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VOL. 122 | NO. 239 | Monday, December 17, 2007

Numbers Confirm That '07 Construction Went From High-Octane to Running on Fumes

By Eric Smith

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THE HIGH GROUND: Rivertown on the Island Condos, a 200-unit project on Mud Island, led all Shelby County developments with 196 new-housing permits filed between December 2006 and November 2007, according to Chandler Reports. -- Photo By Eric Smith

As president of one of Memphis' largest homebuilders and a 35-year industry veteran, Jerry Gillis of FaxonGillis Homes had no trouble summing up construction activity during the past year: "It started out with a bang and ended with a whimper." Indeed it did.

From December 2006 to November 2007, housing starts fell dramatically, with many builders experiencing huge dropoffs in the number of permits filed, according to Chandler Reports, www.chandlerreports.com.

There were 2,735 permits filed during the period - a 40 percent decline from the 4,592 filed during the 12-month period ended November 2006, and a 45 percent decline from the 4,943 filed during the 12-month period ended November 2005.

Fortunately, Gillis has seen enough good years and bad years - and plenty of years in between - to understand that home builders aren't ready to push the panic button yet. Not when they believe the market simply is going through a correction after the torrid pace of 2005 and 2006.

"It was a slow year, no question about it," he said of 2007. "But that was coming off two record-breaking years."

Brakes slammed

That record-breaking period came to a screeching halt this summer when the subprime fallout sent shockwaves throughout the real estate market.

As foreclosures skyrocketed, consumer confidence plummeted and lending guidelines tightened, the residential housing market faced a barrage of problems that threatened to cripple the industry and send the nation into a recession.

Thanks to economic forecasting, builders expected somewhat of a slowdown after recent years of brisk sales, but few were prepared for the onslaught of bad news that routinely garnered headlines.

One local story in particular garnered much attention. The woes of Matthews Brothers Homebuilders - led by brothers Mark and Michael - were the talk of the industry this fall. The company defaulted on loans, was sued by banks and faced a flurry of foreclosures due at least in part to the housing slowdown. Attempts to reach Matthews Brothers were unsuccessful.

But more than anything, the company's plight revealed the resiliency that other homebuilders in Memphis were able to muster amid the slump.

Doug Collins, the newly elected president of the Memphis Area Home Builders Association as well as owner of both real estate company Prudential Collins-Maury Inc. and building company Sovereign Homes LLC, said he knows that while a handful of builders are ending this year on a high note, most simply are trying to ride out the storm.

"There are some builders that will make a profit in 2007," he said, "but it probably won't be many."


Diversifying

One of the keys to homebuilding success in 2007 was diversity. The successful builders were ones that offered a variety of product, price and location. Some even are sitting pretty as they head into the new year.

Keith Grant, owner of Keith and David Grant Homes Inc. and the MAHBA's outgoing president, said he diversified by building homes in the suburbs and condos along the Mississippi River.

"It's being in the right location, it's having the right product that caters to the buyers' needs, it's presenting a good value to the homeowner by offering the right product at the right price," he said.

Grant noted that some of his homebuilding relatives - nearly his entire family works in the business - have forayed beyond residential construction into multifamily and even hotels.

"It is advantageous to have some diversity," he said. "It's nice to have diversity, but it's also nice to have diversity in the line of single-family and attached homes that you're selling."

One of his company's entities, Rivertown LLC, led all builders in the county with 195 permits for the past 12 months. The reason is Rivertown on the Island Condos, a 200-unit development on Mud Island that's nearing completion of its first building.

"Downtown is selling well right now, so that will help overcome some of the slower markets that we're seeing," Grant said.


Still out east

Fueled by the Rivertown development, the Downtown ZIP of 38103 had a strong showing during the December 2006 to November 2007 period with 303 permits filed - making it the second-highest ZIP for new-home permits - but it was one of Shelby County's suburbs that again led the way.

The Arlington/Lakeland 38002 ZIP code ranked No. 1 in the county for permits filed within the past year, with 430.

Gillis is one builder who remains bullish on that community. FaxonGillis is among the four builders contributing to the massive Villages at White Oaks, a 600-lot development launched in the fall by Chamberlain & McCreery.

That type of project indicates the desirability that continually pushes Arlington/Lakeland to the top of permit and sales rankings.

"Arlington is a place where people want to live," Gillis said, citing new amenities such as a hospital and police station, as well as low taxes. "I think it's a desirable place. It's going to continue to be one of the stable markets."

Arlington/Lakeland and Downtown were followed by the Westwood ZIP code 38109 with 269 permits; the Cordova North ZIP of 38016 with 209; and the Rhodes College-area ZIP of 38112 with 192.


Bouncing back?

So, what happens to builders in 2008? If real estate cycles follow the patterns they have for decades, things should eventually creep back up.

"It's always that kind of ebb and flow," Collins said. "There's a shortage so we build a bunch of houses to catch up; and then at some point we caught up and nobody told us that the numbers were going to fall. Then we've got inventory and we've got to reduce it."

Reducing inventory requires a lot of buyers, who either have been reluctant to go through with their new home purchases or had trouble selling their current homes.

When the market rebounds is anyone's guess. So far, the opinions are varied, but most builders expect a slow start followed by heightened activity as the year progresses.

Grant was encouraged by the news that Business 2.0 Magazine ranked Memphis No. 6 among cities expected to "bounce back" from the housing crisis.

"Toward the middle to the end of next year we're going to start seeing some improvement in the market," he said. "The first quarter could be similar to what we've been in the last year, but all the forecasts that I've been seeing have said the Memphis market should start to rebound next year."

Gillis projected a continued lag in construction activity, especially in the first four to six months with a chance for the end of next year to finally see some improvement, albeit minimal.

"I expect 2008 to be somewhat of the same," he said. "With current inventory, I expect starts to remain low because people are remaining cautious. I expect a flat year."

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RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 61 331 19,904
MORTGAGES 80 391 23,305
FORECLOSURE NOTICES 0 83 8,387
BUILDING PERMITS 0 338 40,366
BANKRUPTCIES 35 231 13,335
BUSINESS LICENSES 28 76 6,213
UTILITY CONNECTIONS 0 125 13,120
MARRIAGE LICENSES 21 94 4,936

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