Lennar's New Homes Fetch 60% Less as U.S. Market Slump Deepens

De-Nile is once again just a river in Africa.

Lennar’s New Homes Fetch 60% Less as U.S. Market Slump Deepens

By Bob Ivry

Jan. 10 (Bloomberg) – Lennar Corp.'s November sale of 11,000 properties in eight states set a price that may mark the bottom for the U.S. housing market: 40 cents on the dollar.

That’s how much Morgan Stanley Real Estate paid for an 80 percent stake in the 32 communities, 60 percent less than the price at which the properties were valued just two months earlier. That’s also what some investors say they would pay for distressed land, condominiums, homes and whole developments, whether it’s now or later this year.

``If you’re an opportunistic buyer with enough cash and credit, it will be one of the best opportunities for acquiring property in our lifetime,’’ said Jack McCabe, whose McCabe Research & Consulting LLC in Deerfield Beach, Florida, advises hedge funds and other investors on real estate sales.

As the U.S. housing slump drags into its third year, sellers will start cutting prices as much as it takes to find buyers, said Marcel Arsenault, a self-described ``vulture investor.’’ Properties will be available to buyers with the financial strength to ride out the slide. Now that a price has been set, all that’s left is the waiting.

Arsenault, based in Broomfield, Colorado, bought real estate during the savings-and-loan collapse of the early 1990s. He said he has put together a $200 million fund he expects to expand to $800 million this year to buy distressed condos.

`Eroding by the Minute’

We're watching Denver, Phoenix, Austin and Tucson, but South Florida is our principal focus,'' said Arsenault, 60.If you’re a vulture, Florida has more carrion. This stuff is lying on the ground. It’s lost life. Some of the stuff in Phoenix is still breathing. Perhaps not for long.’’

Arsenault said he and his three partners may buy a block of about 50 new, unsold condominiums in Orlando, Florida. They have a price in mind and they’re willing to wait until they get it: 40 cents on the dollar.

``There’s a risk to buying too early in the downturn, but buying too expensive is our biggest pitfall,’’ he said.

Companies such as Miami-based Lennar, the biggest U.S. homebuilder by revenue, need to generate cash to make up for slowing home sales, especially this time of year, said Vicki Bryan, a Friendswood, Texas-based senior high-yield debt analyst for Gimme Credit LLC.

They sold land at 40 cents on the dollar and they're happy to get it,'' Bryan said.The value of land is eroding by the minute.’’

$10,000 an Acre

New-home sales fell to a 12-year low in November as rising foreclosures, increased credit restrictions and a swelling inventory of unsold houses have persuaded potential buyers to wait.

More than half of all U.S. home sales occur in April, May and June, according to Frank Nothaft, chief economist at McLean, Virginia-based Freddie Mac, the No. 2 U.S. mortgage buyer.

About 150 so-called real estate opportunity funds have been formed to buy distressed properties and other assets, a 21 percent increase over the number this time last year and an all- time high, according to Real Estate Alert, a trade publication based in Hoboken, New Jersey.

Fort Worth, Texas-based D.R. Horton Inc., the biggest U.S. homebuilder by market value, sold 20,000 lots on 6,884 acres outside Phoenix to Wolff Co., a closely held real estate investment and development company based in Scottsdale, Arizona, and Langley Properties of Gilbert, Arizona, in November.

The price, $70 million, or about $10,000 an acre, was lower than the sale price for the same land that Horton had in escrow six months ago, said Wolff Co-President Tim Wolff.

Land Inventory

``We are going to wait for as long as it takes the market to recover and figure it out from there,’’ Wolff said.

The sale reduced the amount of time D.R. Horton calculates it would take to sell off all its land by about six months, to five years, Chief Executive Officer Donald Tomnitz said in a November conference call with analysts.

``We’re going to be looking to sell land opportunistically,’’ Stacey Dwyer, the company’s executive vice president and treasurer, said in the call.

Standard Pacific Corp., the worst-performing of the 15 companies in the Standard & Poor’s Supercomposite Index of Homebuilders last year, sold more than 2,500 home lots, some ready for building and some raw, in the San Antonio area earlier this week.

Standard Pacific is reviewing a number of ways to adjust our business to changing market conditions,'' the company said in an e-mailed statement.As a part of our plan, we sold most of our excess land in San Antonio and will continue to explore ways to optimize our business, while continuing to provide our customers with high quality homes at an excellent value.’’

`Aggressive Right Now’

The buyers were Cleveland-based Forest City Enterprises Inc. and closely held Covington Capital Corp. The price wasn’t disclosed.

We're very aggressive right now because the homebuilders are in survival mode,'' said Ken Sheer, chief executive officer of Santa Monica, California-based Covington.Like any other business group that has some softness, everybody is scrambling to survive. The guys left standing are the guys who are going to be kings of the hill.’’

Lawrence Gottesdiener, chairman of Northland Investment Corp. in Newton, Massachusetts, pounced last week when New York- based Tarragon Corp. offered five apartment complexes in Florida and another in South Carolina for $156 million.

``I could say I bought for 50 cents on the dollar of last year’s price, because I did, but I think that’s a little bit of hyperbole because last year’s price was last year,’’ Gottesdiener said.

`Portfolio Optimization’

Orleans Homebuilders Inc. of Bensalem, Pennsylvania, sold 1,400 lots to nine different buyers in December for $32 million. The book value of the properties was $86 million, the company said in a statement. Orleans also anticipates receiving about $20 million to $25 million in federal income tax refunds as a result of the sales, the statement said.

Most of the lots, which represented about 18 percent of the land the company owned, were in weaker performing communities in Florida, Illinois and Arizona, said Garry Herdler, the company’s executive vice president and chief financial officer. Orleans is keeping properties in the Northeast and the Carolinas, areas where prices have held up well on a relative basis, he said.

We call this strategy portfolio optimization,'' Herdler said in an interview.These sales provided cash to repay bank debt, reduced operational costs and allowed us anticipated significant federal tax refunds.’’

John Levy, a real estate investment banker in Richmond, Virginia, said he’s passed up opportunities in the past to join forces with homebuilding companies. Now he said he’s planning a joint venture with a national builder to buy communities abandoned by bankrupt developers in the middle of construction.

``That’s where you can buy at the biggest discount,’’ Levy said.

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net .

Last Updated: January 10, 2008 00:24 EST

Industry reacts to Countrywide, BofA deal

Merger seen as better than alternatives

Friday, January 11, 2008

By Matt Carter
Inman News

Bank of America Corp.‘s plan to acquire troubled mortgage lender Countrywide Financial Corp. was welcomed by mortgage industry professionals Friday, who said a merger is preferable to other alternatives including a government bailout of Countrywide or bankruptcy.
Some also wonder whether Bank of America is making the right move, assuming it can close the deal, which must be approved by regulators.
“I have mixed feelings – I think it’s great because the government will not be forced into a bailout if this actually goes through,” said Larry Bettag, Midwest region vice president for Denver, Colo.-based Cherry Creek Mortgage Co. “Putting those two together, it’s going to be a monster company.”
Paul McFadden, a mortgage planner and licensed loan originator with Exact Financial Group of Renton, Wash., said that while he does not originate loans for Countrywide, the company’s failure would have caused problems for everyone in the industry.
“The buyout, I think, is a good thing, because on its own, Countrywide wasn’t going to survive,” McFadden said. Last summer, when American Home Mortgage closed its doors, other lenders tightened up their standards. “I think if Countrywide had not made it, all the other lenders would have reacted” by tightening underwriting further.
The all-stock transaction is expected to close in the third quarter, after an agreement was approved by both companies’ boards.
News of the merger failed to cheer Wall Street investors Friday, as the $4 billion deal was overshadowed by a New York Times report that brokerage firm Merrill Lynch needs to raise that much to offset $15 billion in losses on bad mortgage investments.
Bank of America has not been immune to the housing downturn, announcing in October plans to close down its wholesale lending division and lay off 3,000 workers (see Inman News story). With BofA also exiting correspondent lending, one question about the merger is what the bank will do with Countrywide’s wholesale and correspondent lending businesses.
Wholesale lenders fund loans that are originated by independent mortgage brokers, which are often bundled together as collateral for mortgage-backed securities that are sold to investors. Correspondent lenders purchases mortgage loans from other lenders such as banks, savings and loans, credit unions and builders.
“If they cut the mortgage broker out of the picture, that creates a potential problem for us,” said Robert Ashby, president of Solid Rock Mortgage Corp., a mortgage brokerage in Pembroke Pines, Fla. “It’s probably not that big a deal, because we can go somewhere else to get the loans.”
McFadden said that he has 40 to 50 lenders to work with, and that if Bank of America shuts down Countrywide’s wholesale loan division, he would not be affected.
Bettag said Countrywide has been “a big competitor” to Cherry Creek Mortgage. But Cherry Creek is also a correspondent to Countrywide, selling prime loans to the lender.
“We source a lot of our ‘A’ paper to them, and we actually grew by a hair last year in a market where everyone else blew up,” Bettag said. “So we’re curious to see how (the merger) will change the playing field.”
In a press release, Bank of America said it “will benefit from Countrywide’s broader mortgage capabilities, including its extensive retail, wholesale and correspondent distribution networks.” That suggests Charlotte, N.C.-based BofA intends to allow Countrywide to continue funding loans originated by mortgage brokers, and buying loans from other banks.
Bank of America said it plans to continue to operate Countrywide separately under the Countrywide brand until at least 2009.
“I wondered when Bank of America got out of wholesale (lending), whether there might be behind-the-scenes maneuvering to acquire Countrywide,” McFadden said, noting that competitor Washington Mutual has kept its hand in that game.
Another question about the merger is whether Bank of America will lay off more Countrywide employees in areas where the two companies have redundancies.
Countrywide employed 50,600 workers at the end of December, down 17.8 percent from 61,586 in July, after laying off nearly 12,000 loan originators.
In a presentation to investors in December, Bank of America Chief Executive Officer Ken Lewis said consumer real estate was “a significant growth opportunity” for the bank.
In 2007, Lewis said, Bank of America became the largest direct-to-consumer consumer real estate lender in the U.S., gaining market share through a “no-fee” mortgage loan and cross-selling home-equity loans to existing customers.
“We have not had the share of this business that our presence would imply,” Lewis said, noting that only 9 percent of Bank of America customers hold a mortgage from the bank. Bank of America estimates that it’s originated only 12 percent of all loans held by its customers.
Bank of America customers hold more than $4 trillion in loans from other institutions, Lewis said, and the bank’s strategy “is to reduce that number.”

Send tips or a Letter to the Editor to matt@inman.com, or call (510) 658-9252, ext. 150.
Copyright 2008 Inman News