Developers are in trouble

[VADCMD]

“Kara Homes Inc., the New Jersey builder known for so-called McMansions, filed for bankruptcy after $250,000 discounts failed to lure buyers. The closely held East Brunswick, New Jersey-based company sought Chapter 11 protection in U.S. Bankruptcy Court, saying it owes $296.84 million to lumber, concrete, electrical, plumbing and woodwork companies while holding $350.18 million in assets, primarily unsold houses and land.”

I think Kara might have to get rid of the asset very quick to save itself. But I wonder what could the strategy except dumping in the house market.

Obviously, sellers might need to do something ahead of the developers. And for buyers, wait….

Here is the link:
http://www.bloomberg.com/apps/news?pid=20601087&sid=ajY74Kg6RI7o&refer=home

[PerryChase]

Notice that their assets are still $53 million greater than their liabilities. The problem is that the houses aren’t moving so the cash crunch led to the bankruptcy. I can see the values their houses and land drop by 30-50%. Then they’ll really be in a hole.

[rankandfile]

You have a point, Perry. The current valuation, I am sure, is not based on future decreases in the housing market…a time and value at which these units will actually sell.

Although we look at this company and shake our heads, I feel sad in a way for all of the contractors affiliated with it. I am sure that there are many small companies that heavily rely on the income they will were supposed to receive from this bankrupt company.

[privatebanker]

I know of several developers that are on the edge of total failure. Many are stretched so thin, they are knocking on every bank’s door for help. The big players will probably be able to sustain for the most part. But don’t be surprised if this becomes a recurring issue with a lot of the smaller developers.

[Steve Beebo]

It’s going to be interesting to see which builders go belly-up in the next three years. The ones at most risk are those that have just started large developments as the market softened, and especially those that bought large tracts of vacant land in the past 12-18 months, because that land would be worth less, maybe a lot less today. When home prices are increasing or decreasing, vacant land moves up or down faster than finished homes.

In the early to mid 90’s, one builder that almost went bankrupt was Davidson Homes. I have a friend who worked for Davidson at that time, and the only reason they didn’t go completely out of business was because they took on a large Canadian company as a financial partner. When the market slowed, Davidson was doing a lot of different projects, but I think the one that really dragged them down was the Mt. Woodson development and golf course. I’m not sure if they still have their Canadian partner.

[sdrealtor]

Steve,
You seem to be singing a different tune of late. Last month, you said prices werent going down and this month you seem quite a bit more pessimistic. What have you seen that made your perspective change?

BTW, I think davidson is toast too.

[PerryChase]

I also remember the Mt Woodson development well. In the 1990s, most developments in North City West (off of today’s 56) went into receivership. Pardee came out OK. And they sold to Weyerhaeuser.

sdrealtor, I remember your writing about one of your clients buying a property that actually “penciled out.” You were going to tell us more about it once the deal completed. How did it work out for that client?

[sdrealtor]

PC,
I wrote about seeing properties that were close to penciling out and that it would soon be possible in certain markets. Those markets are the low end condo projects in very desireable areas with lots of inventory that are getting hammered. The Carmel Valley and La Costa areas are good examples of this. We are still watching the market. I’ll keep you posted, just remind me.

[Steve Beebo]

sdrealtor –

I don’t know how Davidson is doing now – they might be in great financial shape. I only know they were struggling in the mid-1990’s.

And I never said prices would not go down. I just stated that I didn’t believe they would drop anywhere near 30-50%. I think I’m on record a couple of months ago predicting a 10 to 15% drop before it’s over. I may have to update my prediction to 11 to 16% – I’ll think about that.

It seems like there are a lot of interesting things happening in the market. On the one hand, inventory has declined, (like some predicted), but that surprises me. And median prices for resale homes and condos are at the same level they were at 12 months ago, according to the U-T article. The median price for new homes is off 17% from last year, but I think a lot of that is due to low-priced condo conversions.

Even though prices for a lot of properties in established neighborhoods really haven’t declined much, if at all, I do see a lot of weakness in the market in some areas. With interest rates coming down slightly, the ARM resets may not be the #1 problem. I think the biggest problem will be the number of coming foreclosures, especially in newer tract homes, (4S Ranch / San Elijo Hills), and in condos in some areas, (either conversions, or condos in neighborhoods with a lot of converions).

[PerryChase]

My observation is that prices on existing homes have already dropped 10%. The median price is holding up because people are still buying at the old price point but getting more for their money.

Say that the median price for a hotel room is $100. That gets you a 3-star hotel room. Suddenly occupancy drops and you can now get a 4-star hotel room for $100. People will still spend $100 but they’ll get the 4-star room rather than the now $70 3-star hotel room. The median hotel room price remains the same. The 30% drop in hotel room price is completely off the radar except, of course, for the 3-star hotel owners.

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