While the housing slowdown is affecting the larger national builders, according to reports most analysts are not concerned with bankruptcies. Smaller builders such as Kara Homes in New Jersey, which declared bankruptcy last month, have a greater risk of bankruptcy as they may have expanded to quickly.
The national builders use mostly subcontracted labor. This means they can tighten up operations quickly when the markets turn. They also have the luxury of selling homes that were built on a speculative basis for below market rates. We have seen builders offer amazing incentives to real estate agents over the past few months to help them move their properties and get their cash out.
Analysts predict future quarters of shrinking profits, but believe the large public builders aren’t in immediate danger of bankruptcy because they aren’t as highly leveraged as companies in the sector were during the last market downturn. They also have been increasingly using options to secure land, allowing them to walk away from parcels they are unable to develop.
“Bankruptcies will be the extreme exception, not the rule. Generally speaking, the large public builders are well-capitalized,” says Steven Friedman, who co-heads the home-building practice at Ernst & Young. “The likelihood of a material default is highly remote.” via RealEstateJournal
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