Hell Fights Back

Yesterday we discussed the Pulte House From Hell. The August 13 BusinessWeek cover story Bonfire Of The Builders suggests that hell is fighting back.

Elizabeth and Armando Motto are living a real estate nightmare with a new breed of monster: the big homebuilder as lender. In November, 2005, the couple, who have four children, agreed to pay $540,000 for a newly built three-bedroom house in suburban Clarksburg, Md., near Washington, D.C. Rather than send them to a bank, the builder, Beazer Homes USA Inc. (BZH), offered to provide a mortgage itself in an arrangement of the sort that helped fuel the long housing boom across the country.

But when it appeared that the Mottos might not qualify financially for the loan, things took a troubling turn. Beazer, according to the couple, inflated the pair's earnings in loan-application documents by incorrectly stating they were collecting rental income from the house they were leaving.

"I don't want to misrepresent myself," Elizabeth said in e-mail correspondence with Beazer's outside mortgage service, dated July 14, 2006. But in the end, the couple signed the documents, and soon after they closed on the Clarksburg house.

They now regret it. The Mottos moved to Clarksburg, but they haven't succeeded in unloading their previous home in Rockville, Md. They have nearly $1 million in mortgage debt on the two dwellings. With $145,000 in family income, Elizabeth says, they are "on the brink of foreclosure" on both houses. "We are so broke."

The Atlanta company has much more than the Mottos to worry about. On Aug. 1 its stock fell nearly 18% on rumors that it was preparing to file for Chapter 11 bankruptcy court protection—which Beazer swiftly denied, calling the Wall Street gossip "scurrilous and unfounded." Just five days earlier, Beazer revealed that the Securities & Exchange Commission had elevated an informal inquiry into its mortgage business to a formal investigation. The company warned that criminal penalties could follow. Earlier this year, Beazer received a subpoena from the Justice Dept. seeking documents related to its home loans, and the company is also under civil investigation by the North Carolina Attorney General's office.

Even as the housing supply began to exceed demand last year, builders kept sales brisk by pushing adjustable-rate, interest-only, and other risky loans. In some cases they attracted clientele who couldn't afford conventional mortgages. In others, builders allegedly violated federal lending standards to get customers to sign on the dotted line. KB Home (KBH) paid a record $3.2 million settlement in July, 2005, to resolve allegations by the Housing & Urban Development Dept. that the builder's mortgage unit overstated borrowers' income, among other practices, to obtain loan approvals. KB, which denied wrongdoing, sold its loan business before settling.

It's hard to feel truly sorry for anyone in living hell if that hell was a result of being a willing party to commit fraud. But sooner or later hell nearly always strikes back at everyone involved in fraudulent transactions.

Emails of the Mottos have now provided a smoking gun for the justice department, the North Carolina Attorney General's office, and the SEC to investigate. Expect shareholder lawsuits over this matter as well.

Desperation at Beazer or just complete foolishness?

In what is likely a foolish waste of money if not an act of pure desperation given all the investigatory and liquidity problems Beazer is facing, Beazer nonetheless declared a $.10 dividend on Friday.

August 03, 2007 12:00 PM Eastern Daylight Time Beazer Homes USA, Inc. (NYSE: BZH) (www.beazer.com) today announced that its Board of Directors has declared a quarterly cash dividend of ten cents ($0.10) per share of common stock. The cash dividend will be payable on September 21, 2007 to shareholders of record at the close of business on September 10, 2007.

With a tip of the hat to Minyanville for the idea, let's take a look at a 1 minute chart of BZH before and after the news.

BZH One Minute Chart



If that dividend announcement was an act of desperation, the market sure caught on quick and commenced voting with its feet.

Investing in Homebuilders is Foolish

Over the long haul shareholders never even profit but insiders sure do. Take a look at Beazer Insider Transactions. Massive numbers of shares were acquired by insiders for $0.00 and dumped on the market for whatever the insiders could get. Especially note the transactions of Ian J. McCarthy, CEO.

Builders build until they go bust. It's the same every cycle. They keep plowing all earnings into more and more land at artificially inflated prices until the Ponzi scheme finally blows up.

BZH Monthly Chart



Anyone who bought BZH from 2001 through 2007 is now underwater. Poof. And where were the dividends four years ago? Three years ago? This is why investing in homebuilders is a foolish proposition: they do not pay dividends when they can and should but attempt to do so smack in the middle of massive investigations and liquidity issues.

Insiders have made countless millions in the last six years. But those investing in the biggest housing boom in history lost money. Sure some playing the greater Fool's game made out, but for every one those, other investors holding for the "long haul" got clobbered with as much as 86% losses.

HOV Monthly Chart



Hovnarian (HOV) is now back to 2002 prices.

LEN Monthly Chart



Lennar (LEN) is hanging out just above 2002 prices.

WCI Weekly Chart



WCI just started trading publicly in Autumn of 2003. The weekly chart shows the entire history. But check out the arrogance of WCI turning down an offer at $22 as late as May 2007.

Earlier this year, WCI rejected an offer by Icahn to purchase the company for $22 a share, saying it was financially inadequate. His tender offer expired in May, without him buying any shares. At the time Icahn made his offer, WCI’s stock traded in the range of $20. WCI moved its annual meeting from June 15 to Aug. 30 to give it more time to entertain offers.

As WCI’s stock has taken a nose dive, some have questioned whether the company made a mistake when it rejected Icahn’s original offer.

Question? There is no question. Icahn clearly lost his mind to offer $22 for WCI but was bailed out because a bigger fool refused to take the offer. Add that to the list of lawsuits to be filed.

Meanwhile Back in Hell

While the debate continues about whether or not WCI should have taken the offer (or if the offer was even real as some conspiracy theory question), the mad scramble to turn out product as fast as possible has raised a significant amount of quality issues.

BusinessWeek is asking You Call This A Home?

The next boom for builders may be complaints from angry homeowners.

Residents of a new housing development in South Carolina fear that fumes from contaminated soil have caused dizziness and blackouts.

In Colorado, homeowners say they were led to believe they'd enjoy a recreational lake that never materialized, causing property values to slip. As the housing slump worsens, U.S. homebuilders increasingly find themselves fending off complaints of shoddy construction, unsavory sales tactics, and use of unsafe land.

Criterium Engineers, a Portland (Me.) building-inspection service active in 35 states, found that from 2003 to 2006 the number of new homes with "significant problems" rose more than 13%.

"Right now you're seeing the construction claims start to come in," he says, "but it'll take five to seven years" to get a full measure of the angry fallout. Anti-builder Web sites are proliferating, and two consumer groups, HomeOwners for Better Building and Homeowners Against Deficient Dwellings, are compiling online lists of beefs against developers.

The National Association of Home Builders says 55% of customer grievances concern caulking, paint, and other nitpicky issues.

Lennar Corp. (LEN ), another large builder, has drawn scrutiny in South Carolina. Residents of its new Pebble Creek development in North Charleston, such as Bill and Holly Hurley, say they have suffered from light-headedness, lethargy, and depression. Home inspections they commissioned showed unsafe levels of methane gas, which the Hurleys and others fear may be linked to possible soil contamination by a previous land owner.

Let's rephrase that statement by the NAHB as follows: The National Association of Home Builders admits nearly 50% of homeowner grievances are both valid and significant.

Unfortunately the NAHB provided no percentages for these questions: Of the 45% of grievances that are "not nitpicky", how many homeowners are happy with the resolution? How many are not happy about forced arbitration when the homebuilders get to pick the arbitrators?

Real Estate Gripe Sites

• Homeowners Against Deficient Dwellings (HADD)
• Homeowners for Better Building (HOBB)
• Crap Construction
• Exposing New Homebuilders
• K. Hovnanian Homes Suck
• Not-Khov.com
• Levitt and Sons, Problems
• The Pulte Homes Experience
• Neighborhoods for Quality Homes
• My Pulte Experience
• StopBEAZERHomes
• Fight Pulte
• Fight Divosta
• Fight Del Webb

The above list compiled by and thanks to BusinessWeek.
Two images from the article (titles mine)

Pure Hell #1




Pure Hell #2




There is much more in the issue. I'm picking up a copy.

That said, in the back of my mind is the idea that magazine covers like these often mark major turning points. Then again, unless homebuilder sales pick up dramatically several of them (or more) are going under.

Perhaps the cover marks not a turning point but a major recognition point about how bad the problem is. As late as a couple weeks ago Paulson was talking about how "contained" the problem is. Well it's obviously not contained.

Another problem the builders face is that people are going to read the issue, see the problems, and be scared to death to buy from any builder in question. And then there is the problem of massive condo building in Florida with tens of thousands of units being built even as there are tens of thousands of units that nobody wants already sitting in inventory. Finally there is the problem of a severely slowing economy with unemployment rates poised to go up dramatically.

Bankruptcy is one way out for these homebuilders to stop the lawsuits cold turkey and walk away scot free of what some might say would be their moral obligations. No doubt some of these builders will soon find that option attractive. The only real question about bankrupt homebuilders is "Who's first?" As for "Who's to blame?" the list is long but start with the Fed and proceed to Congress and this administration.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/