It’s all over for Chicago area builder Neumann Homes. Neumann will file chapter 11 shortly.

The crash in the Chicago-area market for new homes has claimed its biggest casualty. Suburban builder Neumann Homes Inc. said Monday it will file for bankruptcy and has laid off most of its employees. Warrenville-based Neumann blamed its predicament on a drop of more than 50 percent in annual sales within the Chicago and Denver markets. It also pointed to a decision in 2005 to invest in the Detroit market, a move it said cost the company more than $60 million.

Neumann said it will file for a Chapter 11 bankruptcy and that its lenders have agreed to provide limited additional funding so that its assets can be evaluated and sold.

It also said the earnest money of customers whose new homes haven’t started construction is safe in escrow. Neumann said it will ask a bankruptcy judge to approve refunds from those accounts. It also said it will work with lenders to ensure that homes will be completed if construction has started. Neumann said it has closed its sales, production and customer service offices. It gave no figures concerning layoffs.

“The market downturn in the Chicago and Denver housing markets [is] now in excess of 50 percent, with home prices dropping from 10 percent to 25 percent in some sub-market,” Kenneth Neumann commented in the fax. “Even after the significant help we have received from our lenders this year, the company can no longer weather this storm.”

The cause of Neumann’s bankruptcy was not a slow down. The cause was over-expansion of spec homes. A search for Neumann Homes turned up 14 communities with 175 new homes for sale.

That is a lot of spec homes for sale in an extremely slow market. Carrying costs were clearly eating Neumann alive. Neumann was offering up to $80,000 off on select models. The largest price I could find for an active listing was $414,990. Assuming the original price was 494,990. The price reduction was 16%. Clearly not enough in this market.

Some townhomes were marked down 13% from $231,000+- to $200,000+-. Once again that was not enough. Perhaps those townhomes go for $140,000-$160,000 at an auction. Perhaps a lot less. For the person paying full price, that is a haircut of 30-40%.

To be sure, anyone paying full price will be trapped (unable to move) unless they bring money to closing. This is the kind of thing that can feed on itself.

Neumann down, many more to come.

Mike Shedlock / Mish/