BUILDER's annual Local Leaders ranking of the top 75 markets in the country, based on numbers of permits, and the top 10 builders in each, based on numbers of closings, proves correct once again the old saw of location, location, location. But this time around, the aspects of the location that appealed to buyers were not sunny climes and resort amenities but, rather, economic realities.
Florida, as might be expected, took the biggest hit in the rankings with 10 areas within the state falling anywhere from two to 21 places on the list. California weighed in with pretty evenly distributed ups and downs, and all six areas in Texas that appeared on last year's list either stayed the same or headed up a bit in the rankings. But some areas—Salt Lake City, Boston, Memphis, Tenn.—rose with a bullet. The housing industry, in other words, looks very different depending on where you're standing.
What does this localized list of rising and falling permits really mean? On the face of it, probably nothing earth shattering to builders, who already know that it makes a big difference what state you build in—and what county within that state, what municipality in that county, all the way down to which block on what street. But it might be news to some economists who continue to focus on national statistics in starts, sales, prices, and foreclosures.
Sure, national averages are indicators of trends but are, by no means, the whole story. Even regional or state-by-state assessments can be way off the mark for many of the localities within them. It's too easy for huge drops or increases in some areas to skew the totals for the larger picture. Housing is, first and foremost, a local industry, despite the growing consolidation by big builders. Local economies, governments, and resources, for the most part, dictate what can be built and what will be sold. And it appears that, going forward, all three of those elements will need to be present, in good shape, and working in concert to effect the turnaround that we are all hoping for.
Two communities in close proximity in Florida, for example, highlight that need for a solid base. Both were selling like mad in the good times and both were slammed by the downturn. Now, though, says Keith Buescher, president of Melbourne, Fla.–based Mercedes Homes, “Palm Beach and the area south of it are okay, with not a lot of spec inventory. But Port St. Lucie, essentially a bedroom community for the Palm Beach area, will take a much longer time to come back.”
What was different about these nearby areas? The feeding frenzy that was Port St. Lucie from 2003 to 2005 was fueled by cheap land, price appreciation in surrounding areas, and loads of speculators. Builders there said they were able to raise their prices by $5,000 every month or two and people kept buying. There was a big increase in starts in the Palm Beach area, too, along with some pretty serious price appreciation. But what Palm Beach has that Port St. Lucie does not is a good job base.
So what is the lesson to be learned from 2006's numbers? Now that many investors and speculators have, like Elvis, left the building, it's time to get back to basics and refocus on industry fundamentals, such as supply and demand. It's time to think about what normal demand will look like without investors and how to get your supply down to accommodate that estimate. There is still too much inventory around and soon you'll also be competing with banks selling their foreclosures as well as the next batch of investors who've been waiting for a better time to sell. Redo your market analysis: Find out who your customers are most likely to be and how much they can afford, and what's selling in your area and for how much. Then take a good hard look at your product and pricing and adjust accordingly.
But most important, refocus on the customers themselves. Spend time with them, follow up, make a connection. Because whoever walks through your doors is your target market.
Denise Dersin, Editor in Chief