Foreclosures and the Vicious Cycle for Builders
Recent equity research on DR Horton suggested that the stock is over-valued as sales trends in Q2 of 2009 might decline as much as 47%. The problem, as the analyst cited, isn’t that people are not buying homes. Prospective home buyers have gravitated to foreclosures, rather than newly-constructed properties.
It is not merely foreclosures resulting from individuals defaulting on their mortgages. There are foreclosures of wholesale properties by builders defaulting on construction loans. Just do a google search of “foreclosure properties” and there is a multitude of sites, not to mention “pre-foreclosure properties”. A category on our website is “pre-preforeclosure properties” - these are properties which banks have recently obtained relief from the stay (imposed by bankruptcy proceedings) and will soon be floated on the market once the court order is entered and the banks proceeds with the foreclosure sale.
In such a market, why would anyone buy newly-constructed properties which are not (yet) affected by defaults? One may argue that these properties are “clean” and there might be better customer service and warranty programs. The risk, of course, is that if the builder eventually goes into default and bankruptcy, these so-called “pre-petition warranties” may or may not be honored - it depends on the specific case (e.g., whether the builder reorganizes or liquidates). In the end, it’s CAVEAT EMPTOR! Buyers may be better off getting the lowest price and paying independent third party insurance to cover the other issues.
