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Builders
regroup in Valley By
Glen Creno The
Arizona Republic
Home
builders have become victims of their own success.
A year after they set records for revenue and income and their
stocks lit up Wall Street, builders are scrambling to recover
from a downturn that has sent their share prices plunging and
forced them to rein in optimistic sales forecasts. The Dow
Jones U.S. Home Construction Index, a barometer for
home-building stocks, was down nearly 5 percent Friday, when
it hit a two-year low. It has lost half of its value since
peaking a year ago.
From
California
to the
Carolinas
, builders are reassessing their strategies and asking
themselves some difficult questions: Does it make sense to
continue to build in far-flung suburbs? Is bigger better?
Should we buy more land?
The answers won't
come easily, especially as builders across the country, and
particularly in the Valley, struggle to sell new houses. With
mortgage rates up and concern over declining resale-home
prices, buyers are canceling contracts for new houses.
"There is no urgency to buy a house," said Steve
Hilton, chief executive of Scottsdale-based Meritage Homes.
"Even if they need a house, they're postponing the
decision. It's like last year but in reverse. Last year,
people were, like, 'Man, I can make money buying a house. Even
if I don't really need a house yet, I'm going to buy one.'
"Now, it's just the opposite: 'I need a house right now,
but I'm not going to buy it because the price will go down.'
"
Meritage, like other national builders, relied on metropolitan
Phoenix
as a cash cow. Now, with the Valley's housing market in
cool-down, the companies are looking to places like
Texas
for the kinds of sales figures that make Wall Street happy.
The builders haven't abandoned
Phoenix
, but they are having to roll out new types of more-affordable
products in different types of neighborhoods to push buyers
off the sidelines.
Builders
face reality
A parade of
builders has announced sales declines of as much as 40 percent
in what one analyst called "confession season."
Builder stocks took another hit Friday after D.R. Horton, a
Texas
company that is the country's largest builder, said late
Thursday that it would miss third-quarter and yearly earnings
targets because of the rising number of new and resale homes
for sale, higher cancellation rates and more sales incentives.
It has been hard for some builders to face the new reality.
Some analysts say builders got so accustomed to the good times
that they forgot that real estate runs in cycles, and they
still haven't adjusted. They're sitting with bloated
inventories of unsold spec homes, created when buyers canceled
deals. Builders who haven't gotten rid of unsold homes froze
construction of new ones, and the number of building permits
pulled through May was down more than 17 percent compared with
last year. It is hard to restart a production line that takes
six to nine months to crank out a product.
There were 8,700 finished but unoccupied homes in the Valley
at the end of March, according to consultant Metrostudy. That
compares with 4,300 at the same time last year.
"You see it in spades in
Phoenix
," said Stephen East, an analyst with Susquehanna
Financial Group. "There's a huge amount of inventory that
has come on the market in the last six or nine months."
Despite their homey marketing, housing is a commodity for many
builders. Executives refer to houses as "product."
The big national builders roll houses off their production
lines like carmakers cranking out Chevys. Their business
depends on mass sales, and they're in trouble when the mass
market can't afford their product. Analysts say that is
exactly the situation now.
"These builders, where volume is the name of the game,
they have to be really careful about where they price,"
East said. "And I think large public builders have to
take some blame for the dramatic run-up in house prices."
It won't be easy for builders to find a city that will give
them the sort of volume and profits that
Phoenix
has delivered. The cities that are producing the biggest
percentage increases in building permits are smaller markets
like
Ocala
,
Fla.
; the
Myrtle Beach
,
S.C.
, area;
Austin
,
Texas
; and
Lincoln
,
Neb.
, places that won't lead the country in new-home permits as
Phoenix
did two years ago.
Analysts say the demand for new homes has waned across the
country as prices increased and mortgage rates hover about 7
percent. They say buyers' confidence is rattled by a weaker
economy. Some analysts and builders, including Meritage's
Hilton, say media coverage about the downturn also hurts.
Many of those same forces are at play in the
Phoenix
market. But experts also say building and buying here is less
seasonal and primarily driven by population and job growth,
with less emphasis on rates.
To lure buyers, builders are beginning to talk about new,
cheaper alternatives to their flagship single-family homes.
Big price increases will disappear, if they haven't already.
Some builders are slashing prices and offering generous
incentives to sell their houses. And they're focusing their
attention as much on vacant pockets of land in developed
cities like
Phoenix
and
Tempe
as they are on swaths of soil in newer areas like Surprise and
Santan.
It is part of an effort to make new housing affordable again
nationally and in the Valley, where the median price for a new
house was $297,000 in May, up more than $76,000, or 35
percent, from the same month last year, housing analyst RL
Brown said. Builders are circling back to their subdivisions,
he said, running demographic profiles and realizing that their
customers can no longer afford the houses that were within
financial reach before last year's boom.
"The builders open the doors, and there aren't any
qualified customers," Brown said. "They say, 'My
God, what happened?' What happened is he moved his price
beyond the customer."
Builders who want to offer big homes at affordable prices can
strip out amenities to cut the price, Brown said.
Building
smaller houses
Look for builders
to also reduce house sizes, keep the amenities and pack in
more houses per acre.
"I think you will see smaller lots, more density,"
said Ben Sage, director of Metrostudy's
Arizona
region. "You have to address affordability."
It is a trend that is already happening in cities like
Las Vegas
, home of the three-story house, as well as
Los Angeles
and other cities where companies that traditionally sold
single-family homes are experimenting with infill sites.
KB is building condos in the Valley and has introduced
different styles of higher-density, lower-cost housing. They
include triplexes, a "green court" configuration
with the garage in back and a common open area in front, and
homes with zero lot lines that are built closer together than
in standard subdivisions.
"We could see land prices escalating quickly and knew
single-family affordability was going to be an issue for
us," said Greg Williams, president of KB's
Phoenix
division.
KB made price adjustments in parts of the Valley and offered
incentives on spec homes, houses built on the speculation that
someone would buy them. It also lowered prices for people who
had bought but were waiting for homes to be finished, locking
in sales and minimizing the number of its spec homes.
Adjusting
prices
"It's the
right decision," Williams said. "It's the moral
thing to do. If we think we're overpriced, we have to adjust
the price. Our buyers appreciated the fact that we knocked on
their doors."
Builders have cut back on land acquisitions on the fringes as
they adjust to less demand. That has led the State Land
Department to re-evaluate appraisals. That's a change from
January, when the department sold property in northeast
Phoenix
for more than $1 million an acre, a record.
"We're seeing a retrenchment going on with the public
home builders," said Brent Moser, a broker at Grubb &
Ellis-BRE Commercial. "Most home builders we're talking
to believe it's an eight- to 10-month process for a lot of the
investors to flush out of the market. But by no stretch is
there a great deal of concern about the long-term legitimacy
of this market."
Meritage, the only publicly traded builder based in the
Valley, has streamlined its company structure and introduced a
new line of housing amid the slowdown.
The company's
Monterey
division is launching a line of attached housing that shoots
for a price and size niche that falls between condo
conversions and single-family homes. They will be built in
infill spots to cater to buyers' interest in shorter commuting
times.
Meritage hasn't issued any revisions in orders or earnings
though Hilton, the chief executive officer, acknowledges that
many of its markets are softer, excluding
Texas
, where Meritage will do 35 to 40 percent of its business this
year. He thinks the
Phoenix
market is in a six- to 18-month correction.
"Some of the less skilled and less financially capable
builders and developers will be out of the business now,
either voluntarily or involuntarily," he said, "and
that will be better for companies like us."
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