Metro Detroit Struggles To Get Off The Mat

Metro Detroit, with its 17% unemployment rate, has become a wasteland for builders, and you can literally count on two hands those companies that are building anything residential in this metro area's four counties. Builders pulled fewer than 750 single-family building permits, and only 924 total residential permits, this year through August, according to the Southeast Michigan Council of Governments.

That compares to 3,074 permits for all of 2008 and the market’s pre-recession 40-year average of about 16,000 permits per year. And builders can’t know what demand really is because banks have all but shut off the vertical financing needed to replenish new-home inventory that is nearly nonexistent, says Byrne Benson, owner of Housing Consultants, a research and consulting firm based in Clarkson, Mich.

PulteGroup, the market’s largest builder and one of the few that are currently active there, recently gave what some observers interpreted as an ambivalent commitment to its home state when a spokesperson told the Detroit News that while Pulte has no intention of leaving Michigan, it wasn’t planning to bring its entry-level Centex brand there, either. (A Pulte spokesman declined an interview request from BUILDER.)

But “entry level” has little meaning when houses in the city of Detroit are selling for under $10,000, and when there are some parts of the city that are radioactive for even the boldest investor, regardless of how low home or land prices fall.

However, local builders and market watchers remain optimistic about the long-range prospects for metro Detroit, which still has close to five million residents and where certain sectors—such as healthcare, education, IT, and environmental—have been relatively immune to the economic blight that has otherwise laid this region low.

While almost no one expects metro Detroit’s housing market to bottom before mid-2010 at the earliest, encouraging signs are evident in the area’s August home sales, which rose by 11.5% over a year ago to 4,572, according to Realcomp II, a multiple listing service.

Granted, foreclosures account for the majority of purchases and continue to drag down median sales prices in many neighborhoods. “But sales have been increasing every month this year,” says Fran Green, Realcomp’s marketing manager. And real estate agents and builders take solace in the fact that unsold standing inventory continues to drop. Multiple listings in August were down 27.2% from a year ago, to 47,753.

Timing the recovery

Right now, residential construction in metro Detroit is at its lowest level in four decades, says Michael Stoskopf, CEO of the BIA of Southeastern Michigan. He could cite only eight of the BIA’s 350 builder members—Pulte, Toll Brothers, Lombardo Homes, Pinnacle Homes, Superb Homes, Silverado Homes, Soave Homes. and Infinity Homes—that are actually building. He thinks the market is beginning to recover, albeit “on a small scale in limited subdivisions where the price of land is not a factor in the total price of the home.”

Stoskopf has devised a forecasting model that uses four factors—oil prices, North American auto production, employment in Detroit-Livonia, and the average sales prices of homes in metro Detroit’s four counties—to predict permits. He’s plugged in data going back to 1998, and the model’s historical accuracy is 91%. Using this model, Stoskopf believes metro Detroit could start coming out of its black hole next month, and pick up “slightly” in the months that follow.

Benson also insists the market must inevitably bounce back. “There are 70,000 to 75,000 births here each year, and 15,000 to 18,000 households formed. People aren’t packing up and leaving because there are no jobs anywhere else, either.” His son, Greg, who runs Benson Homes Michigan, recently agreed to build out lots for banks, and there’s potential in that arrangement to build on between 100 and 125 lots. Such stopgap measures would become less necessary for builders if, as Benson expects, the market gets back up to 10,000 annual starts within the next five years.

Sporadic demand

Currently, though, most builders are simply fighting to live another day in a very difficult environment. But given that there’s been no spec building in metro Detroit for at least three years, any builder with new product will have an advantage if and when buyer demand swings upward.

Most of what’s being built today is in metro Detroit’s suburbs such as affluent Oakland Country, where Superb Homes is active in two communities. Superb Homes has sold two homes so far this year, and expects to sell two more by December. Its houses range from 3,600 square feet to 8,000 square feet, and from $500,000 to $2 million, although the builder has had to drop its prices on the high-end stuff by as much as 25%. “Our mindset right now is that’s the cost of doing business, and we’re choosing not to be a victim of circumstance,” says Superb’s owner Rich Kligman.

During the downturn, his company has also done large renovation projects. “This wasn’t our game plan initially, and it’s a different animal,” says Kligman. “But we’ve had good results, we do it well, and we’ll probably continue to look for bigger projects” in the $50,000 to $100,000 range.

Pinnacle Homes is active in a few subdivisions in “A” locations, such as Rochester Hills, Mich., where it acquired 85 lots from Centex for 30 cents on the dollar. “So where Centex’s homes were priced at $400,000, the lower land costs allows us to offer a better-made home for $300,000,” says Howard Fingeroot, who owns Pinnacle and a development company called Diversified Property Group. Pinnacle opened its first model in Rochester Hills in June 2008, and in the ensuring 15 months has sold 32 houses, closed 20, and has 12 in backlog. The houses are on 75- by 120-foot lots, and two plans—one at 2,400 square feet, the other 2,900 square feet—account for 80% of Pinnacle’s sales in this subdivision. “We’re even making a little money,” but margins, at around 15%, are thinner, says Fingeroot.

His company is also building in Novi, Mich., where it purchased 67 lots from a bank two years ago. Three homes that had already been built in that subdivision sold for between $700,000 and $1 million, but Pinnacle is bringing on 3,000-square-foot homes whose price tag will fall between $300,000 and $400,000.

Fingeroot has positive feelings about metro Detroit’s recovery over the next five to seven years, partly because “there’s a lot of money being spent here on alternative energy,” which should create more new jobs. Another reason for hope is that his company has had more interest from investors over the past six months than it’s had in the previous three years.

The same is true for Windham Development, which lately has been receiving “multiple offers” for properties it’s managing, says owner Herbert Lawson, who sees “a partly sunny picture” in the area’s recovery. Lawson cites one property (a former model with some furniture) that Windham listed at $299,000 and fetched a $310,000 bid. “We also just finished a six-unit attached project in Macomb Township, and all of the units are under contract.”

Windham has been working with Chicago-based NRC Realty & Capital Advisors to conduct auctions of homes and real estate. In June, it auctioned 11 developed lots whose average bid of $50,000 was significantly above the $30,000 minimum Windham had set. In October, it will conduct another auction “and already we’ve sold three of those properties online,” says Lawson, who sees the auction process as “a call to action” for buyers.

While Windham is primarily active in metro Detroit’s suburbs, it is also the master developer of a 137-acre mixed-use urban redevelopment in the city of Detroit that, when completed, will include 400 subsidized rental units and 230 single-family homes. There are tax credits of up to $60,000 available for home buyers, and the mix of houses will appeal to different income levels. This project also will include 100 units for seniors, a shopping center, a daycare center, and two schools. An estimated $25 million in infrastructure is going into this project, and new-home construction should get going early next year.

Lawson is a native Detroiter and his 43-year-old company has been active in metro Detroit since 1990. He’s gone through two other severe housing downturns—in 1973-1975, and 1980-1983—and lived to tell about it, so he’s confident again that Southeastern Michigan can somehow get through this latest recession, and “be stronger than anyone is anticipating.”

John Caulfield is senior editor for BUILDER magazine.