Clock ticks for debt-laden US suburban developers

SUGAR GROVE, Ill. Aug 11 (Reuters) - After three years of trying to wait out the worst U.S. housing crisis since the Great Depression, debt-laden suburban developers around the country face a tough choice -- sell at a discount or go bust.

That crunch may also spell fresh trouble for U.S. housing and banking sectors still struggling for stability under mountains of foreclosures, debt and doubt.

Hannaford Farm in the northwestern Chicago suburb of Sugar Grove, Illinois, is a typical example of how the irrational exuberance that gripped the construction industry and the banks that financed them during the property boom has now gone sour.

At the market's peak the "McMansions" -- huge homes on small lots that typified the excesses of the boom -- in this half-built development sold for up to $1.3 million. The peak national U.S. average home price hit $230,300 in July 2006.

There are still roads, sewer lines and water mains in place for what should have been 131 homes at Hannaford Farm. But half of those lots display thick, tall weeds instead of houses.

Unable to sell the remaining vacant lots here, the developer was forced to offer them at a steep discount -- fast.

"We are dealing with a seller who is very motivated and doesn't have the luxury of choice," said Jim Blanchard, the broker at Inland Real Estate Auctions Inc brought in to run the "Summer Land Rush" for Ed Saloga Builders. "The developer here needs to cut their debt and inventory quickly."

Empty lots originally sold for $205,000. But in the recent auction 20 of them were priced starting at $66,500. A dozen bids were received, and nine lots are now under contract.

Paul Amore, a home builder himself, owns a home in Hannaford Farm that had been valued at $825,000 and he said the auction had under-cut that value by more than $120,000.

"The banks are forcing developers to sell and sell cheap," he said. "Everybody's getting a bailout except people like us. We're stuck just trying to ride this out."

Hard numbers on the nationwide number of "developable" lots are scarce. But what evidence there is suggests many developers -- especially those selling lots for luxury homes -- face a similar choice to that of Ed Saloga Builders.

"The inventory of these lots dwarfs the inventory of existing homes," Blanchard said. "There will be a lot more product like this coming through the pipeline."

HUNGRY FOR LAND

Before house prices began falling in late 2006, developers were in a land rush of their own, snapping up prime farm land like Hannaford Farm at any cost.

"During the boom, developers couldn't wait around because prices were rising so fast," said Dave Hanna, head of the Chicago Association of Realtors. "Now some of them can't give that land away."

U.S. home prices have fallen 32 percent in the past three years, erasing trillions of dollars of equity. Foreclosure filings hit a record of 1.9 million in the first half of 2009. Although there are some signs the market is stabilizing, there are also untold numbers of empty lots out there.

The National Association of Home Builders uses filings from the publicly traded home builders, which account for 30 percent of the market, to provide a best guess.

In 2005 those home builders either owned or had options to buy 2.25 million developable lots, which fell to 735,000 in 2008 as they sold off lots or did not exercise buy options.

"This means a whole lot of lots didn't get built on," said Stephen Melman, the association's economic services director.

He said the worst-affected areas mirror the housing crisis -- Florida, California, Nevada and Arizona.

Small lots for cheaper homes are easier to sell.

Steve Dallenbach, a partner at home builder Dallenbach & Larson in Des Moines, Iowa, said smaller "starter" homes left over by the collapse of regional developer Regency Homes in April 2008 "are moving at a discount of around 30 percent."

But selling lots for luxury homes is a different matter in the credit-scarce world of the recession.

"The majority of people who would have qualified for a home like this a few years ago can't get financing," said Michael Lefevre, head of the National Association of Mortgage Professionals. "It's depressing."

Developers therefore have no choice but to slash prices.

"Home owners and developers are waiting as long as they can to sell," said Dennis Hedlund, founder of iEmergent, a forecaster for mortgage and real estate companies. "But in the end, someone has to take the loss."

Hedlund says his forecasts for 2010 include the possibility that the year could be worse than 2009.

"In the meantime, communities may have trouble maintaining the infrastructure on unused land," he added. "Eventually, many lots will have to be bulldozed." (Editing by Peter Bohan and Gerald E. McCormick)