Signs of Hope

Signs of Hope

HOMEBUILDING by Jean Gruss | Editor/Lee-Collier

Lee County is widely considered ground zero for the state's housing bust. But there are finally some tentative signs of the market's recovery.

Like crocuses in late winter, there are signs of spring in Lee County's homebuilding market.

For the third quarter in a row, the inventory of finished vacant homes in Lee County subdivisions has declined, according to analysts at Metrostudy. "Move-ins have been higher than completions for the past three quarters," says Alan Hunter, an analyst with Metrostudy in West Palm Beach.

That's finally some good news for Lee County, an area that is widely considered to be the epicenter of the state's housing bust. Builders must sell thousands of empty homes constructed during the boom before the market can recover.

To be sure, there's still a long way to go before supply of new homes and the demand for them reach a balance. In overbuilt markets such as Cape Coral and Lehigh Acres, that could take as long as five or six years based on the current pace of household formations, estimates Russell Weyer, an economist with Fishkind & Associates in Naples.

"Fort Myers has to be right up there as an expression of that boom and bust cycle," says Jonathan Dienhart, director of published research for Hanley Wood Market Intelligence in Costa Mesa, Cal. "The credit situation will have a lot to do with how things pan out."

In the second quarter, Hanley Wood ranked Fort Myers as the third-highest market in the country for residential permits issued per 1,000 residents behind Myrtle Beach, S.C., and Wilmington, N.C. That's despite a 61% drop in residential permits issued in the 12 months ending in June. In addition, the area's permit growth is now ahead of job growth. "The job growth there was really big and it tapered off recently," Dienhart says.

Other wildcards include the pace of foreclosures, the general economy and what legislators do to remedy the property tax and insurance problems.

But for now, builders aren't starting homes unless they have solid buyers.

While this is painful for builders today, reduced inventories are the key first step to recovery.

For 2008, Metrostudy forecasts just 1,600 home starts in Lee County subdivisions.

During the boom, that's how many homes builders started in a quarter. Weyer, with Fishkind, projects 4,800 starts in Lee County for 2008, which includes both subdivisions and scattered lots. In 2009, he forecasts 4,500 starts.

"Our prices are back to 2003," says Cheryl Sczesny, sales manager with Adams Homes in Cape Coral, one of the largest homebuilders in Lee County. A top-model Adams Home that used to cost $300,000 a few years ago can now be purchased for $200,000, she says.

So far this year, Adams Homes has written 113 contracts for sales of homes in Cape Coral. In 2004, the company wrote 738 contracts but many buyers subsequently defaulted.

"By this time next year, inventory will be eaten up," Sczesny says. "Every single builder wants to sell inventory and go on and be the builders they were meant to be."

'The End is Near'

Builders are marketing aggressively to cautious buyers. In one eye-catching example in Lee County, marketing firm Spiro & Associates designed a campaign for Engle Homes that shows a wild-eyed man with a sign that proclaims: "The End is Near."

Meanwhile, the Lee Building Industry Association has collected $180,000 in cash from area builders and related trades for an advertising campaign urging people to buy a home in Southwest Florida. That effort includes a $40,000 grant from the National Association of Home Builders. The campaign, which just recently got underway, features advertising in newspapers, radio and billboards. There's also a Web site called www.buynowswfla.com.

For now, builders say buyers are leery of buying homes that may further decline in value. "There's no sense of urgency on the part of the buyer," says Jamie Pirrello, chief executive officer of Vision Homes USA in Fort Myers. "They don't know that we've hit bottom."

It's hard to shift buyer psychology, especially after a bubble bursts. The housing downturn is eerily similar to the tech crash in 2001. Few people were buying technology stocks in 2003 even though it was two years after the bubble burst. Looking back, investors who accumulated tech shares that year have profited handsomely today.

The luxury market is not impacted as much by overbuilding, some builders say. Don Koogler, owner of luxury custom homebuilder Koogler Homes in Cape Coral, says he's seeing as many buyers of multi-million-dollar homes as he saw two years ago during the boom. Although he concedes they're all bargain hunting now, he says it's an indication demand is there. "The people who have money come out at these times," Koogler says. "This is usually when they'll really show themselves."

Koogler says if lawmakers can cap taxes and insurance for second-home buyers, the residential market could rebound during the busy tourism season this winter. "Those people will flood Florida again," he says.

Some builders are focusing on existing homes. "We've targeted remodeling in addition to homebuilding to get us through the market right now," says Annette Carrasquillo, office manager with Community Homes in Cape Coral. "That's something a lot of people are considering now because of the property tax situation."

Under the current law, property owners can't transfer their homestead exemption when they move and buy a new house, although state legislators have been exploring the idea of such portability in the most recent special session.

Foreclosures loom

Among the biggest concerns is what the impact of foreclosures will have on homebuilding. "That's what's got me worried," says Metrostudy's Hunter.

When banks foreclose on homes, they usually sell them at a discount to get them off their balance sheets. "Obviously, the banks don't want these houses," Hunter says.

There are currently 7,200 homes in the foreclosure process in Lee County, though it's not clear how many of those are newly built homes.

There's no sign the rate of foreclosures will slow soon because many adjustable-rate mortgages that were sold with low teaser rates are scheduled to reset at much higher rates within the next six months.

"If all these [homes] get dumped on the market it's going to put tremendous downward pressure on price," Hunter says.

Still, some builders say foreclosed homes often need repairs because they haven't been lived in for months and the prior owners frequently have damaged the interior. "You can't compete against a brand-new home," says Sczesny.

In addition, Pirrello says foreclosures don't necessarily add to the inventory of empty homes. That's because someone who has had to vacate his home will occupy another by renting.

Unless they move out of the area, they'll take a vacant home off the market. "The bad thing is when banks own real estate they sell at whatever the market-clearing prices are," he says.

REVIEW SUMMARY

Industry. Homebuilding

Trend. The massive inventory of vacant homes in Lee is beginning to decline.

Key. Inventory declines and rising customer traffic are the first signs of a recovery.