By Michael Corkery

From The Wall Street Journal Online

Most U.S. home builders are suffering declining profits and sluggish sales. But some companies are experiencing more serious hurt — including pressure from activist shareholders, increasingly nervous lenders, large layoffs and at least one sizable bankruptcy.

At WCI Communities Inc. of Bonita Springs, Fla., not only are orders for new homes expected to have dropped 80% in the third quarter from a year earlier, but one of its large shareholders is getting antsy. New York hedge fund Basswood Capital Management LLC, which owns a 5% stake, sent WCI’s chairman a letter dated Oct. 17, saying it had "grown increasingly concerned with the performance and strategy of the company."

Basswood is frustrated that WCI, even though it has a valuable supply of land in coastal Florida, is more leveraged than many other builders. Basswood said WCI’s net debt-to-capitalization ratio was 62%, compared with an average ratio of 44.5% for its peers.

Basswood also wrote in its Oct. 17 letter that WCI stock is trading 16.5% below its March 2002 initial-public-offering price, while its peer group is up 88.9% over that same period. The stock closed yesterday at $16.12, up nine cents, in New York Stock Exchange composite trading at 4 p.m. Basswood is asking for a seat on WCI’s board, a request the firm says was previously ignored. WCI declined to comment on Basswood’s letter.

Limited Activism

For now, analysts believe this kind of shareholder activism may be limited. "The difference between WCI and the rest of the industry is that WCI is significantly" leveraged, says Credit Suisse analyst Ivy Zelman.

It’s not the first demand on a home builder from a large shareholder. In October 2005, Tontine Partners sent a letter to Beazer Homes USA Inc., asking the Atlanta-based builder to expand its stock repurchases. About a month later, Beazer said it was increasing its buyback to a total of 10 million shares from two million shares.

Lenders also are beginning to take a harder line with builders as the risks in the industry increase amid the slowdown. "We are hearing that a lot of banks are paying close attention to the terms of the loan agreements and are being more aggressive than usual because the apparent risk to loans is higher than a year ago," says Todd Vencil, an analyst at BB&T Capital Markets, based in Richmond, Va.

Comstock Homebuilding Cos., Reston, Va., said it has received a letter "purporting" to be a notice of default from Bank of America Corp. on a loan to develop a condo project in Leesburg, Va. Comstock is disputing the notice, saying it has met all repayment requirements. The dispute appears to center on the builder’s claim that it has only drawn $43 million on a loan that originally made $46 million available for Comstock to use. Bank of America declined to comment.

Large publicly traded builders, which analysts believe have relatively healthy balance sheets despite their declining revenue, aren’t immune to layoffs. Last week, Pulte Homes Inc. of Bloomfield Hills, Mich., said it has reduced its work force by about 10%, or 1,400 full-time jobs, since Jan. 1. Centex Corp., based in Dallas, said it has cut its salaried work force by about 10% since April 1 to around 6,400 employees.

Meantime, D.R. Horton Inc. said on Oct. 17 that it had eliminated three chief operating officer positions, each focused on different areas of the country. Two of the former operating chiefs have become regional presidents. The third resigned from his position with Horton, based in Fort Worth, Texas.

Rapid Growth

Also last month, privately held New Jersey builder Kara Homes Inc. filed for Chapter 11 bankruptcy protection. Industry observers suspect the company, founded in 1999, may have grown too quickly and been caught off guard by the slowdown. According to bankruptcy filings, the company has $350 million in assets and $297 million in liabilities, including millions owed to a few banks. Kara didn’t return phone calls seeking comment.

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."

These troubles could also become opportunities for large builders to buy out beleaguered companies and their land holdings, leading to more consolidation in the industry. But it could take more time before larger builders have enough cash to buy up the distressed companies. "When you are in a free fall, you cannot step up and use cash," says Credit Suisse’s Ms. Zelman. "If anything, you are trying to bring more cash in the door."

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By Rex Nutting

From The Wall Street Journal Online

The housing market correction has further to run, with new-home construction expected to fall another 12% next year, a real estate industry group said Friday in an updated forecast for 2007.

While the market for existing homes will probably flatten out, the new-home market will probably continue to slow through next year, said David Lereah, chief economist for the National Association of Realtors.

Sales prices are expected to rise slightly. "Given the huge gains in home values during the housing boom, and this year’s rise in housing inventory, overall price gains this year and next will be modest," Lereah said. Median existing-home prices are expected to rise 1.7% next year, while new-home prices are expected to rise 1.3%.

Housing starts will probably fall about 12% next year to 1.63 million after falling 11% this year, he said. Starts totaled 2.07 million in 2005.

The NAR forecast for housing starts for 2007 is close to the Blue Chip consensus forecast of 1.62 million. The Blue Chip forecast is derived from the forecasts of 54 economists surveyed by the publication Blue Chip Economic Indicators.

New-home sales will probably fall 8.7% next year to 975,000 after plunging about 17% this year, the realtors said.

Existing-home sales will probably fall 0.6% to 6.43 million next year after sinking 8.6% this year, he said, adding that sellers are becoming more realistic.

"We now have the most favorable market for home buyers in several years," Lereah said.

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By Jeff Bater

From The Wall Street Journal Online

New home-building activity in the U.S. resumed its decline in October, tumbling to its lowest level in six years as builders dealt with bloated inventories of unsold property.

Housing starts decreased by 14.6% to a seasonally adjusted 1.486 million annual rate, the Commerce Department said Friday. Building permits, an indicator of future building activity, fell a ninth consecutive time.

The government also lowered its original estimate for September starts, a number some economists considered a fluke. Construction rose 4.9% to 1.740 million in September, revised from an originally reported 5.9% climb to 1.772 million. Starts fell 5.7% in August, 4% during July, and 6.1% in June. Construction rose 6.6% in May.

Economists had expected a less-severe drop in October. The median estimate of 22 economists surveyed by Dow Jones Newswires was a 5.6% fall to a 1.672 million annual rate. The 14.6% decline was the largest since 16.1% in March 2005, and it carried starts to their lowest since 1.463 million in July 2000.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the housing data were a "sharp poke in the eye" for those who had argued that September’s jump in housing starts was a sign that the housing-market slump was nearly over.

The slowdown in housing this year stands in stark contrast to the past five years, when the lowest mortgage rates in four decades had powered a housing boom that pushed sales of both new and existing homes to five consecutive records.

In a sign that starts will likely continue to fall, October building permits dropped 6.3% to an annual rate of 1.535 million; the last month permits rose was January. Economists expected permits would be up by 0.1% to 1.640 million. Permits decreased a revised 5.2% last month to 1.638 million, compared with an earlier estimated 6.3% drop to 1.619 million.

Despite the worse-than-expected drop in the headline number, Mr. Shepherdson sees a rebound in the next month, based on the less-volatile building-permits data. "The key point though," Mr. Shepherdson wrote in a note to clients, "is that housing is set to be a big drag on fourth-quarter gross domestic product, more than in the third quarter’s -1.1%. It’s not over."

The housing weakness trimmed a full percentage point off economic growth in the July-September quarter, when the economy expanded at a tepid 1.6% rate. Housing is expected to continue acting as a drag over the next year but analysts believe the adverse effects of falling sales and construction cutbacks will not be enough to pull the country into a recession.

And, even as there were signs that the housing slump isn’t over, there were some glimmers of hope that the slide may be beginning to level off. The monthly survey of builder sentiment edged up slightly in early November following another small increase in October. It marked the first back-to-back improvements in builder sentiment since June 2005.

Regionally, housing starts fell 11.7% to 242,000 units in the Midwest, 26.4% to 705,000 in the South, and 2.1% to 374,000 units in the West. The only region showing an increase in building activity was the Northeast, where starts jumped 31% to 165,000 units.

Breaking down the rate of 1.486 million overall U.S. starts in October, single-family housing fell 15.9% to 1.177 million units. Construction of housing with two or more units decreased by 9.1% to 309,000; within that category, groundbreakings of homes with five or more units — or multifamily — fell 14.7% to 266,000 units.

An estimated 131,300 houses were actually started in October based on figures unadjusted for seasonal factors. An estimated 130,400 building permits were issued last month, also based on unadjusted figures.

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