There are storm clouds over Palm Beach County, Fla., these days, and it has nothing to do with the weather.

The housing market is facing a tough year. It has cooled dramatically from the heady days of 2004 and early 2005. But, never mind that the Palm Beach housing market continues to be one of the least affordable in the country or that there is solid job growth or even the fact that retirees continue to flock to the region, the number of single-family housing permits dropped nearly 25 percent over the 12 months ending in March 2006, according to HWMI.

Housing prices are still going up, but at a snail's pace. In the first quarter of 2006, the median existing home price appreciated by 9 percent. Price increases are forecast to continue, according to HWMI, but not nearly at the rate of the breathtaking rates of the past.

And big builders know it, too. Florida, a market that has been very good for D.R. Horton, is down 25 percent, according its president and CEO Tomnitz. “Florida is flat, but I look at Florida, and I say that's an evolving market,” he told analysts during the July 20 conference call.

But other builders are taking a tough look at the Florida market. Chad Drier, president and CEO of The Ryland Group says, “We are going through every cost code to make sure we are getting the best deal possible. We continue to value engineer our houses so we are not giving away extras that buyers aren't paying for.”

The market in South Florida has turned from bad to “extremely ugly,” says Zelman. Most builders in the region had to let go approximately 15 percent of their workforce and incentives, and Realtor commissions remain very high as builders are scrambling to compete with rising inventory from investors.

So just what is a builder to do in this market? Work harder, use incentives, and get bigger concessions from suppliers.

Palm Beach County has a few things going for it, including a diverse population of retirees, working families, and vacation-home buyers. Builders are also betting on a solid job market that includes a $70 million grant and site in Jupiter, Fla., for the Scripps Institute, which is dedicating itself to establishing a hub for bio-research and health sciences development. Other big employers include health care, to treat the growing senior population, and the headquarters of Office Depot and U.S. Sugar Corp.

On the up side, labor costs are dropping, according to Michael Timmerman, managing director for HWMI in Florida. He says some subcontractors are leaving the market because they cannot make it in this stalled environment.

“We've been telling builders to hold tight. They are making adjustments to land holdings and offering incentives to get product out the door. The really big competitor to them is the re-sale market,” Timmerman says.

Nevertheless, “don't bother building a condo if it's just another ‘me too' project, advises Brad Hunter, director of the South Florida region for Metrostudy, a housing market forecasting firm.

Market Snapshot: Palm Beach County, Fla. Year-over-year change

(March 2005–2006)

  • Housing growth ratio: 9.33
  • Job growth: 3.3%
  • Building permits: –17.1%
  • Inventory: N/A