Earlier this year, Park Square Homes pulled out of a project in Claremont, Fla., that the Orlando, Fla.–based builder had spent the previous 18 months resolving with local officials and homeowners. Development costs were heading north of $50 million, and local home prices had fallen by 10 percent. Park Square no longer felt confident that it could squeeze enough profit from this community.

“Th[e] market that was there a year ago isn't there now,” explains Suresh Gupta, Park Square's CEO.

Buyer demand has been waning, in Florida and other hot housing markets, since the summer of 2005. For the fifth time in six months, the Commerce Department estimated that new-home starts fell in July by 2.5 percent, to 1.795 million units, its lowest annualized rate in 20 months. Permits that month fell by 6.5 percent, their steepest decline since September 1999. And the National Association of Realtors (NAR) estimates that existing-home sales in June fell by nearly 9 percent compared with June 2005. Price appreciation, which had been automatic for new and existing homes for most of this decade, is no longer a sure bet. That's put builders in a funk, the likes of which hasn't been seen in nearly 15 years, to the point where several large production builders, including D.R. Horton, The Ryland Group, Hovnanian Enterprises, Toll Brothers, and Pulte Homes, have had to rein in their closings for this year, in Horton's case by 15 percent. Buying activity has been so soft in some areas that builders pine nostalgically for speculators who helped pump up prices and sales. Those investors have mostly dispersed, leaving builders and developers asking what's next: A “healthy correction” that sorts itself out benignly over the next year or two; or the tip of a more fearsome iceberg into which a profligate industry is destined to collide?

What, in other words, will be the new “normal” for America's largest industry in the months and years ahead?

Builders and analysts insist that there's no “national” housing market, and that national data often miss the nuances of regional or local realignments. So BUILDER looked at the business climates for builders in 10 markets: Boston, Charlotte, N.C.; Kansas City, Mo./Kan.; Phoenix; Port St. Lucie, Fla.; Portland, Ore.; Reno, Nev.; Salt Lake City; San Antonio; and San Diego. These markets represent a cross section of demand curves, speculative incursions, and price gyrations. But builders in all markets seem to share uncertainty about their futures. Throw in a few X factors—a shift in political leadership; tougher immigration laws; rising gas prices, property taxes, and interest rates; and intractable international tensions—and it's anybody's guess whether consumers' confidence will ultimately be shaken or stirred.

DIVIDED OPINIONS The Greek chorus that usually chimes in on such matters is divided. The “soft landing” contingent, led by builder and Realtor trade groups, sees a market that “is going through major transitions, from unsustainable heat to sustainable growth,” says David Seiders, chief economist for the NAHB, which projects that, ebbs in demand this year and next notwithstanding, the United States can absorb 1.9 million to 2 million starts per year for at least the next decade. Jonathan Dienhart, director of published research for Hanley Wood Market Intelligence, anticipates that the market will continue to be volatile through 2007 because “there's a lot of stuff in the pipeline” in terms of unsold inventory. However, he foresees a “reasonably gradual” recovery and notes that 2006 should still be the industry's third-best for permits: “Even if new-home sales dip 10 percent for each of the next two years, that's still over the 1 million [units sold] mark.” Michael Castleman, executive vice president with Houston-based research firm American Metro/Study, says the industry is “well into a ‘normal' cycle,” where unsold inventories, which have plagued areas where speculators roamed unimpeded, “are actually approaching equilibrium in some markets.”

Industry watchers in this camp also note that there are still several metro markets around the country with robust economies, where housing demand and prices remain strong, including Austin, Texas (where builders' closings for the three months ending June 30 rose by a record 40 percent, to 4,335 units); San Antonio; Raleigh and Charlotte, N.C.; Salt Lake City; Orlando, Fla.; and Myrtle Beach, S.C.

Those pockets of plenty don't persuade the “harder landing” group, comprising analysts and consultants, that thinks the current downturn could be a prelude to rougher sledding ahead that might not smooth out for years. Rick Murray, a housing analyst for St. Petersburg, Fla.–based brokerage Raymond James, says order declines that builders have been reporting in recent months haven't been this bad in 20 years “despite all of the [sales] incentives that are out there.”

Mark Vitner, chief economist for Charlotte-based Wachovia, says the housing market might be slowing “more than is realized” and points specifically to dramatic rises in contract cancellations and resales in some markets as evidence. “Builders know what's going on, and they are already cutting staff,” says Vitner. “This will take some time to sort itself out.” Ivy Zelman, Credit Suisse's housing analyst, argues that housing demand in several previously overheated markets—such as Fort Myers, Fla., and Phoenix—could come to a “screeching halt” before righting itself, albeit at levels of starts, sales, and prices that pale beside what builders had grown accustomed to over the past several years.

Other analysts see broader, more troublesome, implications in any serious, prolonged housing downturn. Scott Simon, a managing partner with Newport Beach, Calif.–based income manager Pimco, thinks that even a 5 percent retreat in home-price appreciation, which over the past several years has galloped beyond buyers' income growth, would hobble home sales and stall consumer spending and the rate of growth for the gross domestic product. Even more bearish is Peter Schiff, president of Darien, Conn.–based investment consultant Euro Pacific Capital, who sees a housing market decline as the harbinger of a more painful economic recession that could “dramatically” reduce this country's standard of living. “We've spent too much, we've borrowed too much, and we've just got to pull in our reins,” says Schiff.

BACKING OUT: Through June of this year, builders in many of the country's largest home buying  markets were experiencing the double whammy of steep dips in sales and, in  several markets, heavy cancellations of sales contracts. Some analysts  expect more cancellations as buyers get anxious about the value of the homes  they've contracted to purchase.
BACKING OUT: Through June of this year, builders in many of the country's largest home buying markets were experiencing the double whammy of steep dips in sales and, in several markets, heavy cancellations of sales contracts. Some analysts expect more cancellations as buyers get anxious about the value of the homes they've contracted to purchase.


Learn more about markets featured in this article: Orlando, FL, San Diego, CA, Reno, NV, Kansas City, MO, Los Angeles, CA, Phoenix, AZ, Port St. Lucie, FL, Salt Lake City, UT, Charlotte, NC.