Sunday, June 15, 2008

More Legend Homes Details

Ryan Frank has been digging up everything related to the Legend Homes bankruptcy case. This week he interviewed a turnaround consultant who is working with Legend Homes. Here are a few excerpts from the conversation:

Q: If Legend Homes, a respected home builder, files bankruptcy, what does that say about the future for the rest of Oregon's home builders?

A: Well, the fundamentals that affects Legend Homes are the same fundamentals affecting everybody else in this industry. Right now, many of the builders are having a tough go of it, I can say that. Are there likely to be more bankruptcies? I'd be surprised if there weren't. Some others may try to do some restructuring. Some may just fade away.
It isn't going to be the way it was for a while. A lot of home builders are in tough situations right now.

Q: Legend's problems were tied to its land holdings. Is that a common problem for home builders today who are in trouble? If not, what is the main problem for home builders today?

A: We've had a lot of run-up in real estate prices over the last three years. Home builders had to replenish their land inventory. As they replenished it, paid high prices for it. Now, we're seeing deflation in home values, a whole lot less homes being bought. So there's less turnover of capital and values are going down. Every home builder who has land has got an asset that's become ill-liquid where before it was very liquid because they could turn these lots over very quickly. That's not the case now so it's going to cause all of them to have some demands on their liquidity.

Different home builders are going to have different amounts of liquidity. But anybody that has land is seeing deprecation of the land or not seeing an increase anyway. Most of them are seeing declines in land values. It's hard to sell bare lots now. You don't see any developable land, just raw land being sold at any kind of a price. It's just brought things to a standstill. That makes it tough. It's just like people selling cars. When gas gets high and people quit buying cars, it's going to be tough on them. Some will preserve more than others but it's not easy on any of them. Last couple years, it was hard not to make money in this business. That's not the case anymore.

Q: As you're working on these turnarounds, what's your expectation of when the market will turnaround for home builders and when it does how will the market have changed?

A: The big difference between real estate and dot-com is there's some real tangible things that people need. Population is continuing to grow. The Northwest is a desirable area, Portland in particular. So we're going to reach bottom on the real estate markets. I think we're looking at some more deprecation. I don't know how much that's going to be, 8 percent maybe 15 percent. It's going to settle out, and then we're going to see the
markets stabilize. And then we'll get through this recession we're going into.

That will start to settle down. And then we'll start to see some normalcy return to the credit markets as far as home mortgages go. As far as real estate prices go, we'll see some recovery on it. I think 2010, 2011 is going to be more typical of what we saw in 2003, 2004. We won't have the boom but we'll have more stability. And think the Northwest in general will be fine. I think we'll start to see recovery in about 18 months.