Builder Beware

Builder Beware

HOME BUILDING by Sean Roth | Real Estate Editor

Peter Mason wants to make one thing clear: Contrary to what you may have heard, the hearse isn't headed up the driveway of the home building industry just yet.

The vice president of sales and marketing for Bradenton-based Bruce Williams Homes Inc. says if 2006 weren't placed against the backdrop of the three previous great years, it would be viewed as one of his company's best ever. Mason says the often-heard story of the decline in buyers is a short-lived problem that stems from greater buyer-rationality and a slight over supply of homes.

"We're seeing a 5% to 6% decline off the greatest year in our history," Mason says. "There's a chance this could end up the second or third best year for us. How bad is that?"

Mason's explanation is supported by many other Gulf Coast home builders. Many take the stance that perception of the market is really what makes the news appear so dire.

But the statistics reflect a fairly dramatic drop in sales that is being felt throughout the Gulf Coast, Florida and nationwide, too.

Locally, Lee Wetherington, president of Lee Wetherington Homes, says sales at his Sarasota firm are at $23 million in the first six months of this year, down from $40 million in the same period last year.

Naples-based home and condo tower giant WCI Communities Inc. reported that through the end of May, home orders had fallen 42% from the same five-month period a year ago. The company has since projected that orders in 2006 will be 20% lower than 2005.

And Bloomfield Hills, Mich.-based Pulte Homes Inc. reported April and May home orders decreased companywide by 29%, or 6,447 units. Pulte also projected earnings would drop by more than $1 a share, from expectations of $6 to $6.35 a share to $4.70 to $5. Pulte and its sister company, DiVosta Homes, build homes throughout the Gulf Coast.

Housing-research company Metrostudy attributes the market decline to the exit of investors, also known as flippers. In their wake lies a glut of market inventory.

Home builders aren't just waxing poetic about how good things used to be. Some are bringing out the incentives to pump up sales, such as Lennar/US Home, which recently debuted "guaranteed pricing." The program locks in the top price a buyer will pay for a house, but allows buyers to qualify for additional discounts and others incentives offered later by the homebuilder.

As in past slowdowns, the buyer shortage is also going to mean the end for some smaller builders and force others to look for openings in the market or other ways to bring in the buyers.

Increased pressure

Jason Ingram, senior vice president for sales and marketing of St. Petersburg-based CCI Homes, says the net effect of the buyer shortage will be a thinning of the home builders left operating. The company is building homes in the growing city of North Port in Sarasota County.

"There were probably about 53 builders in North Port," Ingram says. "I figure by Christmas there may only be 25 or 30.This should affect the smaller builders the most if they don't sell a building for a while."

Smaller companies typically have lower reserves and smaller margins to squeeze. "These are mainly the guys that build eight to 10 homes a year,' Ingram says. "You have trouble selling one and you could be in trouble."

The slowdown will also hurt companies that may have paid too much for land or bought it on margin, says John Cannon of John Cannon Homes. They may now have to hold the property longer.

Incentives and price cuts are becoming more common as the supply of buyers dwindles. They vary from a free pool or roof to no closing costs to six months without any payments to a discounted price.

"The goal is to generate that urgency to buy," says Scott Mairn, director of sales and marketing for US Home's Sarasota/Manatee area. US Home/Lennar, one of the most prominent provider of buyer incentives, offered the bait prior to the current slowdown, but it previously coincided with slow sales periods such as the summer months, Mairn says. Incentives target US Home's immediate inventory of homes that will be available to close in the next 40 to 45 days.

So far, the deals are having the desired effect, says Marin, the former area sales manager for US Home's Fort Myers division. New sales for the Sarasota division are up 10%, to nearly 200 sold homes this year.

Metrostudy analysts expect incentives to become more prevalent as builders continue to jockey for marketshare.

However, the wide use of incentives could pose a problem for the recovery of the market long-term, some experts say. The discounts could spurn a backlash from buyers and actually keep them on the sidelines waiting for an even better deal.

Refined market

In addition to watching the bottom line more closely, some buyers are also looking for more active niches. Local officials for Mercedes Homes' new Sarasota division, which includes Manatee County, hope to build more high-end custom homes and to specialize in building homes with specialty poured-concrete, hurricane-resistant walls.

"Our homes run from $500,000 to $1 million," says Kirk Malone, Sarasota division president for Mercedes Homes. "We're hoping to raise that inventory level up so that $600,000 is the entry level. We're just seeing more active buyers in that the upper market range."

In instances where land holding costs are not a concern, some home builders, much like condo developers before them, are choosing to delay new communities. Naples-based The Ronto Group recently decided to delay two communities planned for the East Bonita Beach Road area of Bonita Springs Road by a year to the end of 2007.

Robin Driskill, Ronto sales and marketing director, says minor delays just make sense. It gives the company a chance to sell out another community before starting on the new developments. And The Ronto Group expects the market to improve by the end of next year, Driskill says.

The biggest factor tempering the slowdown is the large backlog of work many builders amassed over the past three years. Ingram says CCI Homes is actually looking to hire more people to fill a backlog of about 300 to 400 homes.

Cannon's company still has an 18-month backlog because of the nature of the custom construction he does. Pat Neal, head of Bradenton-based Neal Communities, says the firm plans on building only one new project through 2007.

Driskill of The Ronto Group says: "I'm not going to say we will have the best year ever. [But] we had a backlog of clients waiting through the first quarter. This will be a much better pace for them."