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VOL. 123 | NO. 73 | Monday, April 14, 2008

Bottoming Out

Q1 permits plummet as inventory catches up to demand

By Eric Smith

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SLOWING DOWN: Building permits declined in the first quarter, dropping 71.3 percent from the same period a year ago. Builders have been scaling back in response to the housing slump and also refocusing efforts on places such as Fayette and DeSoto counties. -- Photo By Eric Smith

Reducing starts and shedding inventory continued to be the overriding theme for homebuilders as 2008 began, and it manifested in the shrinking number of building permits filed during first quarter.

Shelby County's residential building permits fell sharply in Q1 from the same period a year ago, according to the latest data from real estate information company Chandler Reports, www.chandlerreports.com.

Just 276 permits were filed in Shelby County during Q1 2008, down 71.3 percent from the 960 filed in Q1 2007 and down 74.4 percent from the 1,078 filed in Q1 2006.

The steep dropoff in permits came as a direct result of the sagging home sales that have plagued residential real estate since the middle of last year, said Doug Collins, president of the Memphis Area Home Builders Association and owner of real estate company Prudential Collins-Maury Inc. and building company Sovereign Homes LLC.

Once the nationwide credit crunch and foreclosures fiasco set in, builders had little choice but to scale back on construction and instead focus on selling the homes they recently had completed or started.

"Homebuilders respond to markets. People think we make markets, but we respond to markets," Collins said. "The building is down all over because we have more inventory. We build houses based on what the market will absorb. What happened is the market changed so abruptly ... so we ended up with the amount of supply we wanted based on the absorption rate of six months to a year before, but it became an oversupply based on the decreased demand."

Pockets of activity

The slumping market meant that only 21 of Shelby County's 33 ZIP codes saw new home permits filed in that three-month span. Not surprisingly, the suburbs dominated most of the permit categories.

The Arlington/Lakeland ZIP code of 38002 registered the most building permits in Q1 2008 with 65. Those permits averaged 3,892 square feet with an average value of $262,582. But even the total number was a decline of more than 46 percent from the 121 permits filed there in Q1 2007, and a decline of 64.5 percent from the 183 permits filed in Q1 2006.

The filings in 38002 were followed closely by Cordova's 38018, which had 64 Q1 permits, up 14.3 percent from Q1 2007 but down 32.6 percent from the same period in 2006.

The top ZIP code for average dollar amount per permit was the University of Memphis area's 38111, whose two permits averaged $675,000. And the top ZIP code for average square footage was Germantown's 38138, which had one permit totaling 16,231 square feet (plus two others with no square footage listed).

The ZIP code with the largest dropoff from Q1 2007 to Q1 2008 was Westwood's 38109, which fell from 220 permits to just 10, a 95.5 percent decline.

Compass Point Properties was Shelby County's top builder in terms of number of permits with 32, followed by Barry Watson Homes LLC with 27, Highland Homes with 21, and Chamberlain & McCreery and Lenox Homes LLC with 17 apiece.

A few exceptions aside, most individual builders filed fewer permits in Q1 2008 compared to the same quarter the previous year, a trend that's likely to continue into spring and summer.

"In essence, I don't think anybody's gearing up to build a lot of houses," Collins said. "I think the permit numbers will stay down, which will allow us to continue to whittle away at the inventory numbers that we have. We won't really gear up until there's a shortage of new housing."

Looking elsewhere

"I think we'll end up seeing some of the lowest permit numbers we've seen in a long time. Builders aren't going to go back and pull permits and start building speculative housing until the market demand is there."

- Doug Collins
President of the Memphis Area Home Builders Association

Whittling away at inventory wasn't the only reason permits declined in Shelby County. As Kevin Yoon, office manager for Oakland-based Southern Serenity Homes LLC, was quick to point out, the lure of Fayette County remains strong for many builders.

Yoon said his company does half its business in Shelby County and half in Fayette County, a growing emphasis among some builders but nothing new for Southern Serenity.

"We're not running to Fayette County to get away from Shelby; it just happens that we've already been there," Yoon said.

Collins acknowledged that builders might be starting homes elsewhere
in the area, but that's not the overlying reason for the dearth of permits in Shelby County.

"I think builders are looking at other areas, specifically Fayette and DeSoto counties, even Tipton County, but I think you're going to see starts significantly lag last year and the year before," Collins said. "I think we'll end up seeing some of the lowest permit numbers we've seen in a long time. Builders aren't going to go back and pull permits and start building speculative housing until the market demand is there."

Yoon said builders have to maintain a healthy balance, and that might mean putting up some speculative homes despite the soft market. It can be a precarious order considering the hesitance of buyers - not to mention the inability of some to sell their current homes - but it's imperative for long-term viability, he said.

"The builders that are in trouble are not going to start spec houses," Yoon said. "The builders that are here for the long haul, it's business as usual and they're going to have to start spec houses just to have the inventory available when the buyers walk in the door."

Commercial activity

On the commercial side, permit applications were down while permits issued were up, according to The Daily News Online. There were 370 permit applications filed in Q1, down from the 489 in Q1 2007. But the permits issued increased from 339 to 398.

The leading category for permits issued was business with 271, followed by mercantile with 52 and multifamily with 24.

PROPERTY SALES 103 137 4,008
MORTGAGES 84 131 4,521
BUILDING PERMITS 178 368 9,636
BANKRUPTCIES 50 110 2,995