Neumann's Chapter 11 sign of things to come

I've been saying for while that it is only a matter of time before a major homebuilder goes belly up. While that still hasn't happened a smaller Chicago based homebuilder has given a sign of things to come by filing for Chapter 11 on Monday.

Neumann in Chapter 11

The crash in the Chicago-area market for new homes has claimed its biggest casualty. Suburban builder Neumann Homes Inc. said Monday it will file for bankruptcy and has laid off most of its employees.

Warrenville-based Neumann blamed its predicament on a drop of more than 50 percent in annual sales within the Chicago and Denver markets. It also pointed to a decision in 2005 to invest in the Detroit market, a move it said cost the company more than $60 million.

Warrenville-based Neumann blamed its predicament on a drop of more than 50 percent in annual sales within the Chicago and Denver markets. It also pointed to a decision in 2005 to invest in the Detroit market, a move it said cost the company more than $60 million.

Neumann said it will file for a Chapter 11 bankruptcy and that its lenders have agreed to provide limited additional funding so that its assets can be evaluated and sold.

It also said the earnest money of customers whose new homes haven’t started construction is safe in escrow. Neumann said it will ask a bankruptcy judge to approve refunds from those accounts.

It also said it will work with lenders to ensure that homes will be completed if construction has started.

Kenneth Neumann, the chief executive officer, could not be reached for comment. The company faxed some details about its plans in response to inquiries from the Sun-Times.

In the fax, Neumann said it has closed its sales, production and customer service offices. It gave no figures concerning layoffs.

"The market downturn in the Chicago and Denver housing markets [is] now in excess of 50 percent, with home prices dropping from 10 percent to 25 percent in some sub-market," Kenneth Neumann commented in the fax. "Even after the significant help we have received from our lenders this year, the company can no longer weather this storm."

It's worth remembering that the downturn in US housing will get a lot worse before it gets better and below is part of the reason why. The chart below courtesy of Credit Suisse shows the mortgage resets yet to come - the peak of which will occur in 2008. How long will Homebuilders be able to weather the storm with cancellation rates like those at Beazer currently running at 68% and D.R Horton at 48%? It may take until next year but you can bet it will happen sooner or later.