June column for Builder & Developer magazine now online

My column for the June issue of Builder & Developer magazine is now posted online.

For this issue, entitled "The 2012 Presidential Candidates on Housing Policy," I wanted to compare what President Obama and presumptive GOP Nominee Mitt Romney have in plan for the housing market.

An excerpt:

After several years of false starts, there finally appear to be more green shoots appearing in the nation’s housing market which indicate a slow yet actual rebound.  Sales of both new and existing homes are on the mend, affordability is at generational highs, and the dreaded tsunami of foreclosures expected to lower prices even further have largely been bought up by investors to re-purpose as rental properties.  Even better, according to Moody’s housing analyst Celia Chen, homeowners will begin to favor newly built homes versus distressed homes which are damaged.

Nonetheless, because the economy remains the top concern of most voters in the 2012 Presidential election, how President Barack Obama and the GOP’s presumptive nominee Mitt Romney influence housing policy is of critical importance to homebuilders and homeowners alike...

So can market forces alone help guide this all-important sector of the U.S. economy to health, or will it continue to need more help?  The answer to that question depends on whom you ask...

To read the entire column, click here.

To read the entire June 2012 issue in digital format, click here.

July column for Builder & Developer magazine now online

My column for the July issue of Builder & Developer magazine is now online. For this month, the focus is on the need to discard the old rule books in order to thrive in an industry which, like many others, continues to undergo creative destruction in the way it works. An excerpt:

Over the past several weeks, my business partners and I have been taking a series of meetings with friends from the building industry to catch up, and through these meetings most seem to share one primary goal: a return to the good old days when every company shared the same mantra of ‘full steam ahead.’ Even despite a barrage of news of long-term changes in U.S. demographics, consumer spending and the economy in general, many people sit and wait, biding their time for a type of rebound that may never come.

And why is that? Because they refuse to throw away the dog-eared rule book which made them successful in the first place -- and perhaps to be surpassed by companies which never bothered to read one...

You can read the entire article here.

Time to throw out the old rule books

“If You Don’t Create Change, Change Will Create You” – Anonymous

Over the past several weeks, my business partners and I have been taking a series of meetings with friends from the building industry to catch up, and through these meetings most seem to share one primary goal: a return to the good old days when every company shared the same mantra of ‘full steam ahead.’ Even despite a barrage of news of long-term changes in U.S. demographics, consumer spending and the economy in general, many people sit and wait, biding their time for a type of rebound that may never come.

And why is that? Because they refuse to throw away the dog-eared rule book which made them successful in the first place -- and perhaps to be surpassed by companies which never bothered to read one.

In today’s world, new rules are constantly being written by the brash and the creative, whether it’s Google’s transformation of the advertising world or the huge success of the CBS franchise “CSI.” For example, not only did CSI creator Anthony Zuiker have zero experience writing for television, he also didn’t realize that including flashbacks and quick cuts were both against long-standing industry convention.

Not knowing any better – because he never read the old, stale rulebook – he included both, thus giving the original series a pace and look that quickly sent it to the top of the ratings game and launched two spin-offs, one of which is the most-watched show in the world. So is that just dumb luck or a sea change that will cut across all industries?

I think that even more potent forms of creative destruction are about to envelope the building industry, and it won’t just be about building more in-fill product or scaling down home sizes and prices to meet today’s demand. These changes are going to alter everything from supply chain management to the way in which homes are marketed and sold, and those veterans who keep themselves otherwise occupied while waiting for someone to call and ask for their outdated skill set may be in for a long wait.

While there will certainly be some demand for the impressive homes of the past, we’re also quickly seeing a return to designs that meet needs more than wants. This is especially important for the groups of people mostly left behind during the last building boom such as families, seniors, the disabled and the homeless who can only afford to live in housing made possible by tax credits, low-interest bond financing and various other government programs.

For example, in upscale Thousand Oaks in California’s Ventura County, our staff is currently drafting a report in support of an affordable housing project that will help to house a variety of low-income families, homeless persons and the mentally disabled, many of whom now are mere numbers on a wait list that’s close to 600 families.

And who’s hoping to build this 60-unit project? A local non-profit that has managed over the last 30 years – mostly under the radar – to build, rehabilitate and fill 400 units and provide housing for 1,000 adults and 200 children. It’s that type of story (along with appropriate private and public incentives to make it happen) this industry really needs to start telling more of around a campfire – assuming, of course, that the old rulebooks are helping to provide the kindling.

A decidedly somber affair at this year's PCBC

Each year in June or July, tens of thousands of builders, suppliers and subcontractors converge on San Francisco's Moscone Center for the Pacific Coast Builders' Conference, but this year the total is down to just about 14,000 attendees (I also decided against attending this year due to a convergence of work deadlines). From the San Francisco Chronicle:

"California's home building industry is in the worst shape ever," said Horace Hogan, chairman of the California Building Industry Association, the trade group that puts on PCBC, and president of Brehm Communities, a Carlsbad (San Diego County) home builder, speaking at a news conference.

"Every builder I know has laid off most of their staff, and contractors and suppliers we've done business with for years have folded up shop." The show reflected that contraction. At the peak of the housing boom in 2006, it drew 35,000 attendees. Last year there were about 19,000. This year only 14,000 people came to Moscone. Even with a smaller exhibit floor, the aisles were noticeably underpopulated...

Hogan had a variety of grim statistics to tick off. Although the 65,000 housing starts in California in 2008 were the lowest ever recorded, "As bad as last year was, right now 2009 looks like it might even be worse," he said, citing projections of only 40,000 housing units this year. That sluggish pace means the loss of more than 360,000 jobs and $50 billion from the state's economy, he said.

California's $10,000 tax credit for people who buy a new home is something the builders would dearly like to see extended. They say not only does it help their industry, but it generates state and local taxes, creates jobs and stimulates the economy.

Sam Chandan, president and chief economist of New York's Real Estate Econometrics, had more downbeat news at a session on the economic outlook, predicting a huge wave of defaults in commercial mortgages.

"About $300 billion in commercial mortgages will come due between now and the end of 2009, and the same in 2010," he said. "We lack the capacity to refinance them. This will lead to a significant increase in defaults and delinquency rates for commercial mortgages..."

During the last downturn of the early 1990s in California, people could choose to find a job in another industry or move temporarily to Las Vegas or Phoenix to find work in the local building industry. But now with the entire economy in recession, there are few good substitutes.

And as for those commenters you always see online (probably sitting alone in their underwear) who quack, "Greedy builders! Had it coming! Get what they deserve!" please give it a rest, it's just not helpful, nor is it original. You could say the same thing about bloated governments, badly managed car companies, irresponsible bankers or media companies which haven't reacted quickly enough to the creative destruction fomented by technology. Like it or not, we're now in this together, and quacking out the same tired lines of schadenfreude is just boring.

McCain vs. Obama: where they stand.

As a final note before tomorrow's election, Builder magazine has an article summarizing the stands of both John McCain and Barack Obama. Although many builders typically vote along strict Republican lines, some well-known builders such as Toll Bros.' Bob Toll and Eli Broad, founder of Kaufman & Broad, support the Democratic nominee. If nothing else, that should make for interesting conversations at industry functions! From a BuilderOnline.com story:

With no end to the housing downturn in sight, with banks and investment firms hemorrhaging billions of dollars, then failing, and the federal government offering more than $1 trillion and counting to try and stem the tide of the credit crisis, the next president of the United States may hold the future of the country in his hands. Many businesses and individuals are hurting, but the home building industry has more at stake than most.

To say that this election is important to builders would be an understatement of the greatest magnitude; the economy is in a full-fledged nose dive, and builders need a president to restore the American people’s confidence, create new jobs, and right the capsized economy before people will start buying homes in large numbers again...

Finding real answers in the candidates’ whistle-stop promises and scripted answers to softball questions is difficult at best. To provide clarity on the candidates’ positions, Builder first asked readers to rank their top concerns on a 1 to 10 scale with 1 being the highest priority and 10 being the lowest. Then we distilled the candidates’ positions on some of those issues. Our survey revealed that many of you rate the energy and credit crises most important, with immigration, infrastructure development, affordable housing, and green building rounding out the list of your chief domestic concerns.

Read on to find out where McCain and Obama stand on several of your top issues.

Click here for full story.

Top builder D.R. Horton dumps lots at a loss, reaps tax benefits

A few months ago, builder Lennar dumped thousands of lots at 40 cents on the dollars, thereby setting a new comp in the areas in which it had large holdings. But a major reason it did so was to reap tax benefits, thereby making it a wash from an accounting standpoint and providing it with some much-needed cash. Now it seems that D.R. Horton is doing the same, only on a larger scale. From a Wall Street Journal story:

Horton, the nation's largest home builder by unit volume, is jettisoning thousands of house lots in far-flung areas, partly to reap the tax benefits from selling property at a loss. As builders try to survive one of the worst housing downturns in U.S. history, land buyers and brokers expect more such tax-motivated fire sales of undeveloped land this year. That could set a new low for land prices in California and other troubled housing markets. The sales also could indicate a shift for big builders: from developing huge swaths of land in the exurbs, to building smaller developments closer to metropolitan areas.

Horton two weeks ago sold about 2,000 house lots in Desert Hot Springs, a blue-collar community in the far reaches of Southern California's Inland Empire, for $7.8 million, according to county records. William Shopoff, a land investor who bid unsuccessfully for the property, estimates Horton paid about $110 million for the land before spending to prepare the property for development by grading and installing infrastructure such as sewers.

(Actually, Desert Hot Springs is located in the northern portion of the Coachella Valley, which includes Palm Springs, Rancho Mirage, Palm Desert and other resort cities. In the last stages of the boom, DHS was an inexpensive alternative for new housing since it was located north of Interstate 10 and had much more vacant land on which to build. But when studying it from a real estate perspective, it's generally considered its own market as opposed to simply being part of the Inland Empire. Something tells me that D.R. Horton didn't due its due diligence on this one or hired a pliable consultant who was concerned more with the fees than the truth about long-term housing demand).

The fire sales are a silver lining in those clouds. Tax law allows companies to apply losses from land and other asset sales to past profits and reap a tax refund. More sales are expected soon because the companies can apply losses only to profits earned as far back as two years and 2006 was the last profitable full year for most builders.

Horton told investors in June that it expects to receive a tax refund of $519 million over the next two years. At the end of last year, Lennar Corp. pocketed a $200 million tax refund after taking a 60% discount on its sale of 11,100 house lots to a joint venture it formed with Morgan Stanley.

"There's going to be a rash of builders shedding assets," said Tom Reimers, executive vice president of O'Donnell/Atkins, a real-estate advisory firm in Irvine, Calif. "It's all tax-motivated."

By dumping land, builders are chasing cash that allows them to keep current with lenders and pay overhead expenses...

So far, most publicly traded home builders have managed to muddle through the housing mess. One reason is the builders' financing arrangements. Many such large companies have long-term corporate debt that doesn't come due for another year or two, giving them breathing room amid the credit crunch. The builders typically don't need lender approval to keep building as long as they honor certain debt agreements at a corporate level.

Most closely held builders, on the other hand, use project-specific financing, in which they need a bank's approval to start each new development. Lenders have completely cut off credit to most small builders, forcing many to file for bankruptcy protection. Analysts expect more than half of the nation's small and midsize builders will fold during the housing downturn, which has already forced such private companies as Levitt & Sons of Fort Lauderdale, Fla., and Kimball Hill Homes of Rolling Meadows, Ill., to file for bankruptcy...

Horton's recent land sales also could reflect an industry shift. Over the next few years, builders will likely build smaller developments closer to large metro areas, where house prices are expected to recover faster than in the far-flung regions. That contrasts with 2005, when builders bought massive parcels in California's exurbs and earned big profits as land values skyrocketed during the housing boom.

Horton, for example, is interested in buying 50- to 150-lot parcels that are already developed and closer to certain cities in the San Francisco Bay area, says a person familiar with the company's thinking.

Builders taking on the banks

With large investment banks a thing of the past, more bank failures on the horizon, the American financial system in disarray and lenders hoarding cash, it’s hard to predict what the future holds for the building industry. But if the recently formed Coalition for Responsible Bank Behavior (www.pathtodefault.org) has anything to say about it, the chaos in financial circles certainly shouldn’t be taking down developers and homebuilders with it.

The coalition, formed earlier this year in San Diego by a collection of builders, attorneys and work-out specialists including Barratt American President Michael (Mick) Pattinson, hopes to force lenders to play by a consistent set of rules versus what the group’s members say have been a series of contrived defaults that have led not only to foreclosed projects, but hibernating or bankrupt development companies. At the same time, the coalition’s 85 members – whom are now geographically dispersed across the country – are focused on assembling the type of intelligence required to warn other builders about to face similar circumstances.

“The banks aren’t straightforward with customers regarding bank policy or decision making, so we’re left to piece together the jigsaw puzzle, and now can forewarn other builders who aren’t yet in the process but know what’s coming,” explained Pattinson to me in a recent phone interview.

The short-term goals of the coalition are quite specific, intending to leverage the political power of a key economic sector and put pressure on a banking industry that’s already proven itself to be less than responsible. These goals include raising the consciousness of both banks and builders about an entire industry in peril, encouraging builders to fight banking abuses, enlisting the media to tell the builders’ stories, contacting federal and state agencies and carefully documenting any patterns of poor and unethical bank behavior.

At the heart of the issue are inconsistencies between banks in their work-out dealings with builders. Citing regulatory issues that tie their hands, many banks are reportedly forcing their clients into defaults when other banks continue to work in tandem with builders to maximize the return of assets. And the stakes are significant: according to the coalition’s website, many lenders are selling foreclosed properties at 30 to 40 cents on the dollar when they could be getting twice that amount by avoiding the foreclosure process in the first place. Moreover, by forcing builders into default or bankruptcy, an entire supply chain of subcontractors, suppliers and consultants don’t get paid, leading to more layoffs and exacerbating the housing recession.

In many cases, these defaults aren’t due to the natural progression of a transparent series of steps but the contrived inventions of banks desperate to hold onto as much cash as possible. “In many cases, the banks encourage the builder to continue with the hope of potential loan renewal,” states the coalition’s website. “The banks seek to be made whole while the builder exhausts its cash. When the cash is depleted, the bank informs the builder they will not continue funding.”

So how does the lender justify such decisions? By relying on a ‘made to order’ deflated appraisal that backs up its findings – which, in a twist of irony, is the polar opposite of the puffed-up appraisals that helped mortgage lenders justify lending on $600,000 homes really worth closer to $500,000 during the boom years. In both cases, the true victims seem to be analytical objectivity, and eventually, the U.S. taxpayer.

Over time, the coalition also has other solutions it’s exploring to help an industry avoid similar scenarios in the future, such as eliminating the personal guarantee and making construction loans, like many purchase mortgages, non-recourse. Another major goal is to revamp the current commercial appraisal process so the process is transparent to the borrower, halting ‘mark-to-market’ rules that include panic-stricken sales comps and which don’t adequately reflect stabilized values, and initiating a three-appraisal rule to compete against sole in-house appraisals which tell the lenders exactly what they want to hear in order to declare a technical default.

Finally, the group suggests that the timetable required for a work-out on a multi-million dollar development should be expressed not in weeks or months but three to five years, and future loans should last the life of the project. Given the list of half-finished projects strewn across the country, I’d imagine that a host of cities, counties and homebuyers would certainly agree that the current solutions simply aren’t working.

While it’s undoubtedly sad that long-standing relationships between banks and builders have deteriorated to this point, it’s understandable that part of the conditions of a $700+ billion taxpayer bailout should have required both mortgage and commercial lenders to act with objectivity, fairness and transparency. Concludes Pattison, “We need every state and Washington, D.C. to ask lenders to explain themselves. If this isn’t the biggest fraud in the history of the world, then I don’t know what is.”

Financial crisis to prolong housing slump

As the housing and mortgage crisis continues to create more destruction on Wall Street, it's not surprising to hear that this only means bad news for the nation's builders, most notably through tighter requirements for business loans and mortgages for buyers. From a BuilderOnline.com story:

Builders who think the financial meltdown happening on Wall Street this week won't affect them should think again.

The capital to run their businesses—acquisition, development, and construction (ADC)—is likely to become less available and more expensive. The mortgages that consumers require to purchase a new home will become even harder to get, despite the recent federal takeover of mortgage finance firms Fannie Mae and Freddie Mac. And the number of jobs that Americans need to qualify for and pay those home loans will continue to shrink if banks are reluctant to give businesses the credit they need to expand and hire more workers...

"What is different today [from past housing downturns] is that you have an overall market problem—it's not isolated to any one geographic area or several geographic areas. It's almost a systemic problem," John Bittner, a partner at Grant Thornton, told BUILDER this week. "What you are seeing now is a much more protracted decline in the housing market because of the situation in the financial markets."...

Bittner, like others, foresees credit becoming even more difficult to get for builders in the months to come. "Credit will only be available to those with the most pristine of balance sheets, and if it's available, it won't be cheap," he predicted to BUILDER. "And the restrictions and covenants placed on the loans will be considerable."

Such a situation does not bode well for builders, who have been fighting for survival and cash flow for months. In a market where firms such as WCI, Woodside Homes, Neumann Homes, Kimball Hill Homes, and others are going bankrupt, what home building companies have such clean balance sheets? "That's the problem," Bittner said. "Very few of them have. They're long in land, and they have a significant amount of debt on their balance sheet. The larger publicly traded home builders, the smaller privately owned home builders with $100 million to $500 million in revenue—they all bought into [the boom] when times were good. Very few, if any, have the balance sheet to go out and get credit these days."...

With the economy reeling, consumers rethinking their spending, and banks reducing their own financial exposure by lending less money, builders will likely start feeling the pain of the overall economic tumult as well as the effects of the ongoing housing downturn.

Builders hurt by housing bill?

It looks like the housing bill so quietly signed into law by President Bush both giveth and taketh away from homebuilders. Although it permanently raises the limits on FHA loans to 115% of the median household income and offers a unique $7,500 tax 'credit' (i.e., a loan that must be paid back over 15 years), it also eliminates the down payment 'charities' that some builders said helped up to 30% of their buyers leap over the down payment hurdle and close the deal. The Wall Street Journal explains:

Although a bill aimed at reviving home sales and curtailing foreclosures is about to become law, some of its provisions are proving a drag for the nation's large home builders...

There have been months of intense lobbying by the building industry, but analysts say the legislation is a mixed bag for the new-home market. On the bright side, the bill shores up mortgage giants Fannie Mae and Freddie Mac, which should help restore some confidence in the mortgage market. It also provides a $7,500 tax credit to stimulate demand among first-time home buyers.

But for the builders, the bill's elimination of seller-funded down-payment assistance on mortgages backed by the Federal Housing Administration is a big loss -- one that could eliminate as many as one in 10 home buyers from the market, according to an analyst.

Starting in October, buyers using FHA loans can no longer accept down-payment "gifts" that are ultimately funded by the home seller, often a builder. Currently, the FHA allows a nonprofit group to gift the down-payment to the buyer. The nonprofit group is then reimbursed by the builder -- a practice the housing bill would stop...

Miami-based Lennar Corp. used down-payment assistance on 33% of the mortgages it originated in the second quarter, while Ryland Group Inc. said 18% to 20% of its buyers used down-payment assistance during the first half of the year...

Complicating matters further for the builders, the housing bill would increase the down-payment requirement on FHA loans to 3.5% from 3%. Previous versions of the measure had lowered the down payment to 1.5%.

"There will undoubtedly be some impact, but we believe the buyers will adjust and the market will adjust," says Tim Eller, the chief executive of Centex Corp, which said that 25% of its sales in its fiscal year ended March 31 involved down-payment assistance...

On a brighter note, builders say the housing bill could boost higher-end sales by raising the conforming-loan limits on Fannie- and Freddie-guaranteed loans and FHA loans to a maximum of $625,000 in some high-priced areas.

But many of those higher-end sales will depend on whether buyers can sell their current homes, often to first-time home buyers, which is why builders say the tax credit will help the overall market.

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 BuilderOnline.com 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.”

Do builders need to re-learn PR 101?

A couple of months ago, I had what I thought was a great idea for a story for the real estate section of the Los Angeles Times: helping their readers negotiate the maze of builder incentives being offered at new home communities including upgrades at design centers, payment of closing costs, interest rate buy-downs or even pricing discounts. There's even a website, BuilderIncentives.com, that helps consumers pick their homes based on incentives (not a great idea, in my opinion, since that could mean buyers buy a home they hate but loved the incentive).

Having written a few book reviews and articles for the paper since January, the Times editor was already comfortable with my writing style and agreed that my background in the building industry would be an asset. She even assigned me a homebuyer to interview, who had recently used incentives to buy two new homes at communities in Orange County built by two large builders in Southern California.

"Great!" I thought. "Good, solid companies -- they'll love the chance to tell their side to someone from the industry who wants to write a balanced article."

The buyer told me his story (which ultimately turned out to be positive since he got what he wanted), and afterwards I contacted both homebuilders to comment, thinking I'd get to someone right away or at least a return phone call within a day or two.

I told them that if the story, once published, is re-purposed to other Tribune-owned properties such as the Chicago Tribune, Baltimore Sun and Newsday, that the story could ultimately be seen by up to 3.5 million readers, so this would be a great opportunity for them to explain to potential buyers how and why they use incentives, including sometimes tying incentives to using in-house lenders, how they figure out the total value of a home, what kind of mark-ups are typical at a design center, how a buyer's agent can participate in the process and get a commission, if the incentives make a new home a better deal than a resale, etc. -- in other words, all the things that I'd want to know when shopping for a new home and what questions to ask.

And what have they said so far?

NOTHING.

First, I got shuffled to one person, and then another, and then another. I'm still waiting for a call from a Division President -- perhaps he's busy, but c'mon, THAT busy?

So far, no returned phone calls, no returned emails, and I've been going at this for two weeks.

I can't imagine ever just ignoring a phone call from a reporter for a major daily or a business publication -- while giving a speech a couple of weeks ago, I forgot to shut my cellphone off, and it was a reporter from the Financial Times asking about -- surprise -- builder incentives, and I called him back as soon as I was done. Even if I can't answer the question, I still return the call in order to build the relationship so they'll call me in the future and view me as a reliable source.

My editor says builders are notoriously difficult about commenting to the press about anything (something that's been verified by reporters at other papers). That, of course, reminded me of the PR debacles of WorldCom and Enron, when refusing to comment ultimately meant that they were hiding something, such as billions in write-downs and falsified revenue statements.

While that's certainly not the case for this story, it does beg a question: do builders need to re-learn PR 101? Many of them hire PR agencies on retainer -- but isn't that simply wasted money if they ignore opportunities such as this? I feel sorry for PR people who are ordered to ignore phone calls, because I'm sure that's not what they thought their days would be like when they chose the vocation.

So, until I hear back from either of these large builders, the next time one complains to me about media coverage of new home sales, I think I'm going to tell them this story and ask them to consider just much of the PR damage has been self-inflicted due to simple lapses of common sense -- you know, the same kind that led to purchases of hyper-inflated land.

If I do hear back from either of them soon, I thank them in advance for helping me to write a well-rounded article. Either way, look for it to be published on Sunday, July 6th!

Unexpected saviors helping to prop up homebuilders

According a Reuters article, a unique blend of hedge funds, private investors and larger public builders are jumping in to buy land at distressed prices and invest in troubled builders in search of a big payoff when the market rebounds:

The precipitous slide in home values and a glut of unsold properties are pushing U.S. home builders to the brink of insolvency, but a posse of unexpected saviors could help keep the companies out of bankruptcy court until home buyers return.

Hedge funds, private investors and even larger cash-flush home builders are eyeing valuable swathes of land held by troubled companies, according to bankruptcy attorneys and restructuring specialists. As long as private firms have the cash to keep a struggling home builder running, they think they can profit when the real estate market picks up again...

Troubled home builder Standard Pacific Corp (SPF.N: Quote, Profile, Research), which builds homes in Florida, California and other major metropolitan areas, may be catching the eye of hedge funds. Hedge fund Tiger Global Management LLC has taken a 3.55 million share stake in the company, making it the fifth-largest institutional shareholder, according to Reuters. The firm declined to confirm the data or comment further.

Hedge funds are finding they can offer operating cash or long-term equity financing to distressed companies...

Still, it is risky for investors to bet on home builders or related companies. Declines in U.S. home prices accelerated in the first quarter, falling a record 1.7 percent from the end of 2007, according the national house price index of the Office of Federal Housing Enterprise Oversight (OFHEO), which covers home purchases.

As home values fall, builders are slashing plans for new developments and allowing land to lay fallow, cutting off their revenue stream.

Debt for companies, including Standard Pacific, is trading at distressed levels and banks are increasingly unwilling to lend to many home builders as the housing market weakens.

A Chapter 11 bankruptcy could protect some companies from creditors, while they restructure, but with analysts saying the housing market is unlikely to regain strength soon, liquidation may be their only option...

But the desperate and expedient measures required by bankruptcy and liquidation can cause much more pain for a company and its stakeholders. With a cash infusion from hedge funds or private equity, the company may be able to wait out the housing slump and its investors can reap the rewards, restructuring experts say.

The truth about new home price guarantees

A couple of weeks ago at a building industry function, I asked a panel of homebuilders including reps from Centex, Standard Pacific and John Laing why weren't offering price guarantee programs along the lines of those offered by KBHome and Ryland.

Their answer: most builders will refund money to a potential buyer still in escrow if the value of their home falls in between the time they sign the contract and closing, but you have to ASK for it. The fact that KBHome and Ryland are promoting the program has more to do with their ad strategies and creating higher comfort levels among potential buyers than a totally unique program. Although the fact that they have announced these programs would certainly make it easier for a home buyer to benefit, it's probably good advice to simply ask all builders what they plan to do should prices fall before homes close escrow.