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VOL. 124 | NO. 179 | Friday, September 11, 2009

What People Want

Beleaguered builders look to accommodate potential homebuyers

By Eric Smith

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SOLID FOOTING: A carpet layer works on a home at 12488 Magnolia Bend in Villages at White Oak in Arlington. The home is one of eight in the subdivision being built for the Memphis Area Home Builders Association’s Vesta Home Show this year, and the Villages at White Oak is one of the busiest. – PHOTO BY LANCE MURPHEY

At one time, the quintessential image for the homebuilding industry was a busy job site where contractors and subcontractors worked on everything from a home’s framing to its plumbing, from its wiring to its roofing.

Today, the most apt depiction is an empty lot.

Homebuilders during the past year set a new low for new home starts in Shelby County, at least as long as records have been tracked by real estate information company Chandler Reports, www.chandlerreports.com.

From August 2008 through July 2009, builders pulled just 537 permits for new homes in Shelby County, a 60.7 percent decline from 1,367 new home permits for the 12-month period ending July 2008 and an 84.5 percent decline from 3,469 new home permits for the 12-month period ending July 2007.

The shockingly low number of starts during the past year is a direct result of one of the worst real estate crises in history as financing dried up, foreclosures skyrocketed and home values plummeted.

“The permits speak for themselves,” said Stephen Hodgkins, president of the Memphis Area Home Builders Association and owner of Oaktree Homes LLC. “Builders have done a good job of scaling back and waiting until values come back up until they build.”

Delayed gratification

When that happens is anyone’s guess, but industry officials are hopeful that construction activity resumes soon. Doug Collins, immediate past president of MAHBA and owner of the real estate company Prudential Collins-Maury Inc. and building company Sovereign Homes LLC, said he thinks the worst is over and the industry has reached the bottom.

“Maybe even the bottom happened 30 days ago,” Collins said. “Most of the new home inventory that was out there when we had an oversupply has been absorbed either through sales and/or leases. So the inventory stock is down substantially.”

Does that low inventory signal brighter days ahead for an industry that has been rankled by waning consumer confidence and an abysmal lending landscape?

As Hodgkins and Collins were quick to point out, builders don’t create markets – they react to them. And after the subprime mess that was followed by a severe slowdown in home purchasing, it’s no surprise that no one wanted to plunk down $400,000 for a home when the job market was so shaky.

That scenario left hapless builders with a surplus of empty lots – some fully developed, some not – and a world of financial woe because of the toll those expensive lots took on their bottom lines.

“We ended up with a glut of housing stock because it was already in process,” Collins said. “That process has run its course now. There hasn’t been anybody that I know of out developing lots. There’s no new lots coming on and haven’t been for probably three years. We will see, as the consumer confidence numbers improve and as job numbers improve, people coming back into the market.”

Demand curves

Because Shelby County historically has built 3,000 to 4,000 homes a year for decades, it’s likely the supply-demand equation will someday turn back toward homebuilders’ advantage.

Collins projects that by next spring the supply of new homes will be much lower than the demand for them, creating the need for more starts. But, he added, that doesn’t mean builders will go crazy putting up new products.

“After the beating we’ve taken over the last three years, nobody’s going to be in a hurry to go back out and take the risk of speculative inventory,” Collins said. “I think you’re going to see permits remain down and continue to lag demand, and that’s actually a good thing.”

Still, with homebuilding representing a large portion of the national economy – think of the jobs one single-family home creates from materials to construction – a financial turnaround in some ways depends on the health of the industry.

“We’re going to have a need for more new homes,” Hodgkins said. “There’s no question that what’s happened in the economy has hurt us, but the long-term need for new homes is definitely there. With all that being said, determining what people want is going to be the next step.”

Hodgkins said he could see square footage shrinking and expensive amenities dissipating, although the average size and value of homes during the past year remained fairly consistent from the previous two periods.

There is one area where he sees a significant change coming.

“I’m an old guy, I’ve been building for 30 years and I don’t think this green building thing is a gimmick,” he said. “I think people are going to demand higher energy efficiency standards, and I think the market is going to start demanding it.”

Fads, fundamentals

One builder who exemplified the need to adapt to the changing markets is Barry Watson, regularly a leader in new home permits the past couple of years thanks to a handful of popular developments, including LaGrange Commons in Cordova.

However, Watson is no longer affiliated with his namesake company, Barry Watson Homes LLC. He instead has forged a joint venture with John Worley to create Woodgrove Homes LLC, a building company that has begun putting up homes in Collierville.

Watson admitted the economy has impacted the industry “tremendously,” and his own changes are just one example of homebuilding’s tumult.

“The industry itself over the last few years has been so good that you could get by with just a marginal knowledge of homebuilding and business, and you could do a pretty decent job if you got in a good area,” Watson said. “What has happened with the economy collapsing like it has, you got to be on top of your game to stay busy. And you got to diversify.”

Watson said the key is keeping a finger on the pulse of the latest trends, from home sizes to home styles to what amenities buyers prefer.

“You’ve got to take every factor and weigh it heavily as to whether or not it’s a risk you want to take,” he said. “There’s been a lot of builders that didn’t have a really good construction background that decided they’re going to do something else for a while – and they may not ever come back.”

The builders who survive this market, Watson warned, are the ones who have a strong building and business foundation. The ones who got in when Shelby County was building 4,000 homes a year and were able to be order takers for developers likely won’t make it, if they haven’t gotten out already.

“Builders that are in business during that time will be in the best position ever,” he said. “A lot of their competition will be gone, and they’ll have proven that they know how to build a house and know how to market them. Anybody that can make it through the next year or two, depending on how long it takes to really turn, is going to be in good shape. I hope I’m going to be one of them.”

PROPERTY SALES 38 38 20,670
MORTGAGES 45 45 23,790
BUILDING PERMITS 187 187 42,781
BANKRUPTCIES 57 57 13,237