When D.R. Horton Inc., the second- biggest U.S. homebuilder, couldn�t sell the one-bedroom condominium in San Diego it listed for $349,800, the property was auctioned as a last resort for 37 percent less.
D.R. Horton, with annual revenue of about $11 billion, and Hovnanian Enterprises Inc. now face the worst choice in the worst residential real estate slump since the 1930s. They�re selling homes at any price they can get.
�It�s desperation time and some companies may not make it,� said Alex Barron, an industry analyst at Agency Trading Group Inc. in Wayzata, Minn. �At this point in the housing cycle, if you have too much debt, it�s hard to get out from under it.�
Homebuilder profits depend on the cost of land, said John Burns, president of John Burns Real Estate Consulting in Irvine, Calif. Companies can still make money building on land purchased before the 2005 peak of the five-year U.S. housing boom, though price declines of as little as 10 percent might wipe out those profits, he said.
�They are all losing money,� Burns said. �They�ll talk in terms of gross margin and it sounds like they made money, but they actually lost money because they didn�t make their costs.�
The average cost to build a 3,340-square-foot home in the U.S. is $403,925, according to the National Association of Home Builders in Washington. That includes $219,015 for construction costs, $45,507 for the price of undeveloped land, $65,969 to prepare the land for building, marketing expenses of $11,258 and a sales commission of $19,499.
During Hovnanian�s �Deal of the Century� promotion last month, the company sold a 2,900-square foot five-bedroom, three-bathroom house at the Greenwood Manor development in Royal Palm Beach, Fla., for $525,000, said Kathy Bell, who bought a house with the same floor plan down the street for $575,000 in March 2006.
�It really stinks,� said Bell, 50, a medical billing specialist who lives in Hovnanian�s development in Royal Palm Beach, Fla. �We were here in the beginning and we didn�t get any deals. It�s very upsetting.�
Construction costs alone for a house that size would be about $435,000, according to the Florida Home Builders Association. That doesn�t include the cost of land, or preparing the lot.
Hovnanian�s Web site said that model was available �starting from $530,000.� Hovnanian spokesman Jeff O�Keefe said the company offered discounts as high as 30 percent. O�Keefe said he wouldn�t comment on the prices paid for properties sold during the promotion, which ran from Sept. 14 to Sept. 16. Chief Executive Officer Ara Hovnanian had said the company sold 2,100 homes in the three days, more than double expectations.
The 15 largest homebuilders are saddled with $7.75 billion in debt due to be repaid through 2009 and the companies� bonds trade as if they were junk, according to credit-default swap data.
At least five of the top 15 homebuilders by revenue are burdened with too much debt, Agency Trading�s Barron said. They are Hovnanian in Red Bank, N.J.; Irvine, Calif.-based Standard Pacific; WCI Communities Inc. of Bonita Springs, Fla.; Atlanta-based Beazer Homes USA Inc.; and TOUSA Inc. in Hollywood, Fla.
WCI will reduce its debt with the completion this year of a luxury condominium tower in Bal Harbour, Fla., said Chief Financial Officer Jim Dietz.
�We might discount a home 20 percent if the profit margin was 30 percent, but we haven�t discounted any properties 40 percent, which some homebuilders are doing to raise cash,� Dietz said.
Officials from Standard Pacific and Beazer didn�t return calls seeking comment.
�We�re not focused on growth,� Ian McCarthy, Beazer�s