NEW YORK -(Dow Jones)- In the housing debacle's latest twist, some builders are competing with new homes - even their own construction - that are being foreclosed on and resold for a song.
New home buyers haven't traditionally been big defaulters, and the shift is another blow for the sector crippled by the worst downturn in decades. To compete with the already bloated housing inventory, builders are cutting prices and offering freebies and financing specials, stressing weakened margins. Foreclosures, meanwhile, typically go for below market price, grabbing attention from what few buyers remain in the marketplace.
"Mortgage foreclosures were never viewed as being competition for a new construction," said Lawrence Angelilli, senior vice president, finance for Centex Corp. (NYSE:CTX) (CTX), the nation's third-largest builder by 2007 revenue, at a recent conference. "Now you do have this first-time phenomenon of massive foreclosures that are coming through on new construction."
Neither builders nor lenders track the foreclosure rate in active selling communities, and so the exact scope is unclear, according to multiple sources. John Burns, a California-based housing consultant, considers it a "very significant problem."
To be sure, some people don't think the trend is that widespread. But, with mounting foreclosures dumping even more homes - both new and existing - onto the market, it will likely grow. Credit Suisse estimates new foreclosures will peak at 1.69 million this year, with another 1.14 million expected in 2009.
Centex (NYSE:CTX) declined to comment for this article. Hovnanian Enterprises Inc. (NYSE:HOV) (HOV), the sixth-largest builder, has seen "a couple of instances."
"We'd rather not have foreclosures at all, let alone at our communities," said Ara Hovnanian, president and chief executive. "It's just part of the marketplace at the moment, and our company, and others, are just dealing with it."
Industry watchers say new foreclosures are most prevalent in larger and multiphase projects, particularly in bubble markets including as Las Vegas, Phoenix, California's Inland Empire and Florida. That's where companies massively overbuilt as speculators, taking advantage of loosened credit requirements, raced to buy and resell homes for a profit, only to be trapped in the housing crash. Non-owner occupied borrowers looking to flip fuel a lot of foreclosures, Centex's (NYSE:CTX) Angelilli said.
Foreclosures sell for 20% below market price - which has already plummeted about half from 2006 in many hard hit areas - and are said be a significant volume of home sales, according to Daniel Oppenheim, a Credit Suisse analyst.
"In Las Vegas, if the property is priced well, especially with a foreclosure, there is a scramble," said Walter Czerkies, with RE/MAX Associates, who has shown "brand new homes."
Foreclosures, which aren't usually maintained, can drag down an entire neighborhood's value, hurting builders if construction - especially on the same floor plan - remains under way. Some builders say they've cut prices enough and customers like the new-home warranty, and so they're willing to wait until foreclosures clear.
Others respond by trimming prices further - even below cost - hurting the bottom line and fueling impairments, which have already passed $24 billion. In problematic areas, some developers have slowed and even paused construction until the market rebounds.
There are more divine solutions. "You hope and you pray that as those foreclosure signs come up, that people start buying them as quickly as possible, (and) you're no longer competing," said Michael Kahn, senior managing director of Michael P. Kahn & Associates LLC, consultants to home builders and capital sources.
-By Dawn Wotapka, Dow Jones Newswires; 201-938-5248; dawn.wotapka@dowjones.com
(END) Dow Jones Newswires 06-26-08 1412 Copyright (c) 2008 Dow Jones & Company, Inc.
