The recent Chapter 11 bankruptcy filings by Florida’s Mercedes Homes and Arizona’s Fulton Homes did not go unnoticed by Tom McCormick, president of Astoria Homes in Las Vegas. When such firms find themselves in bankruptcy, “we thought we better just hang on and see what happens,” McCormick told BUILDER today. “The absolutely last thing we want to do is close our doors” permanently, he said.
The firm’s answer? Stopping construction and essentially going into hibernation until the housing market improves. “When pricing after incentives is down 50 percent and volumes are down 90 percent, there just isn’t a business plan that can account for that,” said McCormick, whose firm sold just 192 homes in 2008. But he stressed that Astoria is not filing for bankruptcy. “We’re just going to sit on the sidelines until the storm passes.”
To do that, Astoria has pared its workforce to 17 people, including McCormick. It has cut the workweek and employee pay by 10 percent for those who remain, who will continue to sell inventory homes, handle customer service and warranty issues, and other essentials.
Astoria won’t say how much cash it has on hand—“I can’t comment on that,” McCormick said, given ongoing negotiations with several banks—but it has enough to operate on a bare-bones basis for now. “It depends on how bad it gets,” he said. “We are not facing an imminent situation, but we can’t do this indefinitely either.”
According to McCormick, Astoria will revisit its “hibernation” weekly, watching Las Vegas area traffic counts and consumer confidence numbers closely for what it hopes will be its return to full operations. “We have our key people, we have our lots,” he said. “Within a month, we could be back not at full speed, which I don’t think will be necessary” but able to deal with the slow recovery that many economists are predicting will occur—when it finally does happen.
Like countless other builders, Astoria’s decision is the result of two factors: incredibly weak housing demand (Astoria builds only in Las Vegas, which has been battered by foreclosures) and the equally difficult lending environment that developed this fall after the fall of Lehman Brothers and the federal takeover of Fannie Mae and Freddie Mac. “Our lenders told us, ‘We aren’t going forward. We’ll let you finish what you have,’” McCormick said.
So much for that. Unfortunately for Astoria, two of its lenders have been taken over by the Federal Deposit Insurance Corp. and another is under a “cease and desist” order by the FDIC, which also affects any lending to Astoria. As a result, Astoria is also losing 30 homes to foreclosure because its banks refuse to extend its loans.
Alison Rice is senior editor, online, at BUILDER magazine.
Learn more about markets featured in this article: Las Vegas, NV.