5. Evaporated Financing
Banks' reluctance to loan money hit both builders and buyers of homes in 2009.
Banks pulled construction money from builders, effectively putting many private builders out of business unless they were able to find alternative sources of money from friends and family, private equity funds, or had personal funds squirreled away that they could tap. (Click here for strategies on avoiding a credit crisis.)
Again, this hit private builders harder than public builders, but the publics didn't escape the credit crunch either. Many shut down their revolving lines of credit or lowered their balances when banks started charging more for the money and adding more requirements for access to the cash.
As for those consumers who bought homes in 2009, if it weren’t for the government loan programs a majority of sales wouldn’t have happened at all. In June, for example, FHA loans represented 36% of the market--a far cry from the roughly 6% it captured during the boom.
6. Builder Bankruptcies
It was another busy year for the bankruptcy courts as builders, hat-in-hand, asked judges to hold creditors at bay while they reorganized their finances under Chapter 11.
For some builders, the code worked in their favor, giving them breathing space to negotiate with their creditors and the opportunity to shed some of their debt. Mercedes Homes, for example, moved into and out of bankruptcy in eight months, which less time than it takes many businesses to come up with a proposed plan. However, Mercedes’ plan was not without controversy as the reorganization wiped out the value of all the employee-owned company’s stock.
Others got stuck in the process when it became clear that they had no future as a going concern. Technical Olympic USA (TOUSA) is a good example of that. The company filed for Chapter 11 protection in January 2007, and it has since stopped building homes and is gradually liquidating its assets.
Other builders who sought the court’s help in 2009 include Fulton Homes, Woodside, McStain Neighborhoods, Kirk Homes, and Woodside Homes. C.P. Morgan and a host of other smaller home building companies simply closed their doors without seeking bankruptcy help.
7. Lawsuits
Economic loss sparks finger pointing and lawsuits, so it’s no surprise that 2009 was a litigious year for builders, who were sued by banks, the government, and homeowners this year.
At least one case filed in 2009 on behalf of upside-down homeowners blames eight production home builders and their mortgage companies for causing the mess.
This case, which was filed in California, accuses the builders of fraud, negligent representation, and a breach of the implied covenant of good faith and fair dealing. It asserts that the builders knew--or should have known--that selling homes to investors and credit-challenged buyers would create communities that would lose their value in a declining house market where buyers with little investment had more incentive to walk from their purchase than to keep it.
That lawsuit is seeking class-action status.
Beazer Homes USA’s legal woes also continued in 2009. Just as the Atlanta-based builder settled federal investigations regarding mortgage fraud, other legal issues emerged.
In September, a number of Franklin Templeton Investments mutual funds sued Beazer and several of its officers, accusing the company of violating securities laws by using accounting tricks to paint a false picture of its profitability in 2006 and 2007.
In November, Securities and Exchange Commission (SEC) staff said it would recommend that the federal agency sue Beazer CEO Ian McCarthy to collect past bonuses, incentive compensation, and profit from stock sales he received when the company's accounting was in noncompliance.
8. Chinese Drywall
At the worst possible time, builders were hit with a problem they never could have anticipated from a product they never would have thought could hold any hazards.
In 2009, drywall--a product that had been used without complaint for decades--suddenly turned toxic as buyers of homes built at the peak of the boom started complaining about corroded and failing copper air-conditioning coils and health problems related to sulfuric smells coming from their walls. Soon, it was discovered most of the complaint-generating gypsum board had been imported from China during a period of high demand for drywall.
The threat brought out scientists, government investigators, and lawyers itchy to litigate in droves. By November, the Consumer Products Safety Commission (CPSC) had received more than 2,000 reports from 32 states, the District of Columbia, and Puerto Rico from consumers and homeowners concerned about problem drywall in their homes.
Many builders began trying to mitigate the problem, replacing drywall in some homes and setting aside money to cover potential claims.
Last month, the CPSC said that it had found a strong association between homes with the problem drywall and the levels of hydrogen sulfide gas as well as corrosion of metals in those homes. Researchers are still working to determine how best to resolve the problem.
9. Union Pressures
For the first time in decades, builders began to feel heavy pressure from a labor union attempting to organize their workers.
In 2009, Laborers International Union of North America (LiUNA) stepped up an already aggressive campaign against Pulte Homes and other builders, showing up at meetings toting placards and pretend pigs and lobbing strong language at those attending.
The protests reached a boiling point in October, when LiUNA allegedly barged into a private Pulte meeting in Missouri where union member verbally and physically assaulted the company’s employees, according to legal documents filed by Pulte.
The Jones Company, a subsidiary builder acquired by Pulte in its merger with Centex, filed suit Dec. 1 against the union accusing the union of violating federal and state laws during the encounter that drove Pulte out of a hotel conference room.
LiUNA said Pulte’s allegations are false.
Teresa Burney is a senior editor at BUILDER and BIG BUILDER magazines.