Lower-Priced Foreclosed New Homes Distress Homebuilders
June 26th, 2009 by 
Joseph Smith
Homebuilders have been struggling since the flood of foreclosed new homes began. After they were distressed by reports of large numbers of foreclosure filings in May, now they are further crushed by reports of the impending readjustment of adjustable mortgage loans, which will surely cause another large wave of foreclosures.
Bill Wheat, CEO of home builder D.R. Horton, said there is too much uncertainty in the home building industry because of the persistent foreclosure activity, the rising joblessness rate and other difficulties in the national economy.
Wheat expressed his expectation that the home building industry will continue to face challenges from foreclosed new homes for the rest of 2009 and the next year. He also mentioned the report that about 1 million adjustable-rate home loans will readjust in the next couple of years.
ARM readjustments are getting homeowners and others worried because the significantly higher monthly payments would certainly be beyond many borrowers’ financial capabilities, leading to more foreclosed new homes.
Richard Dugas, CEO of Pulte Homes, said the demand side of the home building market is being hit by lack of buyers with approved loans and that the supply side of the market is battered by oversupply. Aside from large inventories of unsold new homes, the supply of foreclosed new homes that are much lower priced is adding to the oversupply problem in the home construction industry.
To compete with foreclosed new homes, some builders have been offering incentives such as free upgrades and buy-downs on home loans.
Douglas Yearley, top executive at luxury home builder Toll Brothers, added that banks have made restrictions on their home lending activities, rejecting many applicants for mortgage loans and reducing the number of persons able to buy new homes.
Yearley predicted that about 50 percent of small and middle-sized home builders may have to close because of the current hardship. If the recession continues, home builders with high levels of debt will not be able to refinance and pay off their loans. Foreclosures on multifamily building projects have been increasing in recent weeks.
New-home sales have remained weak in 2009, as seen in home sales data.
This week, home builder Lennar Corp. released its report showing a quarterly loss, but it was encouraged by the optimism showed by investors who supported the stock because of improvements in its balance sheet.
These home building executives recognize the effects of foreclosed new homes on their operations, but they keep on finding ways to survive and ride out the recession.
