Within the next few days, Renaissance Homes, a leading builder of move-up homes with 15 active communities in and around the Portland, Ore., market, will file for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.
Randy Sebastian, Renaissance’s CEO, tells BUILDER today that his company is close to completing agreements for post-petition extensions of loans with six banks, to which Renaissance aggregately owes $85 million. Filing Chapter 11 is a prerequisite for securing those extensions, he explains, and the banks’ financial support “makes us feel a lot better going forward,” says Sebastian, who expresses confidence that his company can emerge from Chapter 11.
Several builders in the Portland area have either entered bankruptcy or have gone under this year, including Decal Homes, Marcella Homes, and, most prominently, Legend Homes, which filed Chapter 11 in June. What had been one of the most resilient housing markets in the country is now experiencing what much of the rest of America has been seeing for at least a year: a dropoff in home sales, closings, and prices.
The Oregonian reported last week that the median price of a home in the Portland area in August, at $280,000, was down 7.3 percent from August 2007, the biggest drop in 16 years. Over that stretch, monthly closings fell 30.6 percent to 413, while active home listings rose 14.2 percent to 5,255. The newspaper quoted statistics from the Oregon Employment Department showing that the state had lost nearly 11,300 construction jobs and 18,900 real estate-related jobs since August 2007.
A more serious concern for builders here is that price erosion might not be over. On Sept. 4, Global Insight and National City Corporation released a study titled “House Prices in America,” which examined 330 U.S. real estate markets. It found only six markets whose median home prices it considered overvalued (down from a peak of 51 markets in 2005), and three of those were in the Pacific Northwest: Bend, Ore. (where Renaissance has a subdivision), Longview, Wash., and Wenatchee, Wash.
The urban growth boundary that controls the level and rate of construction around Portland no doubt prevented the type of sprawl that, in markets like Phoenix and Las Vegas, was the prelude to overbuilding, overselling, and foreclosing. However, the boundary also caused land prices—and, inevitably, home prices—to rise to a point that drove a certain percentage of buyers to the sidelines. Sebastian estimates that land prices jumped from $50,000 an acre in 2005 to as high as $600,000 an acre in 2006, the height of the housing boom here.
Renaissance’s home prices average around $550,000, and Sebastian says that he, like other builders, is looking at “redefining” the homes he builds, and where. He didn’t provide specifics, except to say that he envisions Renaissance as a smaller company building between 100 and 150 homes per year, compared to the 305 it built in 2005. This year, however, he expects to complete 32 houses.
When it goes into Chapter 11, the company’s inventory will include 80 finished and sold homes, and another four under construction for which it has buyers. It also controls 450 lots. Sebastian says his company has a total of 42 homes in various stages of construction. “We’re still building and still taking orders. We had a couple of sales last weekend, which was encouraging.”
Sebastian confirms that he had been discussing his financial situation with lenders since last fall, after his company incurred a sizable number of cancellations. Business went downhill from there: in the spring, Key Bank issued a default notice against Renaissance’s 210-lot subdivision in Bend, Ore., which has nearly $13 million in unpaid debt. (This neighborhood, known as Renaissance Ridge, will not be included in the company’s Chapter 11 petition). Last month, Renaissance returned a subdivision in Beaverton, Ore., to another lender, M&T Bank, Sebastian confirmed.
This year, the company expects its sales to be between $55 million and $60 million, about half of what it did last year and down significantly from the $167 million it generated in 2006, according to the Oregonian.
John Caulfield is senior editor at BUILDER magazine.