Monday, Feb. 2, 2009 | 2 a.m.
Tom McCormick can empathize with homeowners who have lost their properties to foreclosure.
He’s losing 30 brand new, never-lived-in homes to foreclosure in one fell swoop.
McCormick is president of Astoria Homes, a local, privately owned homebuilder that has stopped construction because it is unable to secure loans in the national credit crunch.
Astoria Homes laid off 17 people last week and is down to 17 employees — a tenth of its workforce at the height of the housing boom in 2005-06.
McCormick said the company had been making incremental payments on short-term construction loans but was unable to make a final, lump-sum payment. His lenders, which had advanced money so McCormick could build two developments in Aliante and the northwest, refused to extend the loans — even though extensions are commonly offered, he said — and foreclosed on the 30 homes. Ten of them are upgraded models.
McCormick said the company had no other option to secure financing to pay off the loans. Many banks that had lent to the builder are no longer lending and some have been taken over by the Federal Deposit Insurance Corp., he said.
“You are doing things right and all your projects are performing, but the problem is, there are no other banks to go to right now,” McCormick said. “Sales are down (50 percent in 2008) marketwide, and it almost becomes a self-fulfilling spiral as everyone fails. We are not going to continue to incur liability. We better just shut things down and go into hibernation and wait for things to get better.”
Housing analyst Dennis Smith, president of Home Builders Research, says he wouldn’t be surprised if more builders take that route because of the lack of capital and inability to make a profit.
Many builders have been building at a loss for several quarters to keep people employed and generate cash flow to pay their expenses, Smith said.
“If you can’t make a profit, then why build?” Smith said. “You have to face reality sooner or later.”
Astoria’s sales have gone from 627 in 2006 to 320 in 2007 to 192 in 2008. The builder is selling fewer than 10 homes a month.
McCormick said Astoria isn’t heading for bankruptcy and will use the cash and sales proceeds it has to finish 60 homes under construction in five Las Vegas neighborhoods. The builder simply doesn’t have the resources to start homes and will have to wait for the market to turn around.
“The term I like is ‘hibernation.’ Let’s just stop and keep selling the houses we have. Let’s see how this whole financial meltdown shakes out. To continue to spend all your money while you are waiting for banks to figure out what the heck they are doing doesn’t make sense.”
Monica Caruso, spokeswoman for the Southern Nevada Home Builders Association, said other builders have shut down because of the inability to get construction loans — not to mention the difficulty potential buyers have in getting home loans.
“All you have to do is look at the number of permits to see they are having difficulty,” Caruso said.
Builders sold 665 new homes in December to bring their annual total to 9,741, a decline of 49 percent from 2007.
Builders took out 148 building permits in December. In a two-week period in January, Las Vegas builders sold only 35 homes among them — signs of a worsening slowdown, McCormick said.
Las Vegas homebuilders have been struggling to compete against falling prices spurred by foreclosures in the existing-home market. Sixty-five percent of existing homes sold in December were owned by banks, and that pushed the median price to $157,250. In comparison, the median price of a new home was $240,880 in December, and builders say it is hard to lower prices further because of land costs.
“I am very worried about the market,” he said. “The general public is waiting to see what the government is going to do before they decide to buy,” he said. “For us to try and figure out what is going to happen this year without knowing what or if anything the government is going to do is a wild guess.”
Private builders such as Astoria are more likely to halt construction because they have less access to capital than the large publicly held builders.
“Common sense and rationality are completely out of the market right now,” McCormick said. “We look at it and say this thing has gone far beyond us and it is happening nationally. There are a lot of builders in trouble because the access to capital is gone. When capital runs from the industry, the industry stops.”
A version of this story appears in In Business Las Vegas, a sister publication of the Sun.