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Homebuilders Struggle with Bankruptcy

Written By Brian Hicks

Posted November 15, 2007

Lined up in neat rows one just like the next, the suburbs are as American as the Big Mac. And to the millions of people that grew up in them and call them home today, they are part of much larger idea–a slice of the American Dream.

The grandfather of them all, of course, was a community in New York called Levittown, the first subdivision ever developed. Built by Levitt and Sons after World War II, the planned and mass produced community was so successful that it changed the face of the country forever.

In fact, by 1948 Levitt and Sons became so efficient at cranking out these popular new houses that they could have given Henry Ford himself a run for the money. At the peak of their muscle, Levitt crews were turning out an unbelievable thirty houses a day. Talk about throwing up houses.

Levitt Meets its Match

But some 200,000 houses and 60 years later, the builder that was once featured on Time magazine when it really meant something has fallen on hard times. Levitt and Sons declared bankruptcy last week.

Citing "unprecedented conditions" in the home building industry that left it unable to meets its financial obligations, the Levitt Corporation (NYSE:LEV) homebuilding unit filed for Chapter 11, leaving its creditors, vendors and customers in the lurch.

"The homebuilding industry, particularly in Florida, has experienced unprecedented declines with an oversupply of inventory and waning demand exacerbated by the recent disruptions in the credit markets," said Chairman and Chief Executive Alan Levan in a statement last week.

That put the legendary builder on the same slippery slope with Neumann Homes, Elliot Building Group, Turner-Dunn Homes and Kara Homes as builders that have hit the skids.

And thanks to the ongoing credit crunch and the massive oversupply of houses on the market, it’s a dubious list that will likely grow, claiming much bigger and better-known names.

This is, in short, an industry now facing a major contraction. The same builders that put up over two million homes at the peak just two years ago are now left with a market that economists expect to shrink to only one million units by 2008.

More Homebuilders Headed for Bankruptcy

That, according to Ivy Zellman, means only more pain. "We’re in the first or second inning," the independent housing analyst says. "There are going to be a significant number of insolvent builders."

Mark Zandi, chief economist at Moody’s, agrees. The industry, he says, is "going to be a shadow of itself once we get through this downturn. Everyone was too optimistic."

At issue for the most part are the massive debts that these builders have run up and their ability to maintain enough cash flow to service them. That’s because, as each of these failed builders has learned, it’s a short trip from a payment default to a date with the courthouse steps.

In the end, that’s what eventually buried Levitt and Sons–they were unable to restructure their debt and couldn’t sell enough homes to meet their payments.

Unfortunately, it’s a nationwide problem. In fact, some analysts see a repeat of the downturn in the early 90s, when 15% of the nation’s builders went belly up, according to the National Association of Home Builders.

In their wake, of course, will be a slew of unfinished projects, angry customers and falling prices as builders do everything it takes to avoid bankruptcy.

For their part, Levitt and Sons just came up a little bit short. They won’t be the only ones by a long shot.

The bottom in housing is nowhere in sight.

By the Way: The problems at Beazer Homes (NYSE:BZH) continue to mount. The troubled builder revealed last week that it was cutting 650 positions, or 25% of its workforce, and had halted its 10-cents-a-share dividend. Preliminary figures showed home closings down 39% and new home orders down 53% on a 68% cancellation rate. Now that’s ugly.

On top of that, the Charlotte Observer reported last week that Beazer "will delay paying subcontractors in at least one city where it builds homes, as the company struggles to ride out one of the most severe housing slumps in recent history."

The Observer obtained a letter dated November 5 and signed by Beazer Nashville Division President David Hughes, who said "effective immediately" the company would hold up payments.

"It is unfortunate, but we cannot continue the prompt payments you have received in past years," the letter stated.

Needless to say, that’s not exactly a good sign. Beazer, you may remember, was the subject of bankruptcy rumors this summer.

Wishing you happiness, health and wealth,

Steve Christ, Editor