Shoddy builders make for BAD investments

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http://www.bloomberg.com/news/2011-02-10/homebuilder-shares-undermined-by-creeping-costs-of-construction-boom-flaws.html

PulteGroup Inc., the largest U.S. homebuilder, recorded a one-time expense of $272.2 million in the third quarter, or 25 percent of its revenue in the period, to increase the reserves that cover losses when homeowners demand repairs to new houses. Chief Financial Officer Roger A. Cregg told analysts on a Nov. 3 conference call that there were a “greater frequency of newly reported claims” by people with company-provided warranties against defects.

Claims for defects can take time to surface, because typical construction warranties are good for a decade -- which is also the amount of time many states allow for filing lawsuits for alleged defects.

At Pulte, most of the claims in the third quarter were related to water intrusion, Chief Executive Officer Richard Dugas said on the Nov. 3 call with analysts.

“What was unusual here was the number of claims we received in a particular quarter,” he said. “That was completely unforeseen.”

Given the 10-year warranty periods, it’s a “tough science to nail down” when people will decide to ask for defects to be fixed, he said.

Pulte, of Bloomfield Hills, Michigan, said Feb. 4 that it reversed $10 million of the reserve expenses after further review in the fourth quarter. Its net loss widened in the period to $165.4 million, or 44 cents a share, from $116.9 million, or 31 cents, a year earlier. Pulte shares rose 4 cents to $7.82 yesterday and have dropped 29 percent in the past year.


SHODDY BUILDERS MAKE FOR BAD INVESTMENTS

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