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Shea Homes' share of the Phoenix market alone “slipped a bit” in 2006, as its closings declined by 35 percent to 1,040 units. But the Walnut, Calif.–based builder doesn't regret its decision not to sell homes there through outrageous incentives and deep price cuts. “We didn't start a lot of spec homes, either,” says Buddy Satterfield, division president. “We were going to protect our margins.”
Builders around the country were forced last year to ask what, exactly, market share meant if holding onto it required giving away the farm. Saddled with cancelled contracts and unsold homes, many builders saw their only solution as doing whatever it took to lower their inventories through mortgage buydowns, free upgrades, cash and prizes, and finally price reductions that in some markets hit 25 percent. This strategy may have won builders the market-share battle, but it left some bottom lines bleeding in a ditch, as evinced by the astronomical net income declines that public builders have been reporting lately.
Retrenchment took hold last year, as permits issued—a barometer of potential future construction—declined in 18 of the 25 largest housing markets. And the land options that builders walked away from were further indications that expansion at any price was no longer viable. Given these dynamics, this year's Local Leaders listing of the top 10 builders (ranked by closings) in the top 75 metropolitan areas (ranked by permits issued), can be seen as a profile of either survival or folly. The list validates where the housing downturn hit hardest and shows where builders made a stand—or didn't—to retain their share.
Indeed, many of the builders interviewed for this article preferred to frame their divisions' performances last year in terms of sales, as opposed to closings that account for cancellations, which are the ranking data our Local Leaders charts use. Several builders also preferred to reference more confined geographic regions than the metropolitan statistical areas (MSAs) that serve as the corrals for our charts.
No matter how one looks at the markets, however, some trends were evident. Houston's leap over Atlanta and Phoenix to lead the nation in permits issued accentuates how Texas builders in general haven't felt the downturn as acutely as builders in Florida, California, and Arizona. Other markets emerged from relative obscurity, such as Salt Lake City, whose ranking jumped to 20th place from 50th in 2005, as permits there rose by nearly 96 percent, and builders and developers looked to cash in while prices were still appreciating. But the image of deck chairs being rearranged on the Titanic comes to mind when one sees how the pecking order changed in several metro markets. Even Chicago, normally one of the most stable areas, became a battle where certain builders—Pulte Homes, Lakewood Homes, and Neumann Homes—relinquished ground. Conversely, Astoria Homes' absence from the top 10 in Las Vegas was by design.
Below, Builder takes a closer look at Vegas, D.C., and another volatile market, Sacramento, Calif. But no matter where builders operated, it's a safe bet they were happier than those selling homes in Fort Myers, Fla., the poster child for the housing industry's turmoil. In February, Fitch Ratings' housing analyst Bob Curran dubbed Fort Myers “one of the worst markets in the country.” Market leader Hovnanian Enterprises took a $90 million charge in the first quarter of 2007 to cover lower sales and higher cancellations there.
Holiday Builders managed to close 15 percent more homes in Fort Myers last year by targeting first-time and move-up buyers with houses priced between $212,000 and $245,000. But Holiday's COO, Bruce Assam, foresees a 70 percent falloff in 2007, after his company “rescrubbed our pipeline and called all of our buyers to see who was still interested. We did not want to build another spec home there.”
If anything, the downturn brought quite a few high-flying Local Leaders back down to earth. Shea, for one, expects to close only 800 homes in Phoenix in 2007, even as it starts three communities and will open three others. “We're encouraged by the quality of traffic we've gotten in the last few months,” says Satterfield, whom Builder interviewed in February. “It's fewer people, but better buyers.”