Now Homebuilders Face Foreclosure

For millions of Americans facing foreclosure, the Federal Reserve’s interest rate cut this week was welcome news that could possibly help save thousands of homeowners from default by giving them the opportunity to refinance their adjustable-rate loan into a fixed-rate mortgage with a lower interest rate.

But for many U.S. homebuilders the risk of foreclosure through bankruptcy has sharply risen under the pressure of the grim housing market.

This week, Florida-based homebuilder Tousa Inc. filed for bankruptcy protection. With assets of $2.3 billion and debts of $1.8 billion, Tousa is the largest publicly traded homebuilder to file bankruptcy and is one of 14 builders who have recently filed bankruptcy, according to Builder Magazine. Last year, the tumbling housing market claimed such large builders as Fort Lauderdale, Fla.-based Levitt & Sons, Elliott Building Group in Pennsylvania, Turner-Dunn Homes Inc. in Arizona, Kara Homes Inc. in New Jersey, and Neumann Homes Inc. in Illinois.

 “We’re in the worst housing recession in modern history,” Antonio B. Mon, Tousa’s president and chief executive officer, told the Dallas Morning News. “What’s happening in the housing business is unprecedented.”

Sales of new homes have suffered the biggest decline since records began in 1963. New-home sales plunged 26.4 percent in 2007, the industry’s biggest drop in four decades, the Commerce Department said.

The risk of bankruptcy among the big U.S. homebuilders has risen sharply as the pain of the housing slump trembles across the nation. Homebuilders, meanwhile, have been frantically selling off properties at huge discounts, laying off employees and selling undeveloped land to raise capital and remain liquid.

But many homebuilders — both publicly and privately held — will become extinct in 2008. The builders most at risk are Standard Pacific Homes of Irvine Calif., K. Hovnanian Enterprises in New Jersey, Beazer Homes in Atlanta, William Lyon Homes in Newport Beach, Calif., and Meritage Homes in Arizona. Many of these homebuilders have lost more than 80 percent of their stock value — and have reported hundreds of million in losses to their balance sheet.

What does all the bleak news in the building business mean for first-time homebuyers and investors?

To move the glut of unsold inventory quickly, some builders are staging flashy promotions, slashing prices and throwing in “free” incentives like new appliances, new cars, granite counter tops and other sales gimmicks to try and lure nervous buyers back into the market. Other developers are resorting to auctions to sell huge inventories of new homes, townhouses and condominiums.

But the sales strategy has failed to make a dent in inventories: the backlog of new homes on the market ticked up last month to 9.6 months’ supply based on the current sales rate, according to the Commerce Department.

Sales of new homes were down in most regions of the country, with the steepest declines in the South and West. So homebuyers and investors should start investigating these regions for bargains. If 2007 was the year of the extinction of subprime lenders, then 2008 could shape up to be the year that decimated U.S homebuilders. In future blogs, RealtyTrac will pinpoint specific developments where buyers can purchase new homes for a song.