Dwight Schar’s Palm Beach Estate
By Mike Colpitts
As the U.S. struggles with the growing economic crisis, many of the nation’s largest homebuilders are battling to stay in business. All of the largest publicly traded building companies have seen their values drop on Wall Street. But many of the company’s CEOs and directors cashed out before the real estate boom went bust at a total cost to stock holders of more than $1-billion.
The crisis could spell disastrous affects for homeowners who purchased homes from the companies. Warranties covering construction flaws could be in jeopardy, and repairs to fix homes sold by the companies may be left up to homeowners to pay, despite state and federal laws covering major construction components for up to ten years.
In New York the consensus on Wall Street is that at least some home builders will go bankrupt. Construction workers, office personnel and others who worked in the industry have been laid-off or let go.
New home construction has plunged to the lowest level since at least 1991. In the northeast the Commerce Department reported Friday that new home construction has dropped to the lowest level since records have been kept.
During the real estate boom homebuilders never had it so good. Newly developed creative mortgages and near record low interest rates spurred a new home building frenzy that had never been witnessed. Builders’ stock prices reached new record highs as they reported record earnings.
Insiders at the 10 largest homebuilders sold stock at record pace at the height of the boom in 2004 and 2005, including Toll Brothers, KB Home, D.R. Horton, NVR Inc., and M.D.C. Holdings. They have now sold shares worth more than $1-billion combined.
The chairman of NVR Inc., Dwight C. Schar, may top the list of insiders selling during the peak of the market, selling $243.4 million worth of stock in 2004 and 2005 alone. Schar has been followed by the news media closely since the purchase of a seven bedroom oceanfront house in Palm Beach, Florida for a reported $70 million from Revlon chairman Ron Perelman.
The president and chief operating officer of Toll Brothers, Zvi Barzilay also cashed out big, selling more than 610,000 shares of his company’s stock over the two year period for more than $47.7 million.
The CEO of M.D.C. Holdings, David D. Mandarich sold nearly a half a billion shares of stock in separate sales over five days in 2004 and 2005, netting nearly $39 million in personal income.
Home building stock analysts say the heavy dumping of stock was similar to the technology bubble bust in 2000 when industry executives sold stock before the bottom fell out. The two cycles now clearly have similarities. The technology boom was a Ponzi scheme as company after company sold their interests to a lot of the same companies for overly inflated prices.
The real estate boom was primarily triggered by falsely generated appreciation from new financial instruments sold on Wall Street to back up new mortgages, and new mortgage schemes developed by lenders across the country.
According to U.S. Census data, the price of the average home in Miami increased 106% over the five years up to and including 2005. Los Angles saw an increase of 112% and New York grew by 91% on average.
The huge volume of insider trades now clearly shows that the boom was coming to an end. Market conditions haven’t been the same since and many builders are just trying to make it through the housing depression without going bust.