Dallas-area homebuilders suspend operations, leave buyers in the lurch
Who's Next?  Number way down. The worst housing market in generations is taking a big toll on the local homebuilding industry.  More than two dozen builders have suspended operations in the Dallas-Fort Worth area, analysts estimate, leaving some homebuyers and new owners in the lurch... In North Texas, new home sales have fallen by more than 40 percent since 2006, and single-family home starts are at the lowest level in close to 20 years.

Dallas-area homebuilders suspend operations, leave buyers in the lurch
January 23, 2009
By STEVE BROWN / The Dallas Morning News
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The worst housing market in generations is taking a big toll on the local homebuilding industry.

More than two dozen builders have suspended operations in the Dallas-Fort Worth area, analysts estimate, leaving some homebuyers and new owners in the lurch. 

James Sharp is working with lenders and his builder, Sotherby Homes, to get the Plano house he's buying finished.

"It's under construction and more than 80 percent complete," Sharp said. "We are trying to come up with some kind of resolution."

A bank foreclosed on the partially built house after Sotherby Homes suspended some of its operations. The foreclosure was on the builder, but Sharp has earnest money tied up in the deal.

Sotherby – a longtime, well-regarded local builder – ran into problems when lenders cut off additional funding.

The same thing happened to Arlington-based Wall Homes, which filed for bankruptcy last weekend.

"Our intentions are to complete homes under construction and continue to sell, build and close homes," chief executive Steve Wall said. "Meanwhile, our intention and business goal is to work out resolutions with our banks and construction vendors that lead us to a successful reorganization and prepare us for a busy spring selling season."

Dallas housing analyst Ted Wilson said that even builders who don't make business mistakes can be shut down when they can no longer borrow money. In some cases, lenders are even demanding repayment of loans that are in good standing.

"You can have the best-run company now – good product in good locations – and all that's out the window," said Wilson of Residential Strategies Inc. "At the peak of the market, we probably had 80 or so production builders in the Dallas-Fort Worth area.

"We probably have lost 25 or so of those already."

Jobs are being lost, too.

"Layoffs have been rampant throughout the industry," Wilson recently told a meeting of real estate execs. "Not a day goes by that I don't hear from someone who's out of a job.

"We could more than fill this room."

More dark days

More builder bankruptcies and closings are expected this year.

The National Association of Home Builders estimates that 20,000 homebuilders nationwide – almost one in 20 – have gone out of business in the last two years.

Part of the shakeout is due to slower demand.

In North Texas, new home sales have fallen by more than 40 percent since 2006, and single-family home starts are at the lowest level in close to 20 years.

And even though builders have cut back on speculative home construction, lenders are still tightening further.

"With the credit crunch, the lenders are looking to reduce their exposure to real estate," said David Brown of housing analyst MetroStudy Inc. "We have seen some lenders say they are no longer going to be in the residential construction business.

"They are choosing not to renew lines of credit, and those that are staying in the business want to reduce their exposure," he said. "It's making it tougher for builders to get the financing they need."

That's what happened to Sotherby Homes, which has been in business for 14 years and builds about 300 houses a year.

In December, the company suspended many of its operations and let workers go.

Sotherby "remains in consultation with various banks to see whether it can complete sold homes," a spokesman said this week.

D'Ann Petersen, a business economist with the Federal Reserve Bank of Dallas, said "some banks and lenders are very wary of adding to their share of real estate loans given the current situation.

"How much of that is based on their own precautions vs. how much of that is being suggested by regulators is hard to know," said Petersen, who made her comments based on Fed surveys. "Very few real estate deals are being financed currently."

Trouble for buyers

In some cases where builders have gone out of business or filed for bankruptcy, homebuyers have lost upfront money or have had liens filed against their homes by unpaid subcontractors.

"Sometimes you can't tell until it's happening, which is frightening," said Jeannette Kopko of the Better Business Bureau of Metropolitan Dallas.

In 2008, the number of complaints against builders received by the Dallas Better Business Bureau rose almost 40 percent. But the number of inquiries about builder reliability was down, Kopko said.

Before buying a house, consumers need to "do their homework," Wilson said. "The builders with the stronger financial records are the ones you want to focus on."

Even that is no guarantee.

"Builders that are in good shape are signing contracts and can't get construction funding," said Bob Morris, head of the Home Builders Association of Greater Dallas. "And builders with contracts that have started construction have had lenders shut them down."

Membership in the local homebuilders organization has fallen by about 15 percent from its peak, he said.

Research the builder. Ask your builder if it is a member of the Better Business Bureau and check the builder's record. Ask the company if it has any outstanding complaints. You can also request this information through public records from the state attorney general.

Read your home warranty before you buy. Ask your builder for a copy, and make sure you understand what is covered.

Research your warranty. Ask your builder if the warranty is financially stable and how you can research the information.

Have your new home inspected. Have an independent inspector inspect the house during all major phases of construction.

SOURCE: HomeOwners for Better Building