The Housing Chronicles Blog: How bad is it for builders? Worse than you thought.

Tuesday, July 8, 2008

How bad is it for builders? Worse than you thought.

One of the main reasons that the NAHB is pressuring Congress for tax credits to first-time homebuyers and extending the tax loss carryback is because many smaller, private builders are simply on the ropes. Whereas it's the large, public builders who have been told "go sell stock or raise money from the capital markets," for smaller builders it's just not that simple. From a story:

While many builders have been quoted in newspapers saying the media has overblown the severity of the housing downturn, some home building consultants are saying the picture is far bleaker than even the media is portraying... Why are things so bad? Declining land values combined with banks worrying ­about their real estate–related loans has caused a number of banks to call on countless builders and land developers to either pay lump sum amounts to get their loan-to-value ratios back in order, to sell the land, or even to give it up to the bank...

Evan Smiley, a partner specializing in bankruptcy law at the firm Weiland, Golden, Smiley, Wang Ekvall & Strok in Costa Mesa, Calif., and coauthor of Bankruptcy for Businesses, pegs the problems that banks and builders are having on declining land values.

A bank’s reaction, mainly out of fear for its own financial health, is to declare default or send the builder notice that the bank doesn’t intend to renew the loan. Or the bank may tell the builder it needs to pay down the loan, often through personal guarantees, to somehow re-leverage the transaction and decrease the bank’s risk, Smiley says.

How a bank or banker will handle any given situation will vary from bank to bank and person to person within each bank, but Smiley offers three strategies for a builder facing tough times.

A builder must maintain good communication with its lenders, he says. Lenders are unlikely to want a builders’ land, especially if they are dealing with many builders and facing the proposition of owning huge amounts of land, and will therefore try to be cooperative. Smiley says banks are doing a better job of working with builders than they did in the 1990s housing bust in California...

Market conditions for new-home builders are deteriorating day by day, say the building consultants Builder spoke with.

Builders must seek expert advice; their human resources departments do not have the experience to adequately guide them through this crisis. Solving the complex problems that builders are facing requires specialists, say the consultants Builder interviewed...

Builders need their own advocates, because their creditors will have a team of lawyers at their disposal and the issues that need dealing with are not simple—tax issues, life insurance policies, land, debt, possible cash infusions from private equity, and so on.

But before builders get to the stage of hiring experts, they must admit they have a problem, says Tarabulski.

“One of the problems is that builders are can-do guys. They’re the heroes by nature,” she says. “This is very psychologically hard for anybody, and they are having a really hard time saying, ‘I can’t fix this,’ admitting they can’t. And by delaying this, their chance of surviving this catastrophe and coming out the other side diminishes day by day. By day.”

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