‘The Steepest Decline In Our Memory’
The Asbury Park Press from New Jersey. “Kara Homes’ bankruptcy filing has left scores of customers and creditors wondering if the troubled builder is going to complete the developments it has under construction and make good on its debts.”
“East Brunswick-based Kara Homes, one of the biggest home builders in Monmouth and Ocean counties, filed for Chapter 11 bankruptcy Thursday night. Under Chapter 11, Kara will be allowed to remain in business, and creditors’ claims will be frozen while it comes up with a reorganization plan and tries to regain its footing.”
“Experts said Kara is an example of what can go wrong to an aggressive builder when the real estate industry collapses. After paying top dollar for land, it is not able to sell its homes at a high enough price to pay off its debts, they said.”
“‘This was part of what we were looking for, and I don’t use the word ‘bubble’ — but a housing sector slowdown,’ said David H. Downs, a professor at Virginia Commonwealth University School. ‘The question is, who was going to be overleveraged?’”
“The fallout from Kara’s bankruptcy is far-reaching. The filing lists thousands of creditors. Some homeowners said they have been left in the lurch. Ira Cohen had hoped the builder would complete the clubhouse, swimming pool and landscaping to the entrance of the development. ‘We’re concerned whether or not they’re going to complete this development at all,’ Cohen said.”
“Ellen Voltolino of Dover Township put down $12,500 on a Kara house in in Lakewood with the caveat that the money would be returned if she couldn’t sell her old house, she said. Her house was on the market from January to June but didn’t sell, she said. She asked for her money back but hasn’t received a response.”
“‘It’s like they stole my money,’ Voltolino said. ‘I don’t have $12,000 to throw away in the garbage.’”
“Some customers are not waiting to see if Kara makes good on its debts. Ocean Township lawyer Douglas Katich said Friday that he would file civil lawsuits on behalf of several customers charging company officials with fraud, a charge he said would be appropriate ‘if they are soliciting deposits when they knew the business wasn’t viable.’”
“Kara might find other developers willing to buy some of its undeveloped land. Home-building giant Hovnanian Enterprises of Red Bank has looked at a number of Kara’s parcels and has purchased one in Shrewsbury, said J. Larry Sorsby, Hovnanian’s chief financial officer.”
The Star Ledger. “Faced with rising inventories of unsold homes, Hovnanian Enterprises said it plans to ax executive and field jobs to improve its bottom line and weather what the Red Bank-based home builder describes as ‘the steepest decline in new-home sales in our memory.’”
“In an internal memo to employees, CEO Ara Hovnanian said an unspecified number of staff reductions were necessary in order ‘to remain healthy,’ as the nation’s eighth-largest U.S. home builder grapples with the broad downturn plaguing its industry.”
“‘In many locations, including corporate headquarters, we have been forced to face the fact that we no longer have enough work for all of our Associates,’ Hovnanian wrote. ‘We consider this action to be a last resort.’”
“News of Hovnanian’s job cuts comes one day after East Brunswick-based Kara Homes, one of the state’s largest private home builders of condominiums and active adult communities, filed for protection from creditors under Chapter 11. ‘The company ran out of cash,’ said Kara Homes bankruptcy attorney David Bruck.”
“Bruck blamed the builder’s financial meltdown on ’slowing sales..brought about by a slowing economy.’”
“‘I believe it was the economy, the market itself, and some lack of projecting (by Kara Homes) to some degree,’ said Anthony Garofalo, president of Vintage Contracting of NJ in Belmar. Other factors, such as a slowdown in sales and massive incentives the homebuilder was offering, also contributed to the bankruptcy, he said.”
“In its memo, Hovnanian told its employees it is working to renegotiate the terms of some of the company’s land options, in the hope of reducing purchase prices or extending the time periods in which they agreed to exercise them. Builders can either own their land outright or hold options to buy land, which are easier to walk away from, according to analysts.”
“Typically, when builders take write-downs to walk away from land options, it is a sign that either land values are falling or demand in that market has dried up, said Robert Curran, a senior housing analyst at Fitch Ratings.”
OK, stand back as this is where Hovnanian and Toll Brothers are supposed to swoop in and buy up these weaker competitors. Let’s watch those checkbooks appear.
Too early in the downturn, not going to happen. What’s the point of acquiring more capacity if you can’t turnover your own inventory? As we approach the trough, expect acquisitions. Only a gullible glutton will acquire now.
I think I detected a bit of sarcasm in Ben’s tone…
So did I.
Yes, but if the big boys are just going to stand back and watch this hit the ground, doesn’t that drive down land prices even further? IMO, nobody is going to buy this land except at fire sale prices, which is contrary to the bullish corporate communications these public builders have put out during the boom. Wall Street has been had.
That’s why some of the builders and their Wall Street cohorts set up those off balance sheet joint ventures; so, they can *manage* the impact of falling land prices.
Here on the North Shore of Boston, there are building lots being solf now, without the “builder tie-in”, but the prices are still very high at between $350k - $500k for lots ranging from 1/2 - 1 acre. I suspect though, that the big house covenants are still in place.
You wouldn’t want someone building a terribly small 2,800 sq ft home next to your palace.
I might read the bankruptcy docket to see if they get a valuation consultant retained right away. That would be a clue.
We tend to focus on homebuilder bankruptcies; let’s not lose sight of the flopper bks (Casey) and the condo-convert bks like we read about earlier this week; the name and place escapes me; need some help.
much like countrywide or wamu buying up encore, first franklin, or option one, yuuuuuuuuuuuuuuuuuck!!!!!!!!!!!!
And so it begins.
Yep…dominos (made of granite and steel…)
stainless steel, please
OT:
Speaking of which, am I the only person who
a) cooks in my kitchen and
b) actually cleans said kitchen
that finds Stainless Steel appliances ridiculously hard to keep clean and mark-free?
Could appliance makers start making enamel cookers, fridges etc… in bright attractive colours instead?
The fabulously named SMEG
http://www.smeguk.com/Menu.htm
make some really cute fridges in all sorts of great colours - but as far as I know they have no outlets in the USA.
Enamel is a lot easier to clean than brushed SS.
These new “coloured” appliances will be the next Harvest Gold fridge. You can buy one, if you don’t mind replacing it in 5 years when you come to your senses and realize how ugly it is.
Speedingpullet,
you will be pleased to know Domino mag, and Elle Decor both think Stainless steel and granite are just too tedious and dated for words. Both are talking up white, and more normal-sized appliances as well , not those monster-sized “professional appliances”.
I got a stainless panel dishwasher recently to replace my 15 year old kitchenaid that had wood panels which matched the cabinet.
It is nearly impossible to keep it looking nice. You have to use special “Stainless Steel” polish.
In my youth I spent a fair amount of time working in restaurant kitchens. The lowest guy on the totem pole spent a lot of time cleaning the acres and acres of Stainless Steel surfaces. The last house I rented had a Viking stove and stainless appliances. I like to cook and cook a lot. It was a pretty good stove to cook on but I soon began to feel that I had become the low man on the totem pole. The Viking stove had a two to one cleaning to cooking ratio. Touch a stainless steel surface and you leave fingerprints.
PS; I live down the street from Hovnanian HQ. About three months ago they finished construction and moved into a huge fancy new building on the water here in NJ. Their old HQ was much a smaller / plainer building which they rented. Now they are sending out e-mails to their employees telling of pending layoffs and urging them to keep working on ways to cut back on costs.
http://tinyurl.com/jsta9
- “Kara Homes’ bankruptcy filing has left scores of customers and creditors wondering if the troubled builder is going to complete the developments it has under construction and make good on its debts.”
The answer of course is NO.
“Builders can either own their land outright or hold options to buy land, which are easier to walk away from, according to analysts.”
Suppose in one market, a builder bought $1m worth of land, and in another market, he bought $1m worth of options. Now the market turns against him. Does he come out better in the market where he has to hassle with selling his $1m worth of owned-land at a reduced price, or in the market where he “easily walks away from” his options?
I wonder how many of land sellers either had the money spent already or had it on their “books” as a sale/receivable.
$1 million of options on land would be a lot more land than $1 million of land.
If they bought $1M in land, they can sell for market value, and take a loss on the difference. If they sold it for $600K, they’d recognize a $400K loss.
Options, on the other hand, would be directly written off. So you’d see a write-off for $1M.
If they bought $1 million in land, and sold it for $600,000 they’d take a $400,000 loss. If they bought options on $1 million in land for $200,000, and it fell in value $400,000, they’d write off the option and take a $200,000 loss. With the land, you can lose the full value of the land, with the option you can only lose the full value of the option.
“Faced with rising inventories of unsold homes, Hovnanian Enterprises said it plans to ax executive and field jobs to improve its bottom line and weather what the Red Bank-based home builder describes as ‘the steepest decline in new-home sales in our memory.’”
I expect that HOV will see a big stock price rally next week on the news that they are downsizing in order to become more competitive.
The weekly guest on PBS’s ‘Nightly Business Report’ picked Hovnanian as a buy yesterday evening (US time). I think her name was Garzarelli.
Looks like a long ways to $5 to me:
http://finance.yahoo.com/q/bc?s=HOV&t=5y&l=on&z=m&q=l&c=
Then again, perhaps there is a mid-term “shoulder” formation to profit from (but I’m not techie).
Her claim to fame was predicting the 87 crash. After her 15 minutes were up, she hasn’t been newsworthy ever since.
“Typically, when builders take write-downs to walk away from land options, it is a sign that either land values are falling or demand in that market has dried up, said Robert Curran, a senior housing analyst at Fitch Ratings.”
Since demand is drying up pretty much everywhere where homes are sold in the USA, would it be going out on a limb to guess more options write-downs are in the cards?
Nothing brings down home values faster than BK and foreclosures.
Forget incentives, builders need to just cut the price of the homes to move them. Sellers need to get realistic about pricing if they want their home to sell. Those holding on wishing prices will return…. good luck. I know you don’t want to give your home away, but if you become to greedy, you just might end up giving it away anyhow….. to the bank.
“Forget incentives, builders need to just cut the price of the homes to move them.”
An incentive is a stealth price cut, and the sales statistics I have read suggest they work pretty well: New homes have been selling far more quickly, and only at a slightly reduced price (before accounting for the value of incentives), to comparable used homes, which seem to sit forever these days. I am not clear at what point price reductions become a better strategy than incentives — is it when we run out of people who want to own luxury automobiles purchased with mortgage loans?
I think when they run out of buyers is when they will have to cut prices. They are trying to sustain high prices, but as they slow down, they will be able to sell houses cheaper. They might even realize, lower price, sell more of these cheaper built homes and I can make more money. All it takes is ONE builder to realize this. The rest will have to compete. That is how the market works.
What I mean by cheaper is that building costs and labor go down. It also seems like land is being sold off cheaper. This means the actual cost of building a home drops which means bigger margins, which means they can cut margins and move more product. Decisions decisions….
Or, after cashing in on the loot some can file BK now and go away; come back during the next uptick, new brand and all; the emerging rough and tumble competitive landscape may prove to arduous a journey for some of the smaller HBs.
I would think that price cuts are immediately better, because lower prices opens up the pool of buyers that can be marketed to.
less money down
lower loan amount
lower tax bill
lower closing costs
One phrase I’m hearing a lot lately, and am sick of already, is “giving their home away.” First off, it’s a house, not a home. Second, while some (relatively) recent buyers may find themselves upside down or taking a true loss, I suspect a lot of sellers are people who have seen a tripling of their house’s value-on-paper and are hoping (unrealistically) to lock in that fantasy appreciation. As I said in a previous thread, just because you thought you were getting 300% appreciation but only realized 200% doesn’t mean you “took a loss.”
I don’t know. Given how many HELOCs were taken out over the past 3-5 years, its quite possible that there will be a lot of sellers taking actual losses even if they bought in the late 1990s. While there are some people still fixated on selling for what the home appraised for in 2005 solely because they think that’s what it should be worth–but a lot them only had their home reappraised that recently so that they could borrow against their “equity.”
When they say “We’re not going to give it away for free” they comparing the price that they would get compared to the highest price any house in the surrounding area ever sold at. They “deserve” to get just as much if not more because their house is better due to _____, ______ and ________.
The comment by AJH, “and so it begins,” speaks volumes. Kara, like most homebuilders, has focused its business plan on cashflow. That is the key reason we see the slow reaction in many instances to the market change by them in terms of scaling back construction of new residential units. They must build in order to survive. The reason is simple. They borrow from construction lenders and a key line item in their construction loans is “overhead and profit.” Quit building and you no longer receive as part of the construction loan proceeds, “overhead and profit.”
My sense is KARA will simply be the first in a large number of homebuilder bankruptcies, followed shortly by the disappearance of a number of construction lenders. This downturn is going to be so much worse than we saw in ‘79 and again in ‘90.
I think the new new business plan for the big boyz is forestalling bad news and keeping the stock price pumped up for as long as possible…
You mean like in 2000 with Enron and Worldcom?
Exactimento
You think there might have been any improper stuff going on, like conversion by executives for personal use, etc.? It seems strange to me that a builder goes down so early in the cycle.
txchick57. Come on. Who do you think we are dealing with. Would a major homebuilder, with an ego the size of Texas, ever resort to using company assets for personal use? Brings to mind the comment from one creditor in a bankruptcy proceeding in the early ’80s. It went something like this. “I knew the company was in trouble when they bought their second airplane.” These guys are all about image. They forget a time honored comment my father once told me. If it flys, floats, or fornicates, it is cheaper to rent.
Tyco again?
‘I knew the company was in trouble when they bought their second airplane.’
I recall one general contractor, that upon realizing default was coming, immediately gave the president and vice president a 100% raise, in order to pull as much cash out as possible.
The trustee usually gets those back.
I don’t know anything about this company. It’s in NJ. If it were in Texas, I’d say it’s a lock there was major chicanery going on.
Homebuilders are not the only ones. I think the new car dealerships’ have egos the size of Alaska. In my hometown, the owners of the new car dealerships are engaged in a sort of Cold War to see who can build the biggest house. They go in 3 or 4 year cycles or so. When I bought a new car in ‘97 the salesman told me that the owner had recently built a mansion with 22 rooms. That was almost a decade and at least two cycles ago, so there is no telling how many rooms these Cold War warriors have escalated to by now.
I thought the same thing.
After the runnup of the past five - ten years, one would think the builders would have at least a year or two of cash in reserve.
They do. Its just not in their books, its in their pockets.
Exactly. If Toll Bros. goes bankrupt, Bob Toll’s lifestyle remains the same.
“This downturn is going to be so much worse than we saw in ‘79 and again in ‘90.”
Another independent data point comes to the same conclusion…
I lost my shorts in the 90 crash in CA and that was small change compared to the degree of bubblicity this time round. Between the loose lending, corrupt appraisals, flippers, Fed policies, etc…it is going to be national (and to some extent even a world) disaster.
The tide has even turned here in the “last redoubt” of Seattle. Since we are at the tail end of this whole ponzi scheme, this signals that the whole tower of cards is now shaking.
Now….we wait.
BTW…how is Gilligan?
“Kara, like most homebuilders, has focused its business plan on cashflow. ”
Ummm… isn’t this how lots of households have done their personal finances?
When I see all of these luxury cars rolling down the street I have to believe that most of these households have cash flowing in, cash flowing out.
Since I personally do not live this way, I have a hard time understand how people find it so attractive to live at their maximum cash flow ability. I am not rendering a judgement on this lifestyle, I am just saying I do not understand it.
When was the last time you saw a low risk investment that outperformed the true rate of inflation (6-7% using the pre-1995 CPI)? Some people think it is better to spend the money than lose it to inflation.
That makes no sense. I know its the way some people think, but they are in serious denial if they think things will work out well for them by using that “plan”. They won’t be able to just stop spending once the money runs out. Remember, they’re going to be hit by inflation anyway. Rather than having savings reduced by inflation, they’re going to simply be bankrupt.
And when Fed reduces rates so that savers can only get less than 1% in low-risk returns, they start to feel like big suckers for saving. In retrospect, the moves of the Fed induced exactly the behavior we saw: It rewarded indebtedness and made spenders and borrowers feel smart; it made savers feel like a Warner Bros cartoon in which they turn into a giant lollipop.
I think it is better to save in real money than to lose to inflation. Luckily, the PPT is making that easier by keeping the price of gold low in “dollars”, as long as they can. I think it’s a good idea to take advantage of their “fire sale” while it’s still running.
Expect more bankruptcies and people being left in the lurch. The smaller builders are not equipped to manage a major downturn, they lack credit extensions, proper cash management abilities, price-demand analysis, sales forecasting and so on. Poor bastards, they blind-sided themselves during the expansion. They actually believed the good times would last forever.
I wonder if this slow down will bring a rise to custom home builders that only do 5-10 homes per year.
not to worry, homeowners! moody’s forecasts that all will be well in 2016.
read this latest aol welcome screen link, folks, to see the next round of malarkey we will be fed regarding the misty, but essentially ‘brite and healthy’ future of the american housing market. it is typical of the strange, orwellian aol-ian shop-till-u-drop-and/or-die (or go to jail), mass-hypnosis that is the sine qua non of this bubble.
http://tinyurl.com/oberj
bad link, sorry!
http://tinyurl.com/mpuoq
“‘I believe it was the economy,”
Sorry dude, since all the talking heads on CNBC and Bloomberg tell us the economy is just dandy, your assesment must be wrong.
Excellent point. Imagine the losses when there is a real downturn.
Define “real”.
I am puzzled why the stock market continues to go up in spite of what is obviously a cratering in many real estate markets and a severe stall - inventory buildup in others. I’m guessing HELOC withdrawals continue to prop up the economy while most people continue to spend their entire salaries on consumption.
Like I said, I don’t have a good explanation.
How about manipulation?
There’s an election coming, you know! Also, since so many of us believe there will be a stock market crash as well, perhaps the PTB want to drive up stock prices, pulling Joe & Jane Sixpack in since they don’t want to miss out on the new bubble…and when all the sheeple are in, pull the rug out. That’s how the rich make money.
“Ira Cohen had hoped the builder would complete the clubhouse, swimming pool and landscaping to the entrance of the development.”
That comment is too funny. Kara is in bankruptcy, with their assets frozen and he thinks they are going to spent what little money they have left on a clubhouse, which they will get zero money for.
What little money they have left will go to buy somebody’s BMW 5 series, the stretched version.
I never liked the idea of putting money down on a house that’s not built yet, especially as part of a development with yet-to-be-built clubhouses, etc.
Like ice cracking under a skater’s feet over an icy pond on a cool foggy Spring morning, the credit cruching crippling effect of this housing downturn is going to ripple throughout the economy from consumer, to builder, to supplier, to banker, to governments, and back to consumers; we are all going to get soaked!
Some worse than others.
“Builders can either own their land outright or hold options to buy land, which are easier to walk away from, according to analysts.”
Apparently there is a third way. Barrons had an article last week about how many builders were using off-the-books joint ventures to borrow money and buy land. If the JV’s get in trouble, as some have in Florida, then the builder takes a hit. Between options and JV’s, Hovnanian has 33% of it’s book value at risk, then there is the problem of write-downs on the land they own….
OT bulls n bears
one guy mention real dollars and the DOW being 20% off high-they all laughed at him
Yep, nobody ever talks about the NASDAQ which took the biggest plung by far and has never recovered.
Just show them this.
I’m sticking to this
SWZ
“one guy mention real dollars and the DOW being 20% off high-they all laughed at him”
Just like no one looks at the decline in home values (or most any other asset) in real dollars. The human brain, such as it is, seems to be stuck on nominal dollars.
People in traditionally high inflation economies, like Brazil, are very adept at distinguishing between real and nominal prices and do it quite naturally. A nice bout of hyperinflation in the U.S. would at least have this one positive effect.
Have a look at Mish’s site:
Kara Mia
Kara was touting their profitability just one month ago:
“At Kara Homes, we’ve just completed the two most profitable quarters in the history of our company,” Karagjozi said. “We’ve taken advantage of this temporary lull to reevaluate our business plan, streamline our operation and prepare for the market recovery which some experts are predicting will begin either later this year or in the first part of 2007.”
Fraud indeed.
From Mish:
Just the Facts Maam
On 9/13/06 Kara was bragging about completing “two most profitable quarters in the history of our company”.
On 10/06/06 Less than one month later Kara filed for bankruptcy protection.
If anyone thinks they are going to get a huge advance warning on some of these “low PE low risk” homebuilders please consider the above facts.
Point noted Mish!
Wow.
memory- LIRah’s and other went back to 1968 !
RE has done inflation + point 7% since cavemen days
that’s w hud,fanny ad subsidies galore
To Do a Kara:
http://www.xanga.com/home.aspx?user=russwinter&nextdate=10%2f7%2f2006+23%3a59%3a59.999
Nice, our first builder goes belly up. I’m so happy to see that and can’t wait for the rest sure to come. After this specuvestor fueled mess fully unwinds, I will be able to buy a house here in the SF bay area. It’s a shame to have to root for peoples financial ruin but that’s exactly what I am doing. And I believe that’s what’s going to happen. Someone on this group said everyone is going to feel this. Don’t think so. I’m not going to feel it. I didn’t buy 20 investment properties in Medesto. I bought zero investment properties. Houses aren’t like stocks. They aren’t liquid. At least you can take your medicine with a stock and sell. With a house, what do you do when you can’t sell it? You still have to service a mortgage and pay taxes. Go bankrupt is what you do. I’ve been sitting here renting and saving through the entire bubble. I can feel the pain and pressure out there. Inventory high, for sale signs everywhere, unattended open houses, volume low, builders going belly up. Sweet.
Life is good! Happy times! Burst bubble burst!
Right on, Baby!!
We are still in very good shape financially and are still very solidly profitable,” Sorsby said. ”
“A firms income statement may be likened to a Bikini-what it reveals is interesting, but what it conceals is vital.” -Burton Mailkiel