Homebuilding advisory group says few builders safe from industry troubles, most caught off guard

By Jennifer Lanning Drey

Portland, Ore., Dec. 11 - The only homebuilders who can consider themselves safe from the current industry troubles are the small percentage who "took their money off the table in 2006," meaning they stopped making new land purchases, Scott Brubaker, managing director of Alvarez & Marsal's newly formed homebuilding industry group, told Prospect News on Tuesday.

"Everyone else, I think, was caught off guard by the timing as well as the pace of this downturn. It is a size and a pace they've never seen before," Brubaker said.

"The best way to describe the problem in the housing market right now is 'widespread'."

Leading up to what Brubaker called an unprecedented downturn, some homebuilders were too quick to believe that the advent of the subprime mechanism had ended the cyclical nature of the real estate industry, he said. The result is that many homebuilders now have inventories and land holdings that are significantly above the current demand levels.

Given the industry environment, the new homebuilding group at Alvarez & Marsal intends to work with troubled homebuilders facing a series of problems; the largest of which may be that their assets are currently worth less than their debt balances in many cases.

The challenge for these troubled builders is downsizing their asset bases while achieving proportional reductions in debt, said Andrew Hede, also a managing director of Alvarez & Marsal's new homebuilding group.

However, adding to the challenge is the fact that as absorption rates drop and asset values decline, lenders are re-margining their demands on homebuilders who may not have the liquidity available to meet the increased demands, Brubaker said.

On top of that, homebuilders need to begin positioning themselves for an eventual market recovery when they will need significant amounts of capital to grow.

"The question is, 'How do you fund growth as housing demand begins to recover?'" Hede said.

Possible direction in Q2

As the downturn continues, investors and homebuilders will have to wait for the second quarter of 2008 before potentially seeing any financial indicators as to whether the homebuilding market can expect further deterioration or a soft but settled year in 2008, Hede said.

The first quarter is typically seasonally slow and unlikely to provide much of an indication as to where the market is headed.

Even so, the unique combination of factors that created the current housing downturn also make it harder to project when an upswing will occur and less accurate to use benchmarks based on the past, Hede said.

Previous housing downturns have stemmed from more general global economic downturns; whereas, this time around the downturn was driven by a number of exceptional factors, he said. From the start, the current downturn was characterized by record homeownership numbers driven by specialty investors who prolonged the favorable environment.

By late 2006, however, those specialty investors began to withdraw from the market, a factor that was followed by the subprime fallout and resulting credit crunch in 2007.

Threats of recession pose a further challenge in analyzing a possible recovery in the homebuilding industry, Hede said.

In addition to working with the homebuilders themselves, the Alvarez & Marsal team has been contacted by investors who view the homebuilding industry as a long-term investment opportunity.

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