The mood of the moment for builders? Cautious optimism.
At the Jones Company of Tennessee, traffic has improved in May and June compared to the early months of 2009. “We are cautiously optimistic,” said Bridget Wright, marketing director for the Franklin, Tenn.-based firm.
In Maryland, the founder of Frederick-based Dan Ryan Builders recently expressed the identical sentiment to BUILDER. With 56 sales in May, it was “the best month we’ve had in two to three years,” said Dan Ryan, who owns the Frederick home building company, which also posted relatively strong performances in March and April of this year. “So we’re cautiously optimistic, and we’re trying to get a reading on the pulse” of would-be home buyers, he explained. “Is this just a seasonal spring market or does it have some depth?”
That’s an important question for builders, as they assess whether to build more specs for fall buyers eager to take advantage of the federal housing tax credit before it expires or find a way to buy more land, despite the dearth of capital currently available for such deals. "I'm watching to see if this is a false start on the recovery," said Karl Haslinger, CEO of Essex Homes in Lexington, S.C. "Our big fear is that when the housing tax credit goes away, housing goes back into recession."
For the moment, though, sales do seem to improving for many builders large and small. Public builder Lennar this week reported it sold more than 3,500 homes between March and May of this year, which is an increase of 63% compared to the previous quarter. Fellow public KB Home also said its second-quarter sales jumped 59%, to 2,910 homes, according to financial information released Thursday. Even Essex sold 40 homes in April, "which is as good as any month we've ever had," said Haslinger, whose company sold 340 homes last year, down from its 430-unit boomtime peak.
Significantly, builders say it’s not just first-time buyers who are returning to the market either. “In the past 30 days, we’ve done more business than we’ve done in the first four-and-a-half months of the year,” Kelly Dempsey, vice president of sales and marketing at Jim Chapman Communities, told BUILDER last week. Jim Chapman, based in Atlanta, builds small (less than 100 units) infill communities for active adults, a market segment notoriously slow to move on a new home. “I think they’ve come to the acceptance that [the housing market] is what it is,” Dempsey said. “People are done grieving” for their lost housing wealth and are ready to move forward.
David Weekley Homes, which targets move-up buyers, is also seeing “positive signs,” according to John Johnson, president and CEO of the Houston, Texas-based builder. “Traffic and sales started picking up for us in February, and we’ve been at about 90% of our business plan for sales through May,” he explained.
Ironically, given the pricing pressure existing homes are putting on new homes these days, builders are benefiting from the increased activity in the existing home market. “Buyers are having some success selling their houses,” Dempsey said. “We had a buyer who’d been our interest list for seven months who came in and said, ‘I just sold [my home] and I need something in the next 30 to 40 days.’”
That urgency to move is emerging in other markets as well. “People are selling their existing homes at prices they expected to get,” said Michael Dubb, owner of The Beechwood Organization in Jericho, N.Y. As a result, many buyers need to move more quickly than they would have in the past. At Beechwood’s Meadowbrook Pointe community in Nassau County, N.Y., which features condo apartments, the builder has set aside about a dozen units that people who have sold their existing homes can live in temporarily until the home they purchased from Beechwood is completed. “These are always full,” Dubb said.
Some of the motivation may be coming from the federal housing tax credit, which offers $8,000 to first-time home buyers who close on or before Nov. 30, 2009. That credit “hits our market square in the forehead,” said Ryan. But he and others wonder how well their prospects and customers really understand the credit, which has had several iterations, such as last year’s $7,000 “temporary” tax credit and now the ability to monetize this year’s $8,000 credit for FHA buyers with certain conditions.
Mortgage rates, while on the rise, have been historically low as well, hitting the high 4% range in May. “The public has finally begun to realize that now truly is a great time to buy and that interest rates are not going to get lower,” said Perry Pratt, director of operations at the Jones Company. “They are finally taking advantage of that.” So are move-up builders, who realize that while their home’s values might have dropped, so has the price on the new home they might want to buy. “What is motivating them is a tremendous deal,” said Mike Ruland of Atlanta’s Peachtree Residential Properties, a move-up builder where the average sales price is in the $400s.
Unfortunately, improving sales figures don’t mean builders are seeing improved profitability just yet. Even at private powerhouse David Weekley, there’s “a lot of pressure” on margins right now, Johnson said, because the company is still trying to move its unsold inventory. “It’s not a pretty sight right now,” agreed Peachtree’s Ruland. “Some [homes] are profitable, some are not. … Getting just plain movement outranks profit right now.”
Alison Rice is senior editor, online, at BUILDER magazine. Senior editor John Caulfield also contributed reporting to this story.