More US Homebuilder bankrupticies

From Sacbee.com

Dunmore Homes files for bankruptcy protection

Seeking protection from creditors, Granite Bay home builder Dunmore Homes filed for bankruptcy late Thursday as it tries to restructure its tangled finances.

The move comes six weeks after Michael A. Kane, a Comstock Mortgage senior loan consultant in Sacramento, bought the firm from its second-generation owner Sid Dunmore. It's the first bankruptcy filing by a Sacramento-area home builder as dozens of firms struggle with a downturn in demand and prices for new homes.

and this from Yahoo Finance:

Levitt & Sons files for bankruptcy protection

home-building unit Levitt & Sons said on Friday that it had filed for bankruptcy protection, reflecting the badly battered Florida market.

The unit, which made most of its money in Florida, said Chapter 11 filing in U.S. Bankruptcy Court in the Southern District of Florida, was made "in response to unprecedented conditions in the home building industry, which have severely impacted the company."

We are getting closer to a major Homebuilder going belly up. Levitt & Sons is ranked as the 50th largest U.S. home builder by trade publication BuilderOnline. We are just getting started on homebuilder bankruptcies.

Beazer cuts dividend still Chapter 11 front runner

Last month I speculated that Beazer Home USA Inc. (BZH) had thrust themselves forward as the most likely candidate to file for Chapter 11 amongst the major US homebuilders. Beazer moved one step closer to that reality yesterday by cutting their dividend to shore up their capital position. From marketwatch.com

Beazer Homes eliminates dividend

Atlanta-based Beazer, which has indicated it will need to restate previous financial results due to an internal probe of its lending and other practices, said late Monday that it's eliminating the 10-cent-a-share dividend, a move designed to save about $16 million annually....

Beazer estimated it can reach a settlement with regulators in a range of $8 million and $15 million to resolve the violations of HUD regulations related to the mortgage-origination business.

On Monday, Beazer said it was unable to report its fourth-quarter and fiscal 2007 results but was providing preliminary, unaudited data. It has negotiated waivers of default from its lenders due to its failure to report financial results on time....

The company also said it continues to scale back its land position in response to lower prices and sales activity in the U.S. housing market. For the latest quarter, it forecast $230 million of charges related to inventory impairments and the abandonment of options on real estate....

"The housing industry continues to face the most difficult business conditions in over a decade," said Chief Executive Ian McCarthy in a statement.

Beazer said it let go about 650 workers, or 25% of its staff, during October.

This really is a company fighting to survive. As is the trend of late, shareholders are calling for the CEO's head. This from Bloomberg:

Shareholder Group Calls for Ouster of Beazer Chief Executive

CtW Investment Group, an adviser to union pension funds with $1.4 trillion of assets, called for the ouster of Beazer Homes USA Inc. Chief Executive Officer Ian McCarthy for his ``stunning leadership failure.''

McCarthy ``allowed Beazer to violate federal law, improperly account for land development costs and sale-leaseback transactions, and provide undisclosed loans to executives,'' CtW Investment said today in an e-mailed statement.

Also in homebuilder news Hovnanian Enterprises Inc. (HOV) announced some nasty preliminary results for the quarter ended October 31st. From the same marketwatch.com article above:

Hovnanian's deliveries down, cancellations up

Another large builder, Hovnanian, said it delivered 19% fewer homes during the October quarter compared to the year-earlier period.

Red Bank, N.J.-based Hovnanian's cancellation rate rose quarter-over-quarter to 40% of gross contracts, up from 35%.

Hovnanian is scheduled to release full fourth-quarter results on Dec. 18.

Some interesting commments from the CEO.

Ara Hovnanian, the company's CEO, Tuesday said U.S. housing won't likely get back to a "balanced marketplace" until 2010.

Meanwhile, 2008 will be "another challenging year" and he's not looking for strong earnings from home builders.

"By the tail end of 2008 we should get some positive momentum in sales, setting up a recovery in 2009," Hovnanian said. Home builders by then should return to profitability, although earnings will be more meager than the recent boom years, the CEO said at the UBS conference.

With at least 2 years to get back to some semblance of normalcy in the homebuilding industry there has to be some consolidation. That means some homebuilders will go under whilst others will be acquired by others with stronger balance sheets. Expect that consolidation phase to kick-in in earnest next year.

More Homebuilder pain

From Bloomberg:

Pulte Reports Loss on Writedowns, Tumbling Home Sales

Pulte Homes Inc., the third-largest U.S. homebuilder, reported a third-quarter loss after it reduced the value of its real estate and potential buyers of its homes had difficulty obtaining mortgages.

The net loss in the three months ended Sept. 30 was $787.9 million, or $3.12 a share, compared with net income of $190.2 million, or 74 cents, a year earlier, Bloomfield Hills, Michigan- based Pulte said today in a statement. Revenue fell 31 percent to $2.5 billion. The company wrote down the value of its assets by $1.18 billion in the quarter.

"The operating environment continues to be challenged with elevated levels of new and resale home inventory, tightening of mortgage liquidity, and weak consumer sentiment for housing,'' Richard J. Dugas Jr., the company's chief executive officer said in the statement.

Pulte was projected to have a net loss of $1.25 a share, according to the average estimate of analysts in a Bloomberg survey.

Orders for new homes fell 37 percent to 4,582, and the company had a backlog of 12,042 homes, worth $4.1 billion, it reported. A year earlier, the backlog reached 16,375 homes.

The company said it closed on sales of 7,468 homes in the quarter, a 28 percent decrease over the same period a year earlier. The average sales price per home fell 4 percent to $322,000 over the same period.

The company said it took impairments and land-related charges of $842 million and a goodwill impairment of $336 million in the quarter.

For the fourth quarter, the company said it projects income from continuing operations to range from break-even to 10 cents per share. It said it could not offer any guidance into next year.

Shocker of a result but notice they have managed to shift some inventory. Aslo yesterday:

Ryland Reports Loss on Writedowns and Slower Sales
Ryland Group Inc., a U.S. homebuilder targeting first-time buyers, reported a third-quarter loss on falling sales as mortgage terms made it harder for potential buyers to purchase homes.

The net loss in the three months ended September 30 was $54.7 million, or $1.30 a share, compared with net income of $87.9 million, or $1.97, a year earlier, the Calabasas, California-based company said today in a statement on Business Wire. Revenue fell 35 percent to $732.3 million....

Analysts expected Ryland to report a third-quarter loss of $1.29 a share, according to the average of nine estimates compiled by Bloomberg.

New orders declined 20.9 percent to 1,876 units, and the inventory of homes started and not yet sold declined 21.9 percent to 1,362 units. The company wrote off $128.1 million after adjusting the value of its inventory.

Ryland amended its unsecured revolving credit facility and reduced its aggregate debt to $750 million from $1.5 billion, the company announced Oct. 17.

Again if there is any positive news here it is that inventories are being worked off. Inventories should continue to flatten out as the summer selling season is now over.

Beazer Home- front runner for chapter 11

About three weeks ago I posted that the only thing missing from the US housing crisis is a major homebuilder going bust. That is still the case, however Beazer Homes USA Inc. (BZH) have thrust themselves forward as the most likely candidate in recent days.

An enquiry by the Securities Exchange Commission will require the company to restate earnings going back to 1999 after an internal probe found its mortgage unit violated federal regulations.

That news couldn't come at a worse time for Beazer as they issued preliminary financial results for 4Q07 showing home closings fell 39% to 3,940. New orders plunged 52% percent to 990 homes as the cancellation rate surged to 68% due "in large part to the pronounced tightening in the mortgage markets in August and September.''

If that wasn't enough, on Friday Fitch Ratings and Standard & Poor's cut their ratings on Beazer deeper into junk territory and said they may cut the ratings again as the company's balance sheet continues to deteriorate in a weak housing market.

"The downgrades acknowledge significant internal and external challenges confronting Beazer's management team and the uncertain economic impact stemming from accusations of fraud in the Beazer Mortgage Co. subsidiary," S&P said in a statement.

S&P cut Beazer one notch to "B-plus," four levels below investment grade, from "BB-minus," and kept the company on watch for a further downgrade.

Fitch cut Beazer one notch to "BB-minus," three levels below investment grade, from "BB."

The company remains on review for a further downgrade due to its inability to report earnings for the quarter ended June 30 in a timely manner and because Beazer may be required to negotiate some consent waivers with its bondholders, Fitch said in a statement.

"There is uncertainty as to the financial impact of Beazer's potential liability as well as regulatory fines related to the violations found in its mortgage subsidiary," Fitch said.

Noone can stay in business with a 68% cancellation rate, that is just unsustainable. That's not to say that cancellation rates will stay that high. They will most likely improve going forward.

However, they are losing money hand over fist, a securities commission probe has shown some of their practices to be criminal, the rating agencies are calling their credit junk (and we know how far behind the 8-ball they are) and for the percentage of the public that pay attention to such news their name is now Mud. I think we have a new front-runner.

Homebuilders - who'll be the first to go?

As the US Housing market slumps further homebuilders continue to do it tough. The only thing missing from the scenario so far is a major player going belly-up. The last 24 hours have thrust a couple of candidates to the fore for that honor:

Fitch Rates Standard Debt As "Junk"
Monday September 24, 6:00 pm ET Fitch Issues "B" Rating for Standard Pacific Debt Offering Amid Challenging Housing Market

NEW YORK (AP) -- Fitch Ratings assigned a "junk" rating to homebuilder Standard Pacific Corp.'s proposed $100 million convertible debt offering.

The ratings agency assigned a "B" rating, which means the debt is speculative and subject to very high credit risk. The non-investment grade rating also means Standard Pacific will have less favorable borrowing terms than if the debt received an investment grade rating.

Fitch also noted its "Negative" outlook for the company, due to "a more challenging outlook for homebuilders during the balance of calendar 2007 ... and probable future weakening in the housing market in 2008."

In aftermarket trading shares of Standard Pacific shares fell 1 cent to $7.04, after falling $1.05, or 13 percent, during Monday's trading session.

On the positive side at least Standard Pacific was able to get funding. However, will it be enough to sustain them through what could be a very prolonged housing downturn or are they just putting off the inevitable? The company also announced that they will eliminate the quarterly cash dividend. Desperate times call for desperate measures. In other news just out today:

Lennar posts big quarterly loss on write-offs, adjustments

WASHINGTON (MarketWatch) -- Lennar Corp. (LEN) reported a net loss of $513.9 million, or $3.25 a share, for the third quarter ended Aug. 31, a reversal from the prior year's net earnings of $206.7 million, or $1.30 a share.

The Miami-based home builder's quarterly revenue plunged to $2.34 billion from $4.18 billion in the third quarter of fiscal 2006. Analysts, on average, had been looking for revenue of $2.39 billion, according to estimates compiled by Thomson Financial.

Valuation adjustments and write-offs of option deposits and pre-acquisition costs, goodwill and financial-services notes receivable totaled $856.8 million in the latest quarter, equating to $3.33 a share, Lennar said.

On an adjusted basis, gross margins on home sales narrowed to 14.0% from 19.5%, primarily reflecting higher incentives. Home deliveries dropped 41% in the latest quarter, with the average sales price of homes delivered off 6%.

CEO Stuart Miller said Lennar's cut the size of its work force by 35% and expects to make further reductions during the fourth quarter

In short, very ugly stuff, the company will probably cut back half it's workforce before it's done. Considering that housing is going to get worse before it gets better how long can these guys weather the storm? I'm convinced we'll see a major homebuilder go under before the storm passes.

Homebuilders have been doing it tough and they are going to do it tougher. With Existing Home Sales and home prices today. New Home Sales and a shocker earnings report expected on Thursday from KB home (KBH) it's shaping up as a nasty week for homebuilders.

Turning point for US Home Builders?

US Home Builders have been taking an absolute hammering second only to some mortgage providers such as AHM. So is it time to reassess? Are there bargains to be had? According to Michael Shedlock of MGETA, and I whole heartedly agree, absolutely not:

Bankruptcy is one way out for these homebuilders to stop the lawsuits cold turkey and walk away scot free of what some might say would be their moral obligations. No doubt some of these builders will soon find that option attractive. The only real question about bankrupt homebuilders is "Who's first?" As for "Who's to blame?" the list is long but start with the Fed and proceed to Congress and this administration.

Mortgage brokers are dropping like flies so it's only natural that Home builders be next. As Mish notes, it's just a matter of "Who will be first?" Click here for the full article.

So much for the Spring selling season

D.R. Horton reports 40% drop in quarterly orders

By Steve Goldstein

Last Update: 7:08 AM ET Jul 10, 2007

LONDON (MarketWatch) -- D.R. Horton Inc. (DHI) reported that orders for the third quarter ending June 30 dropped 40% to 8,559 homes, or down 47% to $2 billion by value. The cancellation rate at the Fort Worth, Tex.-based builder was 38%.

"Market conditions for new home sales declined in our June quarter as inventory levels of both new and existing homes remained high, and we expect the housing environment to remain challenging," said Chairman Donald R. Horton in a statement. It expects a profit before impairments, but a loss after including those impairments, during the June quarter.

Another US builder feeling the pinch

Negative housing data pile up
Meritage reports ugly preliminary results, but builders up after jobs report

By John Spence, MarketWatch
Last Update: 2:34 PM ET Jul 6, 2007

BOSTON (MarketWatch) -- Meritage Homes Corp. said its preliminary home orders fell 28% and its cancellations rose in another sign that builders continue to struggle against a slumping housing market with scant relief seen in the near future.

The Scottsdale, Ariz.-based company (MTH) said Friday that its preliminary second-quarter home orders fell 28% from a year earlier to $502 million, while its cancellations rose to 37% of gross orders, up from 32% in the year-ago quarter and from 27% in the first quarter of 2007.

"Weak demand and high inventory levels have increased competition among home builders, pressuring margins despite reductions in new home starts, lot supplies and operating costs," said Chief Executive Steven Hilton, according to a Meritage statement.

Still, shares of Meritage and other builders traded higher Friday following a solid U.S. employment report. See Economic Report.

Meritage said it expects to book additional pretax charges of between $75 million and $80 million for the quarter as a result of inventory impairments and land-option write-offs. Also, it said it anticipates taking about $28 million in charges related to goodwill and other intangible assets in its challenged Florida-based operations.

The charge "belies [the] view that heavy usage of land options makes Meritage a relatively safer home builder for investors," wrote A.G. Edwards analyst Gregory Gieber in a report to clients Friday.

In early June, Meritage warned that April and May sales had been weaker than expected and backed away from its previous earnings outlook for 2007. On April 25, when the company reported first-quarter results, it had predicted full-year net income in the range of $2 to $2.50 a share, but the market has worsened since then. Analysts polled by Thomson Financial are looking for profit of $1.15 a share, on average.

The quarterly earnings season is off to an unpleasant start for the residential builders, with some of the stocks recently hitting 52-week lows.

In late June, KB Home (KBH) said it swung to a loss as deliveries dropped 36% from the previous year and prices also fell. Another large builder, Lennar Corp. (LEN), also suffered a quarterly loss, blaming impairment charges and growing inventories of homes for sale which pushed prices lower and further squeezed margins.

Many signs are pointing to a housing market that may worsen further before it improves. Economists say the market still needs to burn off excess inventory created when speculators fled the market as the mood shifted in 2005. Problems in the subprime-mortgage market and rising mortgage rates also continue to weigh.

Data paint bleak picture

On June 25, the National Association of Realtors said sales of existing homes in May were down 10.3% from a year earlier. Meanwhile, the resale inventory rose to an 8.9-month supply, the largest in roughly 15 years. The next day, the Commerce Department estimated that U.S. new-home sales fell 1.6% in May, the 18th straight month that sales fell from the previous year's levels.

Earlier this week, the NAR said pending sales, seen as a leading indicator, fell 3.5% in May. Banc of America Securities analyst Daniel Oppenheim said the data indicate inventories could rise even more. He estimated inventories of existing homes for sale could approach 10 months of supply, "likely at or above the peak in the late 1980s [and] early 1990s" -- during the previous housing-market downturn.

"We think a lower level of construction activity is necessary to work off the inventory overhang and eventually lead to price stability, since demand is not expected to improve near-term as price declines and high inventory levels depress buyer confidence," Oppenheim wrote in a report.

"We think that this correction will be equal to or, more likely, greater than that in the early 1990s," said Gieber at A.G. Edwards."It seems that home builders' efforts to remove inventory have failed to ignite the market and instead, the psychological factors of home buyers are playing a dominant role on the market," wrote Lili Zhang, an analyst at independent research firm Wall Street Strategies, in a report this week.

Buyer confidence has been further shaken by the trouble in subprime mortgages, which are designed for customers with weaker credit histories. Foreclosures are up, and the subprime mess has spilled over into hedge funds that made bets in riskier mortgage-backed securities.

"The home-building industry is in a severe recession, the subprime loans created a potentially major psychological problem for investors, and now the related hedge-fund debacle is in the news every day," wrote A.G. Edwards Chief Market Strategist Al Goldman in commentary earlier this week.

Additionally, the critical spring selling season has been a bust for builders despite "aggressive price," Wall Street Strategies' Zhang said.

"Taking all these factors into account, we feel the housing market will not bottom out until the end of 2007, or early 2008," the analyst added. "The housing market is cyclical in nature, and a housing downturn could easily last for over two years, and would not fully rebound [until] another two years later."

For whom the bell Tolls

So Paulson was right, we've seen the bottom in the housing market with new home sales up 16% in April. However prices were down 11% indicating builders were discounting to get rid of stock. So is Paulson dreaming or is he on the ball? Difficult to say when the data is so volatile the statisticians have trouble confirming whether numbers were actually up or down for a particular month. They say we need 5 months of data before we can see a new trend emerging so it's probably wise to keep the champagne on ice for a while. Forget about house sales for a minute and let's take a look elsewhere for a clue to the health of the housing market.

How about Toll Brothers Inc. (TOL) whose 2Q07 profit plunged 79% to $0.22 a share from $1.06 per share in the previous corresponding period? The result included pre-tax land write-downs of $119.7 million, or 44 cents a share, CFO Joel Rassman added that:

"Given the uncertainty surrounding sales paces, and market direction and, thus, the potential for and size of future impairments, we are not comfortable giving full earnings guidance at this time,"

So it seems TOL doesn't share Paulson's optimism. Analyst Daniel Oppenheim of Banc of America Securities said he expects additional pre-tax land impairments of $225 million this year, based on continued declines in margins.

You can't really blame the builders for not being more forthcoming with their forecasts since the effect that tightened lending standards will have are yet to be fully felt. Whilst the company believes less than 2% of its customers used subprime loans the CEO commented that:

"the impact of stricter lending standards arising from problems in the subprime market is negatively affecting affordability at lower price points," "This, in turn, can impact the entire 'housing food chain,' including some of our potential customers' ability to sell their existing homes."

On a brighter note and lending support to Paulson's claim that the corner has been turned in the housing market Toll's cancellation rate fell to 18.9% in 2Q07 from 29.8% in 1Q07.

Silly season

At the height of the tech boom in 2000, it seemed that even the flush of a CEO's toilet could send the shares of a tech company higher. We have seen similar movements in speculative resource stocks of late particularly uranium. But unwarranted movements in share prices are not the sole domain of speculative issues as last Thursday in New York showed. Dallas Federal Reserve president Richard Fisher has joined the chorus that believes the effects of the subprime mortgage fiasco haven't yet fully played out.

This might sound like negative news but apparently not. The Philadelphia housing sector index gained more than 3%. Leading the charge, Countrywide Financial Corp. (CFC) rose 3.2%, even after its earnings missed estimates. Woes in the subprime market, it said, subtracted 22% from its profits. Elsewhere Beazer Homes USA Inc. (BZH) rose 5% even after warning that

"it has yet to see any meaningful evidence of a sustainable recovery in the housing market"

and withdrew its outlook for the year. Ryland Group Inc. (RYL) said that it swung to a loss in the first quarter, that it does not expect to meet its prior earnings guidance and couldn't provide new forecasts. No wonder the stock rose 4.3% on such upbeat news.

Analyst's estimates of around 3% growth this quarter are looking overly pessimistic as current reports indicate earnings growth of 6-7%. Some market commentators believe that the better than expected results are the reason for the market's rally. However that would imply that markets had built some negative expectations into stock prices - hard to believe as indexes set new highs. In fact the market barely moves on the release of bad news whilst neutral to mildly positive news can produce 100+ point rallies. Another sign that silliness is well and truly back in season and from a contrarian point of view raises a big red flag.

Tracking the US Housing meltdown

As mentioned in a post last week US homebuilder D.R. Horton Inc (DHI) said sales orders had slumped 37% from a year ago for the quarter ended March 31st 2007. Yesterday the company announced an 85% drop in profit to go along with the slump in sales for the quarter. And whilst some are still hoping for a rebound in sales for the Spring selling season D.H. Horton Chief Exceutive Donald Tomnitz doesn't sound so optimistic stating:

"We're still faced with a liquidity crisis in the mortgage industry and I think that's going to get worse over the next two to three quarters as opposed to better,"

The company also announced that they had cut just over 25% of their workforce from last spring.

Also this week another large US homebuilder, Pulte Homes Inc. (PHM) announced that new orders fell 21% in 1Q07 from a year ago and expected their net loss to be in the range of 34 - 38 cents per share, a lot worse than their previous estimate of between break-even to a loss of 10 cents a share.

From the evidence so far 1Q07 earnings are meeting or slightly bettering expectations of around 7.5% growth across the S&P 500 universe of stocks and whilst it represents a significant slowing in earnings from the previous 13 quaters of double digit growth it is by no means disastrous. However it is a little early to guage the full effect of the mortgage lenders and homebulders on other sectors but expect the earnings infection to spread as the year progresses.