Tuesday, September 9, 2008

Algon Group Predicts 'Perfect Storm' in Homebuilding Industry Will Lead to Significant Bank Failures in Next 24-36 Months

At Alabama Bankers Convention, Algon Group founder Troy Taylor predicts substantial bank losses; in July Taylor tells American Bankruptcy Institute - Southeast Members that 25-50% of Atlanta, GA banks may fail or merge by 2011.

PRNewswire/ -- Citing excess inventory and the substantial erosion of housing asset value - particularly in certain Southeastern areas - Algon Group founder and president Troy Taylor predicts that the inability of homebuilders to satisfy loans will lead to increasing bank failures in these markets over the next 24-36 months.

Addressing the Alabama Bankers Convention in June 2008, Taylor said that based on what Algon Group clients and other homebuilders were experiencing in Florida and Georgia, he expects banks to suffer substantial losses as builders default on loans. In July 2008, Taylor told Southeastern members of the American Bankruptcy Institute that he predicts 25-50% of Atlanta-based banks will fail or merge by 2011. Taylor said that the ongoing problems Algon Group has seen over the past two months have only furthered his belief that the worst is yet to come.

Taylor and Algon's Managing Director Larry Comegys - a housing industry veteran and former President of Pulte-Florida and Meritage Homes-Florida - have since January 2008 advised homebuilders, banks, hedge funds, and trustees in eight separate real estate-related engagements. Taylor attributes the housing industry crisis to a "perfect storm" created by the confluence of subprime mortgages, real estate speculation, new home prices outpacing income, and overbuilding. As an example, he points to select Florida counties where the supply of vacant developed lots increased from 12 months in the second quarter (Q2) of 2005 to 80 months in Q2 2008, and the inventory of future lots increased from 64 months in Q2 2005 to 391 months in the fourth quarter of 2007. During this same period, the average price of new homes in the sample areas fell by 27 percent.

Taylor said that although home sales in the Florida panhandle may be helped by the eventual opening of the proposed airport, most developers do not have enough working capital to last until recovery. "To survive this crisis, banks can't wait until the interest reserve runs out," said Taylor. He advises banks to recognize that housing assets will re-price, raise capital, and clean up their balance sheets.

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