9 Tough Breaks For The Housing Industry In 2009

Every business gets hit with a piece or two of bad news in a normal year. But builders again hit numerous obstacles to profitability--and just business survival--this year in an onslaught that took out many weakened players and continues to challenge the rest. Here are our 9 tough breaks for builders in 2009.

1. Foreclosures
Foreclosures--and distressed sales--continued to rank as one of the biggest business challenges of the year in 2009 for builders and, unfortunately, are expected to be a plague in 2010 as well.

The numbers are sobering. In October, for example, more than 332,000, or one in every 385 housing units in the country, received some sort of foreclosure filing (default notices, scheduled auctions, and bank repossessions), according to California-based RealtyTrac. That figure, while down slightly from the previous month, was up nearly 19% from the same month in 2008.

The builders who could fight back did, by redesigning their homes or options to compete. They marketed the economic value of their new homes' greater energy efficiency compared to existing houses. Many also focused on the entry-level market, where buyers could take advantage of the first-time buyer tax credit and didn't have to worry about selling a current home.

2. Appraisal Problems
New appraisal rules introduced in 2009 sucker-punched builders who were already trying to get off the mat. Even if a builder (or an existing homeowner) managed to find someone to purchase a house, builders and sellers often found themselves forced to lower the price at closing or lose the sale when appraisals came in below the sales price.

It wasn't supposed to work this way. The new Home Valuation Code of Conduct, HVCC for short, requires lenders who want to sell their conforming loans to Fannie Mae and Freddie Mac to follow new rules designed to ensure greater appraiser independence and more honest home valuations.

However, critics complained that the rules overcorrected for boom time sins, turning home price inflation to deflation.They argued that low prices for distressed properties were unreasonably dragging down values for other homes, that the new rules encouraged the use of appraisers who were either inexperienced or unfamiliar with the market, and that the new requirements slowed down the sales process.

3. Weak Consumer Confidence
Uncertainty about the job market, falling home values, and worries that they couldn’t sell their own homes for any price--much less for what the paid for them--kept many consumers out of the housing market in 2009.

As the year wore on, there were some signs of improvement, as home prices seemed to bottom and stabilize. But builders have pronounced that stability to be fragile at best, saying that new declines in home prices or rises in mortgage rates could shatter that tenuous situation.

4. Elusive Profits

Builders who did sell homes in 2009 often lost money in the process, selling homes at low or nonexistent margins to shake whatever cash they could from the market. And they started the year in tough shape. According to Shinn Consulting, which does an annual financial survey of private builders, 2008 was the worst year financially for builders since 1970.

Public builders also struggled, adding minuses to their quarterly financial reports. Most managed to narrow their losses as the year progressed by slashing overhead, and a few are promising a profitable 2010. Still, it will be a challenging year. Many have shrunk themselves to the limit and the number of homes they closed in 2009 was even lower than in 2008.

5. Evaporated Financing 

Banks' reluctance to loan money hit both builders and buyers of homes in 2009.

Banks pulled construction money from builders, effectively putting many private builders out of business unless they were able to find alternative sources of money from friends and family, private equity funds, or had personal funds squirreled away that they could tap. (Click here for strategies on avoiding a credit crisis.)

Again, this hit private builders harder than public builders, but the publics didn't escape the credit crunch either. Many shut down their revolving lines of credit or lowered their balances when banks started charging more for the money and adding more requirements for access to the cash.

As for those consumers who bought homes in 2009, if it weren’t for the government loan programs a majority of sales wouldn’t have happened at all. In June, for example, FHA loans represented 36% of the market--a far cry from the roughly 6% it captured during the boom.

6. Builder Bankruptcies
It was another busy year for the bankruptcy courts as builders, hat-in-hand, asked judges to hold creditors at bay while they reorganized their finances under Chapter 11.

For some builders, the code worked in their favor, giving them breathing space to negotiate with their creditors and the opportunity to shed some of their debt. Mercedes Homes, for example, moved into and out of bankruptcy in eight months, which less time than it takes many businesses to come up with a proposed plan. However, Mercedes’ plan was not without controversy as the reorganization wiped out the value of all the employee-owned company’s stock.

Others got stuck in the process when it became clear that they had no future as a going concern. Technical Olympic USA (TOUSA) is a good example of that. The company filed for Chapter 11 protection in January 2007, and it has since stopped building homes and is gradually liquidating its assets.

Other builders who sought the court’s help in 2009 include Fulton Homes, Woodside, McStain Neighborhoods, Kirk Homes, and Woodside Homes. C.P. Morgan and a host of other smaller home building companies simply closed their doors without seeking bankruptcy help.

7. Lawsuits
Economic loss sparks finger pointing and lawsuits, so it’s no surprise that 2009 was a litigious year for builders, who were sued by banks, the government, and homeowners this year.

At least one case filed in 2009 on behalf of upside-down homeowners blames eight production home builders and their mortgage companies for causing the mess.

This case, which was filed in California, accuses the builders of fraud, negligent representation, and a breach of the implied covenant of good faith and fair dealing. It asserts that the builders knew--or should have known--that selling homes to investors and credit-challenged buyers would create communities that would lose their value in a declining house market where  buyers with little investment had more incentive to walk from their purchase than to keep it.

That lawsuit is seeking class-action status.

Beazer Homes USA’s legal woes also continued in 2009. Just as the Atlanta-based builder settled federal investigations regarding mortgage fraud, other legal issues emerged.

In September, a number of Franklin Templeton Investments mutual funds sued Beazer and several of its officers, accusing the company of violating securities laws by using accounting tricks to paint a false picture of its profitability in 2006 and 2007.

In November, Securities and Exchange Commission (SEC) staff said it would recommend that the federal agency sue Beazer CEO Ian McCarthy to collect past bonuses, incentive compensation, and profit from stock sales he received when the company's accounting was in noncompliance.

8. Chinese Drywall
At the worst possible time, builders were hit with a problem they never could have anticipated from a product they never would have thought could hold any hazards.

In 2009, drywall--a product that had been used without complaint for decades--suddenly turned toxic as buyers of homes built at the peak of the boom started complaining about corroded and failing copper air-conditioning coils and health problems related to sulfuric smells coming from their walls. Soon, it was discovered most of the complaint-generating gypsum board had been imported from China during a period of high demand for drywall.

The threat brought out scientists, government investigators, and lawyers itchy to litigate in droves. By November, the Consumer Products Safety Commission (CPSC) had received more than 2,000 reports from 32 states, the District of Columbia, and Puerto Rico from consumers and homeowners concerned about problem drywall in their homes.

Many builders began trying to mitigate the problem, replacing drywall in some homes and setting aside money to cover potential claims.

Last month, the CPSC said that it had found a strong association between homes with the problem drywall and the levels of hydrogen sulfide gas as well as corrosion of metals in those homes. Researchers are still working to determine how best to resolve the problem.

9. Union Pressures
For the first time in decades, builders began to feel heavy pressure from a labor union attempting to organize their workers.

In 2009, Laborers International Union of North America (LiUNA) stepped up an already aggressive campaign against Pulte Homes and other builders, showing up at meetings toting placards and pretend pigs and lobbing strong language at those attending.

The protests reached a boiling point in October, when LiUNA allegedly barged into a private Pulte meeting in Missouri where union member verbally and physically assaulted the company’s employees, according to legal documents filed by Pulte.

The Jones Company, a subsidiary builder acquired by Pulte in its merger with Centex, filed suit Dec. 1 against the union accusing the union of violating federal and state laws during the encounter that drove Pulte out of a hotel conference room.

LiUNA said Pulte’s allegations are false.

Teresa Burney is a senior editor at BUILDER and BIG BUILDER magazines.