Since January, Providence Homes in Jacksonville, Fla., has seen traffic at its sales offices pick up. But for the first two months of the year, the builder wasn’t converting many of those customers to buyers, and business was “pretty abysmal,” recalls Providence’s CEO Bill Cellar.
Over the last few weeks, though, sales have suddenly started to kick in. Cellar isn’t exactly sure why, but this activity has at least given him hope that business will carry through the rest of the year and beyond. “It might not be the train, but we are seeing some light” in what has been a long, dark tunnel, he says.
Builders around the country, buoyed by sales that, for some, took off in February, are crossing their fingers that 2012 will be when their businesses grow from the start of the year to its finish. No one expects a boom, but neither are builders expecting home purchases to eventually fizzle, as they did two years ago after an initial burst.
“We’re not on the ‘sugar high’ of the tax credit, and homes are selling even with high unemployment,” says Chris Cates, co-owner of Caviness and Cates Communities in Fayetteville, N.C., whose two primary markets benefit from their proximity to Fort Bragg and Camp Lejeune. “Even our ‘conventional’ markets are doing better. It’s not going to be a gangbuster recovery; just gradual and steady.”
It’s the timing of the recovery that still has builders and prognosticators guessing. On Thursday, for example, the Irvine, Calif.-based market research firm John Burns Real Estate Consulting forecast a 21% increase in housing construction activity this year, propelled in part by resurgent master-planned community development and sales.
But housing statistics so far haven't been as clear. National home prices and starts in February declined, but permits rose to their highest annualized level since October 2008. Existing home sales, while down a bit last month, were up solidly over a year ago, a signal to builders that markets are making headway clearing out their unsold inventories. In Raleigh, N.C., one of Cates’ markets, existing home sales were up 33.8% in February, according to the RE/MAX National Housing Report.
Bellevue, Wash.-based Quadrant Homes has capitalized on this existing-home dilemma via a new program that offers buyers a three-year lease guarantee on homes they already own but can’t get rid of. Sales at Quadrant’s 16 Puget Sound-area communities soared by 50% in the first two months of 2012. And four out of every five customers are availing themselves of Quadrant’s “Build Your Way” program, which allows buyers considerable latitude to customize and personalize their new houses. (Through a spokesperson, Quadrant’s president Ken Krivanec declined to project future sales because his company is a subsidiary of publicly traded Weyerhaeuser’s real estate division.)
Another positive sign of the housing market’s nascent recovery has been the restarting of stalled residential projects by banks that took them over from bankrupt builders and developers. Since 2009, lenders have awarded contracts to McBride & Son Homes to build out more than 30 of these REO projects in the greater St. Louis market, including 200 units in the New Town master-planned community in St. Charles, Mo., a deal valued at $35 million. “We have worked very hard to foster banking relationships and, most important, we deliver what we promise,” John Eilermann Jr., McBride’s CEO, tells Builder.
But McBride is also “transitioning” from building out foreclosed projects to developing its own again, and the company has enough confidence that its markets are improving to begin buying land for that purpose. “We just closed on our first raw land deal this month and will immediately begin development,” says Eilermann. “We have three more coming in the next six months.” His company is only interested in what he calls “A-plus” real estate, “meaning projects in ideal locations and ideal prices. It is definitely a lesson learned in our industry over the last six years: builders were convincing themselves that ‘C’ and ‘B’ grade projects were viable and acceptable. They are not.”
Houston-based David Weekley Homes expects to open another 30 to 40 new communities this year. Those projects will be modestly scaled, to between six and 50 units each, as this builder focuses on what its chairman, David Weekley, calls “unique positional community development.” What he means by that is, for example, building patio homes or in-town homes in markets where there are short supplies of these products. The builder relies on its team of Internet Advisors to promote “Coming Soon” communities and assemble lists of eager shoppers.
David Weekley Homes sold more than 100 houses in February, which represented a 40% increase over the same month in 2011. Weekley says business “in general” has been “improving” in the 16 cities where his company builds and sells. The builder has been selling more presales and fewer specs to move-up customers who “want what they want and are spending more time picking out options and making changes. That plays right into our strength because we’ll do customization.”
Headwinds Are Still Blowing
Weekley thinks his company’s sales should continue to expand in the coming months. But, like other builders, he’s hedging his bets and being careful not to overestimate early sales returns.
“It will be interesting to see how interest rates—which have risen 30 basis points—affect sales,” he says. Weekley also worries about the prospect of rising costs for materials and labor, which could further erode margins that are already thin because of price discounting that is necessary in order to sell houses. “It’s still competitive, and there are customers who want to negotiate every price,” observes Carl Mulac, CEO of Avatar Homes, which builds in Florida and Arizona. And yet, Avatar has been able to take modest price gains at some of its communities.
Greg Yakim, CEO of Texas-based Castlerock Communities, says his company “strategically” scaled back its unit sales last year as not to “chase margin” with national builders he claims are “underpricing their products.” But pricing worries him less than a “dysfunctional mortgage environment” with “uncertain” regulatory restrictions that Yakim claims “is getting worse” and could make it even harder for buyers to qualify for loans.
These impediments, though, didn't keep Castlerock from expanding its business during the recession, during which it reduced its debt to zero. This year, it will open new communities and Yakim is anticipating “a significant increase in unit sales.”
“It just feels better out there,” says Mulac. But not quite right enough to be buying land because, he explains, “when it costs $25,000 to $30,000 to develop a lot, it’s hard to make deals work.”
John Caulfield is senior editor for Builder magazine.