VOL. 123 | NO. 202 | Wednesday, October 15, 2008
Q3 Building Permits Plummet
By Eric Smith
Listen to homebuilders’ language and it’s easy to discern their problems. Instead of using terms such as “expanding operations” and “ramping up production” – as they did a few years ago – builders now resort to phrases like “hunkering down” and “scaling back.”
But they aren’t just words. The numbers support the notion that homebuilding is one of the most decimated industries in this economic crisis.
Building permits in Shelby County declined 59 percent in the third quarter (July through September) compared to the same quarter a year ago, according to the latest data from real estate information company Chandler Reports, www.chandlerreports.com.
Homebuilders filed just 220 permits over that three-month span – fewer than three a day – down from 537 in Q3 2007. Worse, last quarter marked a 76.7 percent dropoff from the 946 permits filed in Q3 2006.
Of Shelby County’s 30 ZIP codes that saw at least one permit filed in Q3 2006 and 2007, only 22 saw activity in Q3 2008, with only six ZIP codes registering double-digit permits. Only two ZIP codes, Westwood’s 38109 and Frayser’s 38127, saw permit numbers increase from last year.
Doug Collins, president of the Memphis Area Home Builders Association (MAHBA) and owner of the real estate company Prudential Collins-Maury Inc. and building company Sovereign Homes LLC, said the decline in permits is a simple result of supply and demand.
“Builders don’t create markets; they respond to markets,” Collins said. “There’s no reason to go start a house because the demand isn’t there.”
Shedding the surplus
With little demand – the result of a credit crunch, declining home values and waning consumer confidence – homebuilders instead are committed to reducing inventory, something they’ve been focused on for the past year as they work toward market correction.
“Builders are going to continue to do that,” Collins said. “We will respond after the market turns. You won’t see us go out and pull building permits until the market says we’re ready to get active again. And I don’t see that happening before the first of the year.”
Building permits for Q3 averaged 3,093 square feet and $225,382, both of which were down from Q3 2007’s averages of 3,189 square feet and $249,629.
The top ZIP code for permit activity was Arlington/Lakeland’s 38002 with 46 permits, although that marked a 56.2 percent drop from 105 permits in Q3 2007 and an 81.2 percent drop from 245 permits in Q3 2006.
The top builders for Q3 were FaxonGillis Homes, which pulled 40 permits averaging 2,571 square feet and $170,811; Barry Watson Homes, which pulled 28 permits averaging 2,456 square feet and $172,537; and Charles Morgan of Vintage Homes, which pulled 17 permits averaging 2,866 square feet and $172,114.
Barry Watson, owner of Barry Watson Homes, said the emphasis for homebuilders today is different with regard to pulling permits. Simply put, there is almost zero speculative building happening in this housing slump.
“We are working on a presale basis. If we start a house it needs to be a sold house,” Watson said. “We do have some that end up for some reason or the other as not being able to consummate, so we turn those into a spec house and it sells right away. But we don’t like to start anything that doesn’t already have a sold sign. That’s what we’re going to do as long as there’s volatility in the market.”
Proceeding with caution
Charles Morgan, owner of Vintage Homes LLC, said because of that market volatility he changed his business model from a “move-up builder” to an “entry-level builder,” constructing more affordable homes.
“It’s been a good move for us,” Morgan said. “What you’re going to see is that the builders that are at the low end of the spectrum – that is, the deep end of the ocean – are the ones that are going to have the better shot of making it through this simply because of the finances involved. It comes down to simple math.”
Meanwhile, FaxonGillis was bolstered in Q3 by its Austin Park Place development in Westwood’s 38109 ZIP code, the leading subdivision for permit activity in the quarter.
Austin Park Place is where City Housing LLC – an entity set up by FaxonGillis Homes and Dean Tutor – is building a $9 million low-income rental community along the west side of Horn Lake Road between Raines Road and Shelby Drive.
FaxonGillis owner Jerry Gillis said that while developments like Austin Park Place have been a boon for the company, his focus of getting homes off the books is no different than other builders.
“Inventory has fallen; whether or not it’s fallen enough is always the question,” Gillis said. “I think builders are more focused on moving inventory than starting new product.”
Out of work
While this shift from starts to sales can reduce inventory and restore balance to the market, it has some obvious downsides. Builders as well as their suppliers and subcontractors are forced to reduce overhead. That means fewer jobs across the board.
“We’ve had plumbers and electricians that laid off half their work force,” Gillis said. “It’s had a definite impact in the trades and suppliers that supply the residential business.”
As Collins noted, the companies supplying carpet, concrete or curtains, or those framing or roofing houses, are being devastated by the slowdown as much as the builders.
“It’s a far-reaching effect on the economy,” he said.
Morgan mentioned a builder he knew who had to cut his staff from 16 to eight, a direct result of starting fewer homes.
All that said, many companies have resolved to “weather the storm,” a phrase that is being used more frequently.
“There’s a lot of builders suffering that decided to hang on,” Morgan said. “We’ll entrench ourselves and wait for something to come back around.”