Monday, July 14, 2008

KB Homes to Declare Bankruptcy?

You could see the crowd behind the caution tape at the Indymac bank in Pasadena today. There were over 100 desperate people in line despite the FDIC’s best assurances that there is absolutely no rush to get your money out. “Everything is fine” they say on the radio. “Plan on coming down another day when the crowds have died down a bit,” customers were told. FDIC agents served free sandwiches and drinks to the people who stood in line for hours according to one news announcer. Meanwhile a dozen or so news vans peppered the neighborhood. A run-on-the-bank is reminiscent of the great depression and the last Bush Presidency. I remember when the now infamous Savings and Loan Scandal broke causing over 2000 financial institutions to collapse from bad loans. Now Indymac is the latest to fall because of shifty no down, low interest, no documentation, “We’ll lend to anyone” shenanigans. Remember those days? KB Homes stock took off like a rocket back then. But then it all came to an end with the bursting of the residential bubble. Tomorrow General Motors will announce huge layoffs and plant closings. A lot of workers and their families will be hurt by it. Some will say that the two have nothing to do with each other. That the rise in oil prices and the housing bubble are completely separate issues. Perhaps; but one thing is for sure, the workers and the customers are always hurt when something like this happens. Keep an eye on KB Homes this week. If you see more sales offices close, don’t be one of those poor souls waiting to just get out with whatever you can get. I guarantee the FDIC won’t be serving any sandwiches.

Thursday, July 10, 2008

KB Homes Shuts Down Sales Gallery
















KB Homes has apparently shut down the Ascent at Warner Center Sales Gallery on Oxnard Street in Woodland Hills, CA in hopes protesters will remove the twelve foot inflatable rat attracting public attention to the troubled project. The office manager locked up the empty office after movers loaded furniture on trucks to be delivered to an undisclosed location. An email response to my inquiry to the KB Homes website reads, “Unfortunately, our Ascent at Warner Center community is currently on hold and we do not have a re-opening date available.” Meanwhile a demolition crew at the Ascent project removed ash, soot, and debris left by the construction fire a few months back that some say was caused by a welder. There was major damage to two of the floors exposing construction workers to smoke and flames and causing nearby businesses to be evacuated.

There is speculation that KB Homes is considering changing the name of the project due to the bad publicity from the fire. Let’s face it, the residential market is in terrible shape and these builders are as much to blame for the mortgage crises as the predatory lenders that preyed on unsuspecting buyers. Now they want to hire non-union contractors, pay lower wages to the workers, and put a cheap coat of paint on a project that some industry experts believe should have been demolished. The problem KB Homes faces is buyers are smarter then they were just a few years ago. The popularity of the Internet and availability of information on the Ascent project will make it hard for KB Homes to put a happy face on this stinker. Forget the balloons and the flags; people are going to want answers about the integrity of the building. What corners were cut and how is it that a fire was able to start and spread so fast? How safe would you feel living in a wood structure this poorly managed? Was a fire-watch on duty? Why weren’t extinguishers enough to control the flames before they spread to additional floors?

I believe this is a sign of bigger problems for KB Homes. Sure this is just one project that spun out of control, but what does this say about the company and its leadership. Why was KB Homes CEO Jeffrey Mezger willing to risk bringing in second rate contractors and risk the scorn of their stockholders and customers? What does that say about the man? Amongst the turmoil of the credit markets, and foreclosure activity he decides to lower standards and put the company at more risk? KB Homes has a big problem on its hands. Problems like these are expensive.

Options are limited for the California home builder. The economy is on the ropes, and with Freddie Mac and Fannie Mae both suffering staggering losses it’s not hard to see what’s next for KB Homes. That’s right, “BK” aka “bankruptcy.” What other options do they have right now? Sell-off the Ascent at Warner Center project for pennies on the dollar to an apartment management company? This possibility would have been more likely a few years ago when investors were caught up in the buying frenzy and lenders were only too eager to fund risky endeavors. Let’s face it; those days are gone. Today, investors are plagued with debt and there seems to be no end in sight for the slide in real estate prices. No one is calling the bottom yet. Many industry experts believe it could take a year before we even see the bottom and many more before markets recover to their previous state.

Housing markets are in the worst shape they’ve been in since the great depression. Fox News Channel, and the Bush Administration are the only groups touting the resilience of the American Economy these days. No one is taking them seriously. It’s obvious they don’t even believe it themselves. They buy gas like you and I. They see the value of their 401k’s dropping and their medical insurance skyrocketing. Changing the name of the troubled Ascent at Warner Center project and dropping prices to well below cost may be the only option. The problem is; it’s nowhere near completion. This project is so far behind schedule already, there’s no end in sight.

Some will say, “Recessions are nothing new to home builders.” And they’re right. What usually happens in times like these are non-essential staff are let go. Lights are turned-off and sales people are gathered together and given a do-or-die scenario and told, “We’re going to invoke in a brand new sales competition. We’ll have prizes and awards for the top sellers. We’re going to bring in a special motivational speaker and we’re going to Sell Like We’ve Never Sold Before!!! And I know with a little luck and hard work we’re going make it. I just know we are.” But you know what? I don’t think they’re going to make it. Not this time. Not in this market. What do you think???