive officers at D.R. Horton Inc. and Centex Corp. expect another tough year. This looks like it's going to be the deepest correction of any housing correction since World War II, and the question really is, What's the duration, how long will it be?
Centex CEO Timothy Eller said at a JPMorgan Chase & Co. conference in
Las Vegas, the decline in the S&P homebuilding index has pushed the measure to March 2003 levels, with companies including Centex and Pulte Homes Inc. falling more than 65 percent in composite trading on the New York Stock Exchange. Credit Protection Costs Total new home sales peaked in July 2005 and have declined for 19 of the last 28 months, according to Commerce Department data. Existing home sales peaked in September 2005. The median price for a new home dropped 13 percent in October, the most since 1970, and the annual sales rate for new homes in September was the lowest in almost 12 years.
Bond investors have sought more protection against homebuilders defaulting on debt as revenue and cash flow have declined. Credit protection costs reached 12-month highs for Miami-based Lennar Corp., Bloomfield Hills, Michigan based Pulte, Dallas-based Centex and Fort Worth, Texas-based D.R. Horton, the four largest U.S. builders by revenue; as well as Calabasas, California-based Ryland Group Inc., a builder in 28 U.S. markets, and Hovnanian Enterprises Inc. of Red Bank, New Jersey, the biggest builder in that state.
"Bankruptcy Risks"
Credit default swap spreads climbed by as much as 335 basis points for
builders with investment-grade ratings and by an average 209 basis points for
those with junk ratings, according to CreditSights Inc., a New York-based research firm. Credit default swaps are contracts to protect bondholders against default. An increase indicates worsening perceptions for credit quality. If we talked two weeks ago, I'd say there wasn't much more downside, but the market is acting like there's still a lot more to go,'' said James Wilson, an analyst who follows home builders at San Francisco-based JMP Securities LLC.
Beazer Homes USA Inc, the Atlanta-based homebuilder under investigation
by the U.S. Securities and Exchange Commission, and Hovnanian are "bankruptcy risks," Wilson said. Those companies have too much debt and are exposed to slumping housing markets in Florida and Michigan, Indiana and Ohio, he said. Beazer CEO Ian McCarthy said at the conference in Las Vegas that it is going to be another tough year. The company has a secured credit line of $500 million, he said. The company is really looking to make sure its balance sheet and its credit position is strong as we go through this tough time, McCarthy said. The company also has agreements with our bankers and with our secured credit lenders that will put us in good stead going forward.
Worse 2008-2009?
Hovnanian CEO Ara Hovnanian said at the JPMorgan conference that
the company has a better financial structure than we've ever had. Hovnanian's bonds don't start coming due until 2010 and 2012, giving us plenty of breathing room, he said. We're experienced operators, been around for almost 50 years, Hovnanian said. We will clearly persevere and thrive in the eventual upturn as we have after every cycle. Many homebuilding executives at the conference said they expect the slump to last through 2008. Next year is going to be worse than for us and for the industry in general, said Donald Tomnitz, D.R. Horton's CEO.
At least three closely held companies filed for bankruptcy protection in the past month, including Fort Lauderdale, Florida-based Levitt and Sons LLC, the 1949 pioneer of planned suburbs with Levittown on New York's Long Island. Tousa Inc. of Hollywood, Florida, which has lost 99 percent of its stock market value this year, said this month it was considering filing for Chapter 11 bankruptcy protection.
"Tousa's Strategy"
Tousa acquired 22,000 home sites in Florida through a joint venture in
August 2005, when the housing market was close to its peak. Florida accounted for five of the top 25 U.S. metropolitan areas with the highest foreclosure rates this year, according to RealtyTrac Inc. The Irvine, California-based seller of foreclosure data has a database of more than 1 million U.S. properties. The New York Stock Exchange suspended trading in Tousa because the average closing price was less than $1 for 30 straight trading days. Tousa last traded at 8 cents, down from a seven-year high of $30 in August 2005.
Standard Pacific Corp., based in Irvine, California, is the worst performer in the S&P homebuilding index, dropping 89 percent. Home sales in California,
the company's largest source of revenue, fell 40 percent and median prices for existing homes slid 9.9 percent, data compiled by the California Association of Realtors show. Housing Glut A housing rebound is unlikely, as about 1 million adjustable loans made to subprime borrowers, those with weak or incomplete credit histories, are scheduled to reset at a higher rate in 2009, according to RealtyTrac. That may put many homeowners at risk of foreclosure and lower the value of neighboring houses, said Rick Sharga, vice president of marketing at RealtyTrac. About 1.3 million subprime mortgages will be in foreclosure by September 2009, including actions already under way, according to estimates from New York- based analysts at Credit Suisse Group.
There is just no quick fix, including further rate cuts, to stabilize the current weakness in the housing market, said CreditSights analysts Frank Lee and Sarah Rowin in a report to clients. Discounted Prices Builders must contend with a glut of existing homes on the market. There's an almost 11-month supply of unsold existing homes, the highest in more than eight years, according to data from the National Association of Realtors. The decline in the market for existing homes is lagging "far behind" the new home market, and resale prices have only started to erode, said Citigroup Inc. analyst Stephen Kim in a report.
We have never before seen how a belated dropoff in existing home prices will
affect already discounted prices for new homes, but it is difficult to be optimistic here, Kim wrote.
Citigroup cut its rating on Lennar, Centex, Los Angeles- based KB Home,
D.R. Horton, Ryland, Pulte and Standard Pacific to ``hold'' from ``buy.'' Meritage Homes Corp. in Scottsdale, Arizona, was reduced to sell from hold. Cash flow will assume even greater importance as homebuilders owe $875 million in debt payments in 2008 and then about $1.6 billion in 2009 and 2010, data compiled by CreditSights show.
"Hard Year"
Potential legal costs also may hurt the builders, said Lee of CreditSights. D.R. Horton, Hovnanian and Reston, Virginia- based NVR Inc. are being sued by consumers who saidthey were coerced into taking loans from the company's mortgage units. The top 10 builders made $2.1 billion from providing financial services such as mortgages and title insurance last year, according to data compiled by UBS AG. Investigations of builders may also weigh on the companies.
The U.S. Department of Housing and Urban Development is examining whether builders received kickbacks when selling property. Pulte and KB Home are among six homebuilders that agreed to pay a total of $1.4 million to settle federal probes into whether they accepted rebates from insurers for referrals when selling homes.
New York, Ohio and at least six other states are investigating the
mortgage industry, including whether appraisers, mortgage brokers and lenders may have inflated home values. Resolving the complaints "could run into the millions or billions of dollars," CreditSights's Lee said. There will be some bankruptcies, some consolidations, some private equity plays, said Kenneth Rosen, chairman of the University of California's Fisher School of Real Estate and Urban Economics in Berkeley. It's going to be another hard year.
The end of the real estate recession seems nowhere in sight, in light of a slew of bleak news Tuesday of falling sales and prices, a severe decline in construction and deep losses and layoffs at one of the nation's largest builders.
Sales of existing homes fell last month to their lowest point in five years, the National Association of Realtors says. The NAR says it expects more dismal figures for September as the housing market reels from the crisis in the mortgage industry.
But the September figures might be much worse. Re/Max International, which analyzed existing-home sales in five major cities for USA TODAY, says September totals so far are down sharply from last year. In Baltimore, Tucson and Seattle, for example, sales in the first three weeks this month are off more than 40%.
"I've given up forecasting how low housing sales will go," says Joel Naroff, president of Naroff Economic Advisors.
And Stuart Miller, CEO of Lennar, (LEN) has given up forecasting the builder's profits after reporting a record loss of $514 million in its third fiscal quarter, as it laid off 35% of its employees and wrote down the value of real estate.
Lennar warned that more pink slips are on the way. The company began construction on 60% fewer homes in the June-through-August period compared with the same fiscal quarter last year. At the same time, nearly one-third of buyers canceled their contracts.
"August seemed to be a melting pot of all things negative," Miller says. The declines were felt in every region of the country, he says.
Pulte Homes: "The Problem Is Demand"; No, the Problem is Pulte Homes
We heard from Toll's Bob Toll on bended knee looking for Congress to stimulate housing demand, and Pulte Homes joined in. Nothing really new there - the homebuilders are asking Congress for a $15,000 tax credit similar to the $2,000 tax credit offered to kickstart housing 35 years ago during the Ford Administration (they'll likely get half of that amount) - however, there were some interesting comments related to pricing that are worth sharing.
Richard Dugas, PHM CEO, said he believes it is a mistake to believe the new housing market can correct without the resale market also correcting. This is an important point of distinction. New homes are now selling at a 10% to 15% discount to resale in most areas of the country. Historically, that ratio has been reversed.
"We clearly need resale pricing to correct, and correct dramatically,' Dugas said. He cited the most recent data from the S&P/Case-Shiller index showing a 14% decline in prices year-over-year, by far the largest on record, but noted that even that kind of decline is not enough.
"We view that [price decline] as a good thing," Dugas said, "and frankly we think resale pricing needs to continue to move down, because existing buyers are telling us they would like to buy our homes, but need to sell their existing homes, but they've obviously got
to get realistic about price before they have a chance to sell those homes."
This view - that prices still need to come down significantly - makes some sense, especially if your business is selling new homes, but there are other issues at work. Foremost is the problem facing both Fannie Mae (FNM) and Freddie Mac (FRE) if Dugas gets his wish for dramatically lower home prices. We believe both companies are underestimating coming price declines.
Fannie recently relaxed downpayment rules so borrowers approved by Fannie Mae'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.
Meanwhile, the real issue facing homebuilders is the psychological impact of housing price deflation. "Of [the issues facing housing], I think by far the biggest issue is buyer confidence and the lack of the ability for the buyer to make a decision to get in housing, because they are fearful of price declines," Dugas said. That's why he's looking to Congress to help. "The whole idea here folks would be to put a floor under pricing and get people back in the market," Dugas said.
If Dugas and Toll get their way, we taxpayers will essentially become home price guarantors as existing homeowners are forced to reprice their homes downward while only they (the homebuilders) get to share in the profits. The rationalization for this disjointed and incongruous view of risk and reward is that housing is a "key linchpin" of the U.S. economy. Well, so was the cotton industry in 1790. Some things need to change.
Woodside Homes, which bills itself as the third largest private homebuilder in the U.S., may be nearing bankruptcy.
The Utah-based company is part of a group of builders developing the Inspirada master-planned community outside Las Vegas. Other developers at the community include Toll Brothers TOL, KB Home KBH, Meritage Homes MTH and Beazer Homes BZH.
The Inspirada project is being built on 2,000 acres in Henderson, Nev., that Woodside and the various joint venture partners purchased at auction from the Bureau of Land Management. The project was originally dubbed South Edge.
Earlier this year, another partner in the project, private builder Kimball Hill Homes, filed for bankruptcy.
Last week, a group of note holders filed an involuntary petition against Woodside Homes in U.S. Bankruptcy Court in the Central District of California. Involuntary petitions are often made by creditors to force a company into Chapter 11 bankruptcy. Woodside has 20 days from the date of the Aug. 20 filing to respond.
“First and foremost, Woodside continues to operate in the normal course of business — paying employees, vendors and subcontractors, and building and selling homes,” Jennifer Mercer, a spokesperson for Woodside Homes, told TheStreet.com.
“The company is working with both the note holder and bank groups and will be presenting its position to the judge requesting an orderly resolution on Wednesday,” Mercer said. She refuted the Tuesday report from Standard & Poor’s LCD News that said Woodside had already filed for Chapter 11.
The petitioning creditors listed on the filing against Woodside are John Hancock Life Insurance, AXA Equitable Life Insurance, Metropolitan Life Insurance, New York Life Insurance and Security Life of Denver Insurance. The total claim amount is $156 million.
Government assumes control over mortgage giants Fannie Mae and Freddie Mac
WASHINGTON (AP) -- The Bush administration, acting to avert the potential for major financial turmoil, announced Sunday that the federal government was taking control of mortgage giants Fannie Mae and Freddie Mac.
Officials announced that the executives and board of directors of both institutions had been replaced. Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.
Treasury Secretary Henry Paulson says the historic actions were being taken because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.
"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," Paulson said.
Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie.
The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans."
The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.
Paulson said that it would be up to Congress and the next president to figure out the two companies' ultimate structure.
"There is a consensus today ... that they cannot continue in their current form," he said.
Paulson and James Lockhart, director of the Federal Housing Finance Agency, stressed that their actions were designed to strengthen the role of the two mortgage giants in supporting the nation's housing market. Both companies do that by buying mortgage loans from banks and packaging those loans into securities that they either hold or sell to U.S. and foreign investors.
The companies own or guarantee about $5 trillion in home loans, about half the nation's total.
Lockhart said that both Fannie and Freddie would be allowed to increase the size of their holdings of mortgage-backed securities to bolster the housing industry as it undergoes its worst downturn in decades.
Lockhart said in order to conserve about $2 billion in capital the dividend payments on both common and preferred stock would be eliminated. He said that all lobbying activities of both companies would stop immediately. Both companies over the years made extensive efforts to lobby members of Congress in an effort to keep the benefits they enjoyed as government-sponsored enterprises.
Both Paulson and Lockhart were careful not to blame Daniel Mudd, the CEO of Fannie Mae, or Freddie Mac CEO Richard Syron for the companies' current problems. While both men are being removed as the top executives, they have been asked to remain for an unspecified period to help with the transition.
By Alan Zibel and Martin Crutsinger, AP Business Writers
Congress must not write the no-strings-attached blank check the Bush administration wants to bail out Wall Street with. The $700 billion (at minimum) for Wall Street and $0 for Main Street deal that gives the Treasury secretary absolute control of who gets cash is not the way to address the nation’s financial crisis.
Pulte Homes Inc.'s (PHM) fourth-quarter net loss narrowed due to lower write-downs, but revenue and net new-home orders tumbled as the company said the housing market took "yet another step down." "Sinking consumer confidence, excess foreclosure inventory and continued very tight mortgage availability put dramatic downward pressure on the homebuilding market," said President and Chief Executive Richard J. Dugas Jr. The home builder reported a net loss of $338.2 million, or $1.33 a share, compared with a year-ago loss of $874.7 million, or $3.46 a share. The latest results included $380 million of pretax impairments and other land-related charges, while year-ago results included $509 million in impairments. Revenue tumbled 43% to $1.65 billion. Analysts polled by Thomson Reuters projected a loss of 71 cents a share, including the impairments, on revenue of $1.44 billion. In October, the company declined to provide a fourth-quarter guidance, citing a high degree of volatility in the housing industry and overall economy. Net new-home orders in the quarter slumped 61% to 1,763 homes. Closings decreased 37% to 5,474 as the average sales price declined 13% to $278,000. The backlog as of Dec. 31 was valued at $631 million, or 2,174 homes, down from $2.5 billion, or 7,890 homes, a year earlier.
