Uncharted Territory

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.

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.

While they may disagree on the outcome, these groups find common ground about three factors likely to shape the housing industry's future:

Most analysts contacted for this article would agree with that not-exactly-rousing assessment, especially if unemployment stays below 5 percent nationally. “There's no recession on the horizon, and the economy should do well for at least the next five years,” says Vitner. Celia Chen, director of housing economics for Moody's Economy.com, expects a “controlled” housing correction, partly because “conditions are better balanced now then they were before. Economic growth will remain steady; that didn't happen in the late '80s [or] the '90s.”

But considering that one-fifth of the country's GDP derives from home-related industries, according to Freddie Mac estimates, one can only wonder what the ripple effect might be if the housing downturn worsens and builders and developers downsize aggressively. John Burns, an Irvine, Calif.–based real estate consultant, calculates that a 20 percent decline in construction- and finance-sector jobs would mean only a 1 percent total loss of jobs nationwide because “other sectors would offset this.” But markets with heavier concentrations of construction, real estate, and finance jobs could get rocked. “What's the economy going to look like six to 12 months from now,” asks analyst Murray, “if [builders] are laying off 1,500 employees at a time because demand has slowed?”

The Fed decided in early August that another interest rate hike wasn't needed to stem inflation, and Chairman Ben Bernanke even suggested that a cooling off of the housing market might slow the economy and allow inflation to moderate. Nevertheless, David Lereah, chief economist for NAR, says higher interest rates have already tamped sales in more-expensive housing markets. And in June, NAR released a survey of American households that, by a 2-to-1 margin, identified high monthly mortgage payments as the chief obstacle to homeownership.

Where interest rates land is a major concern for those buyers who purchased a house using mortgage instruments that required little financial commitment up front. Christopher Cagan, director of research and analytics for First American Real Estate Solutions, says “creative financing” may have delayed the housing downturn, but it's yielding again to conventional fixed-rate mortgages. An avalanche of mortgage resets is about to be unleashed over the next few years: $400 billion worth this year, and $1 trillion in 2007, according to Loan Performance. In the worst-case scenario, these resets lead to “payment shock” and higher delinquencies; at the least, they encourage a segment of buyers to move down to less-expensive homes.

Most industry watchers expect the rate of price appreciation to recede, but few predict outright price declines. In California, affordability might be at an “all-time low,” according to Layne Marceau, chairman of the California Building Industry Association. But Ryan Ratcliff, an economist with UCLA, told the Los Angeles Times in June that, absent a recession, “the price of a home five years from now is not likely to be substantially lower than it is today.”

As builders have gravitated to bigger, pricier homes, they've all but pushed first-time and even move-up buyers away—just as they need new customers. Castleman of American Metro/Study notes that two years ago, 60 percent of the homes being sold in Las Vegas were priced under $200,000. “[T]hat doesn't exist there today,” he says. “Builders have been pushing so much product beyond traditional price points, but you can't move up 100 percent of entry-level buyers.” Many of those buyers are canceling orders or sitting on the sidelines waiting for better deals.

As a result, denial is giving way to damage control. Many builders are already rushing to add more-affordable attached products to their offerings. Others, like Park Square, are taking a more skeptical look at some of the land they control and are exiting deals and even partially completed developments that no longer make economic sense. In August, Centex Corp. cited a slowdown in the housing market as the reason why it rescinded its offer to pay the town of Warrenton, Va., $22 million in exchange for approval of a 300-home age-restricted community. Several builders say they are using this break in demand to re-establish their relationships with trade partners. Others are sharpening the skills of their salespeople to win over suddenly reluctant buyers. And with eyes focused on the bottom line, rounds of personnel reductions, divisional consolidations, and managerial reshufflings have begun—and they're not over yet.

“Builders are finally realizing that this slowdown is going to be with us for a while,” says Vitner.

DURING THE SUMMERS OF 2004 AND 2005, hurricane stories dominated the news in Port St. Lucie, Fla. This year, a different type of storm has grabbed the headlines. The speculators that helped make the market one of the hottest in the nation have vanished, leaving in their wake sharply higher inventories of homes for sale and builders forced to quickly shift strategies.

“Talk about a market that's gone through a 180-degree transition in the last nine months,” says Jack McCabe, CEO of McCabe Research and Consulting, a Florida market research firm. In 2002, Port St. Lucie didn't rank among the nation's 50 largest housing markets. Within a year, it had climbed into the 37th spot. Between the first quarters of 2005 and 2006, prices appreciated more than 24 percent, enough to rank 27th on the Office of Federal Housing Enterprise Oversight's House Price Index of 275 metro areas.

Many buyers at the start of the boom came from cities farther south, such as Miami and Fort Lauderdale, where Florida's extreme price appreciation appeared first, says Larry Brians, co-owner of Port St. Lucie–based Town and Country Home Builders, which closed 75 homes last year. Most of his buyers sold their existing homes at enormous profits, bought in Port St. Lucie, and had cash to spare. “They could get a brand-new home here that was twice as big and twice as nice as the homes they had in Miami or [Fort] Lauderdale,” he says. The equity those buyers brought enabled builders in Port St. Lucie to raise prices accordingly. Brians says the market easily absorbed the $5,000 increases he was adding to his homes every 30 to 60 days.

It didn't take long for St. Lucie County's secret to get out. The combination of population growth and price appreciation attracted national builders to the market. As in many cities, their arrival—and willingness to pay higher prices to tie up large plots of land—changed the dynamic. Brians recalls what happened with land prices: “You could find lots for $5,000. Then it got to a point where lots were at about $25,000—and I'm thinking this has to be the max that anybody would be willing to pay—but then they were $35,000, then $45,000, then $50,000. When they hit $50,000, I really thought there was no way anybody in Port St. Lucie would spend $50,000 on a lot. Over the next year, they hit $100,000 to $120,000. One area that turned out to be a really nice area started to go for $120,000. Two years ago [the lots there] went for $3,500 a piece. We would have bet millions that this would never have happened in our lifetimes.”

Higher land prices meant even higher home prices, and the continued rapid price appreciation didn't escape the notice of real estate speculators, who had already infiltrated the Miami condo market. They set their sights on Port St. Lucie, which is primarily composed of single-family homes.

It's difficult to know just how many homes speculators bought—especially because builders said throughout the boom that they were not selling to investors—but McCabe estimates that they may have accounted for as much as half of South Florida's single-family home sales. Some Port St. Lucie builders and industry observers say it was an open secret that investors accounted for a large share of the market's sales. “Absolutely, they were selling to investors,” says Bart Johnson, a Realtor with ReMax 100 Riverside, based in Port St. Lucie, adding that he knew one investor who bought 250 from one builder alone. (A number of the largest builders in the area, including Mercedes Homes, KB Home, and WCI Communities, declined multiple interview requests from BUILDER for this article.)

“Everybody knew [they were selling to investors], but they were making money hand over fist,” says Thomas Lawler, an industry consultant and former Fannie Mae economist. “They knew it wouldn't last forever, but if in one year you make three years' worth what you usually do, you deal with the downturn when it comes.”

That dealing's being done now. The investors began dumping their homes back on the market by the beginning of the year. Builders, without time to adjust their production levels, found themselves competing for sales with the homes they'd built just months earlier. What's more, the population influx to Port St. Lucie has slowed as the potential buyers coming from farther south can't sell their own homes there.

“South Florida is significantly oversupplied,” says Hank Fishkind, president of Fishkind and Associates, a Florida economic consulting firm. Single-family homes are in better supply-demand balance than condos—everywhere but in Port St. Lucie, he says. The numbers back up his assertions: Home sales fell 32 percent between June 2005 and June 2006, and active MLS listings were up 85 percent.

Estimates of how long the market could take to correct itself range from one year to five years, with the amount of inventory speculators have yet to put on the market a variable that's tough to quantify. Two factors will help the city come back into equilibrium, Lawler says. First, sellers need to reduce their asking prices, and then after seeing those prices, other sellers may choose not to sell. “Combined with an economy that's doing OK, you would start to see inventories come down, prices stabilize, and everything get back to normal,” he says.

In the meantime, area builders are adapting to the new market dynamics. In July, Mercedes Homes announced it would accept all reasonable offers on inventory homes. A month earlier, Cara Kane, a spokesperson for KB Home, confirmed to The Stuart News/Port St. Lucie News that the company had laid off “less than 50 employees” in its Treasure Coast division. Permits and starts have fallen off their overheated pace as builders ratchet their production levels down. In May, builders applied for 539 permits, down from 883 a year earlier. Prices on those highly priced lots have begun to retreat, too, though they're unlikely to fall to their pre-boom levels. “They will probably bottom out around $50,000,” Brians says, adding, “but I also thought they would top out at $50,000.”

Despite the weak short-term prospects for the market, observers are bullish on the area's long-term future. Earlier this year, the U.S. Census Bureau ranked Port St. Lucie the nation's third fastest-growing city, and St. Lucie County estimates its population could hit 314,000 by 2010, a 63 percent increase over the 2000 Census count.

Several factors seem likely to move that growth toward Port St. Lucie. Other nearby markets remain more expensive and less welcoming of new construction, which will once again be needed when the current oversupply is absorbed.

THE PHOENIX MARKET “HIT THE wall” for Hacienda Builders this summer. In the second week of July, the Scottsdale, Ariz.–based builder sold eight homes in Phoenix, but had seven cancellations. Hacienda has also lowered the price of its most economical home to $170,000 from $220,000. But the company, which became accustomed to closing 800 to 1,000 homes per year, will probably close only 200 to 300 in 2006. “If I were a bear, I'd be hibernating right now,” says Hacienda president Todd Stevens.

Many other builders here might wish they could sleep for a while to escape what has become a frighteningly sudden turn of events in a market that had enjoyed the industry's highest levels of sales gains and margins. “Last October, the lines [of customers] started getting shorter. Then, in January, the lines were gone. Every week got a little harder, and by April 1 it was just dead,” recalls Tom Lewis, who owns Tempe, Ariz.–based T.W. Lewis, which has been building in the Phoenix market for 28 years. Lewis says his company used to average 30 sales per month of homes whose median price is around $700,000. In June, he notes, “we had 20 gross sales, but six cancellations. That's the way it's been going.”

Unsold inventory in Phoenix jumped 256 percent in July over the same month the year before, according to Raymond James estimates. While no one expects Phoenix's housing market to collapse—its enviable population and job growth rates should sustain healthy, if reduced, construction and sales—and some predict that buyer demand could start returning by next spring, many builders are going through a painful process of scaling back to adjust to a housing dynamo that simply isn't generating the juice it once did. “We've all been in a five-year sprint, not a marathon, and we're tired,” says Steve Soriano, executive vice president for Sun Lakes, Ariz.–based Robson Communities.

Phoenix's housing downturn is occurring at a time when the market itself continues to expand. Phoenix is adding between 80,000 and 100,000 people per year, more than any other city, and recently surpassed Philadelphia as the country's fifth-largest metropolis. Phoenix is also the country's second-best job producer. To absorb this mass of humanity, Phoenix has sprawled. Reed Porter, president of Gilbert, Ariz.–based Trend Homes, says that “Phoenix” now stretches 100 miles from end to end.

This growth pattern suits some builders just fine, despite a softening in demand. “Our core strategy has not changed,” says John Chadwick, divisional president for market leader Pulte Homes. For the first time anywhere, Pulte this year opened two Sun City communities simultaneously in one market here. Chadwick says his company has also recently opened several communities featuring multifamily townhouses and condos.

One of Pulte's newer communities, Anthem at Merrill Ranch, is located in Florence, Ariz., where infrastructure hasn't caught up yet with new-home construction. Real estate consultant Burns notes that a sizable percentage of permits issued in Phoenix in recent years have been for lots in outlying areas that are 45 to 60 minutes away from job centers. Soriano adds that of the market's three development corridors—Johnson Ranch-Florence, Maricopa, and Eloy—the first two still don't have highways. “The absolute softest parts of the market are where there are no roads,” says Stevens.

Not surprisingly, some builders, including Centex and Meritage Homes, are turning to infill projects and are looking for land closer to metro centers. “There are lots of infill opportunities in Phoenix, which has 40-acre parcels scattered all over the city that horses still graze on,” says R.L. Brown, publisher of The Phoenix Housing Market Letter. He explains that this land is available because some parts of the city were “over-zoned” but not developed.

The market is definitely imposing some new arithmetic on what levels of new-home construction and selling prices it will bear. Brown estimates that the Phoenix market will issue around 54,000 permits this year (versus 63,750 in 2005), but some builders and analysts insist that number needs to come down a lot more. Credit Suisse's Zelman thinks permits should “take a haircut” to around 45,000 to be in line with current demand, “and maybe another 5,000, because the free money that was available in the form of cheap mortgages isn't there any more.”

Lewis and Stevens agree that 45,000 permits is where the market should have been all along. What worries Stevens, though, is that about 20,000 of the permits issued annually over the past few years became homes that were purchased by speculators. He estimates that as many as 30,000 homes on the market for sale now are in the hands of investors. “That's nine months' supply,” he says.

It remains to be seen what impact the pressure from investors as sellers has on pricing—still this market's third rail for most builders, but of seminal importance to this mostly middle-class community. Brown says that unsold inventory in Phoenix would have been cleared by now were it not for builders' reluctance to relinquish margin. He and other builders, though, contend that the area is a bargain compared with markets such as Southern California. But the exorbitant rates at which builders had been jacking up their prices are now unsustainable. In 2004 and 2005, Robson Communities increased its prices 35 percent each year. In 2006, “we raised them 2 percent,” says Soriano, and improved the value of its homes “through a rotating buffet of incentives” that other builders are also serving their customer bases.

Builders are responding to the current downturn in different ways. Some, say competitors, are trimming their workforce (in a few cases, steeply), although it's hard to get builders to confirm this. Other builders, such as Monterey Homes and KB Home, are building condos and other attached products to appeal to price-conscious buyers.

Robson Communities delayed the release of homes at its SaddleBrooke Ranch community in Pinal County, and is using the break in buyer demand to design what Soriano calls “a new library of products” that incorporates upgraded technologies and other features. And Lewis says his company is using this transitional period to address some quality issues with his contractors.

Lewis concedes that the housing downturn might last a few years. But he and other builders here believe that any short-term decline will ultimately be a “hiccup” in Phoenix's long-term “exponential growth.” Indeed, Burns says he has two private builder-clients that would open divisions right now in Phoenix, proving that even when it's earthbound, this market appears to be in ascent to some people.

SOMETHING HAD TO GIVE. Boston's housing market headed upward for 12 years. It shrugged off interest rates approaching 9 percent in 1995. It flourished through the loss of tens of thousands of jobs after the tech crash of 2001. Even as Massachusetts fell into the undesirable group of states losing population, housing prices in the Boston market continued to move higher.

By late last year, buyers had had enough. According to The Warren Group, a market research firm, median single-family home prices grew 72.5 percent between 2000 and 2005. As prices continued to rise well above $300,000, buyers took to the sidelines, and inventories began to rise. Between January and May, home sales fell about 9 percent against the same period in 2005, says Tim Warren, CEO of The Warren Group.

Rising interest rates were the tipping point for buyers, says Jeff Rhuda, business development manager for Beverly, Mass.–based builder Symes Associates. “Right now, we have an affordability issue,” he says. In fact, a recent report by the Rappaport Institute for Greater Boston at Harvard University cited the market's dismal affordability as a reason for Massachusetts losing an average of 42,000 residents each year between 2000 and 2004.

Rhuda sees three factors affecting the market's health: home prices, personal income, and interest rates. “Income has to go up, interest rates have to go down, or house pricing has to go down,” he say. “Right now, rates are up, and incomes are flatlining, so pricing has to give.”

Officially, The Warren Group reports that prices are down 2.4 percent, but anecdotal accounts in local newspapers and from some builders say prices in some areas have fallen as much as 10 percent. On balance, Warren expects a decline of between 2 percent and 3 percent by the end of 2006, with prices flat or down slightly in 2007 before heading upward once again.

That fact alone sets this slowdown far apart from the last bust Boston experienced, between 1988 and 1993, when prices fell 15 percent. Back then, the market was done in by factors being seen now in other markets—namely, an oversupply of homes and speculators dumping inventory. Industry observers and builders agree that the lesson of starting too many spec homes was learned the hard way, and some builders are even postponing opening new project phases to avoid any standing inventory.

Builders aren't holding many unsold homes—most of the inventory is on the resale side—but they're getting creative in their efforts to close sales. Michael Wakeen, a partner in Tewksbury, Mass.–based TopNotch Homes, says his company has begun to partner with lenders to buy down mortgage rates in addition to offering more traditional incentives including finished basements and upgraded kitchens. Even still, his volume will likely be off about 50 percent this year, down from 200, when he closed 42 homes.

Stephen J. Gillis, president of Gillis Homes in Topsfield, Mass., has tried to address the resale side of the equation with his incentives. Because many of his prospective buyers won't commit to a new home until they sell their existing home, he's connecting some with staging companies to prepare their homes for sale or getting them a bank appraisal so they price their homes appropriately from the outset. “It helps set realistic expectations on what their house is worth. If they can't afford to buy a house from us, it cuts out a lot of disappointment,” he says.

Gillis is being as proactive as possible, but he says he and many of his peers can withstand the changing market: “I think everyone's done well enough in the last four or five years that they can take a breath. It's different than in the early '90s, when we were all in survival mode.”

While there's a sense among builders that this slowdown is markedly different, they're not sure they've weathered the worst of it yet. “I don't know where the correction is at on the curve. We haven't bottomed [out] yet,” says Rhuda, adding that inventory levels could plateau anytime within the next six months to two years. Judy Jenkins, president of the Builders Association of Greater Boston, estimates the market has returned to 2003 or 2004 levels, “but we still have a half year to go,” she cautions.

These builders and industry observers say it's difficult to forecast what a normal housing market will look like after this slowdown. Two of the factors that helped drive prices higher during the boom—lengthy approvals processes and a lack of available land—will likely keep demand even with, or ahead of, supply. “We're still so constrained that ultimately we are going to be OK,” says Gillis, who recently won approval for the first new housing development in Topsfield in seven years. “You have to be the eternal optimist,” he says, “though I'm definitely working a lot harder today to make positive things happen.”

BUILDERS IN SALT LAKE CITY ARE as surprised as anyone about how land and home values here have shot up so fast.

Bill Montgomery, COO of Orem, Utah–based Trophy Homes, remembers only shrinking margins and measly job growth during the period between 2001 and late 2004, when Utah languished at the bottom of the Office of Federal Housing Enterprise Oversight's House Price Index. But since then, and particularly since January 2005, prices for real estate and homes have been climbing, in some cases extravagantly so. Builders say they are baffled by this, but one explanation might be Utah's population growth rate, which now exceeds many other states', according to Census Bureau estimates. An analysis of national economic and demographic trends conducted by Rutgers University ranks Utah among the top three states for projected percentage gains, through 2030, in population, household formation, employment, and wages.

Builders here normally don't get too excited about these kinds of forecasts about one of the more stable housing markets in the country. Like clockwork, Salt Lake City builders pull between 12,000 and 15,000 permits per year. But if the city is breaking loose, builders here don't want to miss out. Since Jan. 1, Trophy Homes has put under contract around 2,000 lots through a land development company it started last year, and it has hired an ex-D.R. Horton official to run it. “He's been hitting the ball out of the park,” says Montgomery.

Draper, Utah–based Sage Homes, which specializes in move-up and semicustom products, closed 65 houses in 2005, and expects to close 100 this year and 125 in 2007. Salt Lake City–based production builder Wright Homes, whose homes range in price from $200,000 to $450,000, expects to triple its closings this year to around 150 units and bump that number up again to 200 in 2007.

Murray, Utah–based Hamlet Homes will have its “best year” in 2006, says owner Michael Brodsky, when it closes 390 units that are projected to generate $110 million in revenue. Much of Hamlet's recent success has come from infill projects built along Salt Lake City's light-rail system. Its first such program, Inverness Square, sold its 110 homes in two years. Brodsky says he has two similar projects under development, including Burke Hill Station, which will open in 2007 and offers townhouses, condos, retail, offices, and open space.

American Metro/Study's Castleman thinks Salt Lake City “has one of the best supply/demand profiles” of any housing market in America. There are reasons for this. Until this year, “owner-builders” (i.e., people who build the homes they intend to live in), regularly pulled more permits annually than any single builder. Clark Ivory, who owns market leader Ivory Homes, notes that Salt Lake City historically has been less than accommodating to national production builders—The Ryland Group, Pulte Homes, Centex, KB Home, and John Laing Homes have all come and gone, and D.R. Horton has only a modest presence—primarily because there are few large developers or landowners here. “We'll do just under 1,200 units this year, but in 50 different communities,” says Ivory.

This latest run-up in land prices, though, would be familiar to builders in other markets that have peaked similarly. Land “has gone haywire, doubling or tripling” over the past year, says Mike Williamson, Sage Homes' vice president, who's seen quarter-acre lots going for $150,000 to $200,000. Sage is now considering building detached cluster homes that could fit seven to the acre, and townhomes that could fit a dozen to the acre.

Brodsky has been trying to purchase a 30-lot parcel adjacent to a 130-acre community his company has developed for 18 months, during which the per-acre price rose to $50,000 from $20,000. In mid-July, he was offered 10,000-square-foot unfinished lots in Magna, Utah, for $93,000 per lot; 10 years ago, Hamlet could build homes in that same town at a total cost of $85,000.

“Land values here just don't make sense,” says Ivory. “I haven't seen a good deal in six months. Prices are based on a future appreciation that I don't believe in.” Ivory says his company controls enough real estate that it can hold out until the market calms down.

Salt Lake builders also have witnessed some jaw-dropping (for this market) home-price hikes. The Salt Lake City Tribune reported in July that prices had increased by one-third, to $280,000, in Salt Lake's Sugar House area during the first quarter of this year, and by more than 57 percent, to $529,000, in Alpine, Utah.

However, by comparison with Southern California or Las Vegas (two of Salt Lake's feeder markets for new residents), prices here remain reasonable. Brodsky says that, excluding what he builds in Park City, Utah, his homes average around $215,000. Salt Lake avoided more-drastic home-price inflation partly because many builders here resisted selling to speculators, according to Derek Wright, Wright Homes' owner. “We had a lot of conversations among ourselves about limiting what we sold to investors,” says Wright. “Some [builders] didn't care, but most did.”

That's not to say builders here aren't interested in improving their margins. Sage Homes recently bought a home valued at $300,000, tore it down, built a larger one, and sold it for $1 million. But several builders say they want to offer a product mix that appeals to a broad customer base.

Trophy Homes, for one, expects to increase its closings to between 700 and 800 per year, from 360 in 2006, on the strength of its expansion into Park City, where it recently released 270 townhomes and condos whose selling prices averaged $500,000. But Montgomery says his company, which specializes in attached products that range from 1,100 to 2,200 square feet and from $130,000 to the low $200,000s, is committed to concentrating on first-time and move-up buyers.

Ivory Homes is also getting into construction of townhomes that will start at $150,000 because, says Ivory, “we'd rather build townhouses that are affordable in good locations than build single-family homes in secondary locations.”

THE RUMORS OF A SLOWER MARKET began about a year ago. Then, after the Super Bowl, buyer traffic simply didn't pick up, as it usually would. Next came higher cancellation rates and evaporating waiting lists. “[I]n the last few months, the brakes have really gone on,” says Brian Kaiser, a business analyst at the University of Nevada, Reno Small Business Development Center, who adds that he expected a slowdown much sooner than this one actually arrived.

Four years ago, Reno's housing market was humming along, propelled by solid population and job growth. Home prices appreciated within a healthy range of 1.9 percent to 4.9 percent between 1993 and 2001, according to data tracked by Kaiser. Back then, median home prices were well below $200,000, and about 70 percent of the homes sold were affordable to median-income households.

Seemingly overnight, the market turned. It was a turn for the better, at least at the start. Job growth picked up, and prices grew 9 percent in 2002, followed by 15.4 percent growth in 2003, 31.3 percent in 2004, and 23 percent in 2005. Prices in some submarkets jumped 40 percent a year. Area builders attribute much of the phenomenon to buyers who cashed out hundreds of thousands in equity in Northern California and arrived in Reno willing to pay much higher prices than the market had ever seen. By last year, median prices hit $315,000, and families earning the median income could afford just 31 percent of the homes sold. That data needs to be viewed in context, Kaiser says: “It seems outrageous for native Nevadans, but relative to California, [Reno] is still affordable.”

Ryder Homes' northern Nevada division was among the area builders able to raise prices thanks to the influx of buyers from California, but that trend has tapered off, says John Schroeder, vice president of the Walnut Creek, Calif.–based builder. “We did outpace the ability of people to afford homes,” he says. “We have to sell homes locally. We have to get the price of housing a little more realistic with income levels.”

That process is under way. The median home price in the Greater Reno/Sparks area was $370,000 in January, up 19 percent from January 2005. By May, that figure had fallen to $340,000, which was just 2 percent ahead of May 2005, Kaiser says. He began seeing some year-over-year price decreases within the first quarter data, though he doesn't expect many months of decreases. “I think 2006 will end up being barely positive for appreciation,” he says.

Schroeder, who has headed Ryder's northern Nevada division since 1994, takes a more pessimistic view. Prices have already fallen between 5 percent and 7 percent, he says, and he anticipates a total decline of 10 percent to 15 percent for the year due to the oversupply in the market—a factor he admits his own company contributed to. “We were rushing around building houses as fast as we could to meet what we saw as the demand,” he says.

He expects widespread “dumping” of inventory later in the year as Reno's public builders strive to meet their sales targets. The competition among the national builders—most of whom are relatively new to the market—is fierce. Centex, the longest tenured, was the market's third-largest builder last year. Newcomer Lennar, which bought local builder Barker-Coleman Communities, took the top spot. Pulte Homes and D.R. Horton were the only other public builders to crack the top 10. As they have in many markets across the country, some of the companies have resorted to sales and price reductions of as much as $100,000 to move standing inventory.

“The publics are giving things away, and that's good. Let's get rid of it, the sooner the better,” says Dan Ott, co-owner of Altmann-Ott Homes. Ott is able to match many of the incentives offered by the larger builders because he has owned his land long enough to realize a significant profit. In Fernley, about 30 miles east of Reno, he sold 17 houses in two weeks after cutting prices by $25,000. “My business is not to sit on houses. I sell them and keep things moving,” he asserts.

Jesse Haw, president of the Builders Association of Northern Nevada, expects to have a better sense of where the market will settle by the fall, because builders are still working through their backlog. “There is a lot of uncertainty in the market about where this is going,” he says.

Nevertheless, he says, the same job growth that propelled the market in recent years—a 15 percent gain between 1999 and 2005—means it's not a question of whether housing will bounce back, but when. Both Ott and Schroeder agree that by this time in 2007, Reno should be on a rebound. “By the middle of next year, we will have truly bottomed out, and the market will stabilize,” Schroeder says.

Higher prices for single-family detached homes may be here to stay. Increasing municipal regulations, water shortages, and land constraints—Reno is surrounded by mountains—combined with forecasted steady job and population growth have likely built a floor that will keep prices from falling too far.

When the market rights itself, first-time buyers will be poised to buy. Builders nearly abandoned the entry-level market during the runup, choosing to build higher-priced move-up product instead. Priced out of the market, many first-time buyers moved into rentals, creating a pent-up demand for units priced less than $300,000. Some builders are planning condo projects now to respond to the need for affordability, the first of which are nearly guaranteed to succeed. “They are going to have no trouble selling condos for [a] couple of years,” says Kaiser. “The ones who are in quickly are going to make a killing.”

JOHN MCMANIE WENT THROUGH the real estate bust of the early 1980s while working for The Ryland Group in Cincinnati and Columbus, Ohio. It's safe to say he's thankful to be building in Charlotte, N.C., these days. “We're definitely on an upswing. There's no end in sight. I don't want to sound cocky, but it looks very healthy,” says the owner of Dublin Homes, which builds about 50 homes a year in Union County, N.C., a fast-growing suburb southeast of the city limits.

Charlotte didn't boom along with the other East Coast markets, but you won't find builders complaining about that now. Its historically steady growth, combined with population growth and comparatively low prices, has set the area up to be one of the best-performing markets during this downturn. Few real estate speculators and continued economic growth should help support strong housing demand in Charlotte and its neighbor to the east, Raleigh, N.C., says Celia Chen, director of housing economics for Moody's Economy.com.

It's not difficult to find positives about Charlotte. As affordability in many markets has waned, it has actually improved in the Charlotte metro area. Between 1995 and 2002, a household earning the median income could afford 66.4 percent of the homes sold in Charlotte. During the first quarter of 2006, that figure stood at 71.2 percent, according to the NAHB-Wells Fargo Housing Opportunity Index. “You can still buy a new home in Charlotte for $130,000, though I'm not saying you can buy a lot of them,” says Mark Baldwin, executive vice president of the Charlotte HBA. (The Charlotte Regional Realtors Association reports an average sale price of $240,213 in June, up from $214,144 a year earlier.)

Prices have remained low in part, Baldwin says, because of intense competition in the market. Twenty-four of the country's top 30 builders are in business in Charlotte, he says, and the Charlotte HBA Web site lists more than 400 builder members.

Those builders aren't having trouble finding work. The Charlotte area is growing rapidly, propelled by corporate relocations, a popular financial district, and retirees who are choosing the Carolinas over Florida. “This area just seems to be growing like a weed,” says Scott Hanlon, sales manager of Brookwood Home Builders, who estimates that one-third of his company's sales are to people moving from the Northeast. The population of Mecklenburg County, home to Charlotte, grew an impressive 14.5 percent between 2000 and 2005, but that growth was surpassed by Union County, which grew 31.6 percent in the same period, according to Census Bureau estimates.

Much of that growth has come as a result of corporations moving and expanding to the area. As the second-largest financial district in the country, Charlotte—called “the financial capital of the South”—has generated a steady stream of new home buyers, says Wachovia's Vitner.

Young professionals are flocking to the city, but so are their parents. Builders affectionately refer to the retirees as “halfbacks” because they're originally from the Northeast and are moving halfway back from Florida, and they see a source of demand from the demographic for years to come. In May, the first residents moved into Sun City Carolina Lakes, a 4,400-unit, active adult community by Del Webb just over the South Carolina border from Charlotte. The company is also planning another 1,650-unit development in Lincoln County, northwest of Charlotte.

Bonterra Builders, based in Union County, has sold some of its Craftsman-style homes to halfbacks. The company expects to close 240 homes this year and 360 in 2007, says Scott Kelly, the company's broker in charge, who adds that Bonterra expects positive growth for at least the next five years. “It's hard not to be enthusiastic here.”

Many of Kelly's peers agree, but as builders in some other markets have learned this year, nothing's certain in home building.

Condo buildings, not previously a significant share of Charlotte's housing stock, are popping up, targeted at the financial district professionals. Some industry observers wonder if condo investors, having pulled out of the Florida markets, have moved into Charlotte. Chris Branch, president of the Boulevard Co., an infill, mid-rise condo builder, says he and other condo builders are discouraging speculation. “I feel like the market is healthy,” he says.

There is a chance, though, that the condo builders see more demand for their product than is really there. Condo construction has doubled since last year, says Baldwin of the Charlotte HBA, and Branch notes that seven high-rise towers have been planned for the area. Three are under construction, and three others are in presales. “It looks like all seven of those will get started, although the presales market is slightly more difficult because there's so much product on the market,” Branch says.

Higher home prices may be ahead, too. Land prices have headed north since the arrival of more national builders, local builders say. “Land is being driven up faster than I've ever seen,” says McManie, of Dublin Homes. “What cost $30,000 three years ago maybe costs $65,000 now.”

Charlotte builders aren't immune from price pressures their peers in other markets are seeing. Although the city of Charlotte and Mecklenburg County remain largely pro-growth, Union County is discussing a possible $21,000 per house school impact fee, says Hanlon, and builders are finding it necessary to pass along increases in the prices of material and labor. But, Hanlon says, he doesn't hear many concerns from area builders. “The market can handle it. It has yet to outprice itself.”

KANSAS CITY HAS ALWAYS BEEN A fragmented market—literally. It's split into three pieces by the Missouri River and the Kansas-Missouri state border. Despite its status as one of the nation's largest housing markets, it's not dominated by a few land developers or builders. In fact, just one national builder, Pulte Homes, works there, and the top 10 builders captured only 8.5 percent of the market share in 2005. Estimates of the builder population ranges from 650 to as high as 950, and the median company builds eight homes a year.

That fragmentation likely contributed to the current slowdown, illustrated by an oversupply of spec homes. Kansas City is typically a spec-heavy market, but about 36 percent of the new-home stock is sitting finished and unoccupied right now, up considerably from the more normal rate of about 20 percent, says Dan Whitney, president of LandMarketing, a market research firm. He's also keeping a close eye on the starts-to-closings ratio, which recently has been out of sync. As of early July, starts were outpacing closings by 833, but that's down from the spring, when the difference was 1,240.

Tim Underwood, executive vice president and CEO of the Greater Kansas City HBA, points to the fragmented market share to explain the current condition. Bringing the market back into balance is difficult with so many builders and developers operating independently, he says, adding, “one company making changes doesn't affect the whole market.”

McBride and Son Homes, the market's third-largest builder, builds between 60 percent and 70 percent of its homes on spec, a formula not likely to change, says Charles Heiser, the division's general manager. “This is the Show-Me State,” he says. “People want to see what they're getting.” The company keeps the process under control by giving customers exactly what they see in model homes, and Heiser is not averse to using incentives to move standing inventory. He has used mortgage promotions and price discounts to fuel sales; a one-day sale in May resulted in 28 sales.

The division's aggressive strategies helped it set sales records five of six months this year through June, and Heiser estimates that closings will be close to 230 for the year, up from 170 in 2005. “[The market] is not what it was a year ago, but by no means is it getting worse,” he says.

Kansas City's fundamentals seem steady, if not especially strong. The population has grown at a respectable 1 percent annually for the last five years, and the market has rebounded from job losses in 2002 and 2003 to pick up more than 20,000 new jobs.

Those factors should comfortably support about 12,500 starts a year, Whitney says. By his estimates, the market got slightly overheated, with more than 13,000 starts in the last two years. Starts will likely drop to about 12,000 this year, he says. “The positive news is a lot of inventory has been sold off and starts have slowed to correct the oversupply issue,” he says. He projects that the oversupply should be absorbed in time for the spring selling season of 2007.

Within the market's population growth, a demographic shift has been underway, Underwood says. More than half the households now have two or fewer people, helping to fuel new product types, including active adult and downtown condos. In 2005, multifamily units accounted for about a quarter of new-home sales, a major change for Kansas City, which has historically been dominated by single-family detached product. “You couldn't give [a condo] away five years ago, and now they're starting hundreds,” Underwood says.That surge is likely to result in a temporary oversupply of downtown condos, Whitney says, as amenities and entertainment lag behind residential construction. All told, he expects the units to account for 3 percent to 4 percent of the housing market—a valuable addition to the diversity of the market, but not enough to fundamentally shift the market dynamics.

Two other factors may do just that, though. Underwood estimates the HBAadded 300 new builders within the last four years, and more than 200 banks in the area write construction loans. That combination may result in a shakeout of overleveraged companies unprepared to absorb the carrying costs of even a few spec homes, leaving fewer builders behind to divide a strong demand for new homes.

This would be the natural time for public builders, many of whom have long eyed Kansas City as a possible expansion market, to swoop in and try to pick up market share. But with most of them sitting on the land sidelines—one area builder reports that Pulte cancelled contracts to buy lots from him—this period could be an opportunity for regional or national private builders with available capital to expand, Whitney says.

Underwood agrees. “I think eventually there will be a change,” he says. “I have always said that at some point we will have to have bigger builders.”

LAST YEAR, VANCOUVER, WASH.–based Pacific Lifestyle Homes closed 350 homes, 100 percent more than in 2003. Half of its sales come from Portland, Ore., one of the country's stabler housing markets. Matt Lewis, Pacific Lifestyle's acquisitions and forward-planning manager, says his company this year should close 400 homes, which range from 1,600- to 2,100-square-foot cottages to Pacific's “Premier” series of homes, which run from 2,000 square feet to 3,720 square feet.

But any builder thinking about expanding in Portland must contend with the fact that land there is pricey and in short supply. Over the past four years, land prices in Portland have risen 100 percent, says Lewis, while his company's home prices have gone up 25 percent. The Oregonian reported in late June that some developers in Portland have paid up to $700,000 per acre for lots.

A study conducted by Portland State University found that, on average, developers spent $187,000 per acre in 2005, or six times what land went for 15 years ago. “What we're seeing is documented evidence of increasingly expensive land costs and decreasingly attractive [lot] sizes and locations,” says Bill Reid, an economist with Beaverton, Ore.–based real estate consultant Johnson Gardner. This price escalation is attributable in large measure to the Urban Growth Boundary (UGB), a land-use plan required under state law that separates rural land from urban land and, in effect, limits development. Portland Metro Council, which regulates this plan, has authorized the expansion of the UGB by only 21,000 acres since 2002. “It creates an artificial shortage of land,” says Dave DeHarpport, president of Beaverton-based Four D Construction, which builds 20 to 25 homes per year ranging from 2,200 to 5,500 square feet and $500,000 to $2 million.

This land barrier, though, is a double-edged sword that DeHarpport and other local builders say they benefit from because it deters speculative developers and some large production builders. Randy Sebastian, who owns Portland-based Renaissance Homes, the market's largest luxury production builder, notes that The Ryland Group left the market frustrated because it couldn't find enough large tracts. Centex and D.R. Horton do OK here, he says, but “Portland is still an old-boys' market, and getting land depends on who you know and how long you've been here.”

Those connections have their limits, though. Renaissance Homes will start 560 homes in 2006, compared to 380 last year, but much of that increase will result from the company's recent expansion into Bend, Ore., says Sebastian.

This year, Renaissance Home's prices are up by 40 percent, to an average of $550,000. Prices in one community have jumped to $750,000 in June 2006 from $500,000 in April 2005. Still, Sebastian and other local builders insist that Portland “is still the place to be” for affordable homes, compared with other West Coast markets.

Portland is a “lifestyle” destination that builders say draws people from other states looking for an environment where the vestiges of urban living—traffic congestion, overcrowding, sprawl—are less prevalent, and where they can indulge their inclinations for sports and outdoor living. The UGB, in fact, was established to preserve the state's livability. Portland is bracing for another 1 million people moving in by 2030, and a sizable number of those new arrivals will come from markets in California and elsewhere where housing is considerably more expensive.

This population influx has already pushed prices skyward. DeHarpport says that Four D's home prices have doubled in the last few years. He also points out that Portland has only a two-month supply of unsold inventory, so he expects prices to continue rising for a while, by at least 10 percent annually. That estimate might be conservative, as some land inside the UGB will be difficult to build on. A lot of the land that was brought into the UGB over the past four years is lying fallow because local governments can't afford the infrastructure needed. Reid notes that the rocky topography of much of this land will make installing sewers, roads, and the like “very expensive.”

He also notes that recent additions to the UGB have been larger tracts that, in his opinion, only large production builders can afford. “This could be difficult for small builders in the short run,” he says. Four D, in fact, is already looking at building what De-Harpport calls “specialty products” such as hobby farms on larger lots outside of the boundary.

Renaissance Homes is being more cautious about how it grows, too, by cutting in half its construction of spec homes, which accounted for 40 percent of its starts last year. But Sebastian doesn't blanch at the prospect of more competition. “We're ready for a little shakeup here,” he says.

HALLMARK COMMUNITIES IS REDUCING the number of homes it closes this year to 50, from 200 in 2005. And like many of its competitors, Hallmark has downsized its staff—in its case, by 50 percent—to adjust to a San Diego housing market whose downturn in sales is into its third year. However, owner Michael Hall wants to double Hallmark's closings, to more than 100 units, within three years, and he's started to stockpile land and search for management “talent” by occasionally picking up employees who have been laid off from or have left other companies. “We've been rolling down hill, but you have to hit the bottom before you can go up again,” says Hall about the market.

This hopeful attitude is shared by many builders here, who believe San Diego's economy is simply too sturdy for any sustained falloff in demand to take hold. But ifrecent events persist, builders might start second-guessing themselves. “It's not a panic situation, but it hasn't been pleasant,” says Hall.

San Diego has long been the poster child for an overheated housing sector whose speculator-spiked pricing has spiraled out of control. In the first quarter of 2006, only 5.2 percent of San Diego's households could afford the market's median home price, according to the NAHB/Wells Fargo Affordability Index. “Affordability is the Achilles' heel of California's economy,” says Leslie Appleton-Young, chief economist for the California Association of Realtors (CAR), whose data for May showed that a mere 9 percent of San Diego's households could afford the median price.

In July, the median home price in San Diego fell by 1.8 percent, to $487,000, the second consecutive month prices there fell, which hadn't happened since July 1996, according to tracking firm DataQuick Information Systems. “We're going to wobble around the zero point for a while,” DataQuick's analyst John Karevoll told the Associated Press. Juri Kretowicz, who owns Cornerstone Communities, says that there's been a 15 percent “correction” in market pricing this year, “and it's not all on the price sheet” but through incentives and broker co-ops, which he says were “unheard of” two years ago.

This price decline was inevitable, as buyers have become scarce. The San Diego Association of Realtors estimates that 19,803 homes were for sale in June 2006, compared with 6,657 in June 2004. “What's going on in San Diego is more than a short-term adjustment,” observes Hall. During this cooling-off period, several of the industry's largest production builders active in San Diego have either scaled back production, reduced staffs, sold land, closed divisions, or consolidated them with those in other areas of Southern California.The big guys aren't the only ones retracting, either: Cornerstone expects to close 150 homes this year, versus 225 in 2005, and Kretowicz told BUILDER in July that his company would stop releasing phases of communities it was working on until it had presales, and it might shrink the number of homes it releases in each phase to reduce its exposure to price fluctuations.

Donna Morafcik, executive director of the Building Industry Association of San Diego, says customers are “spooked” by the negative press that San Diego's home buying slump has generated. Yet she and other builders remain upbeat about the future of a market that is “recalibrating,” says Paul Barnes, president of Shea Homes' San Diego division, which the tracking firm Construction Monitor estimates pulled more single-family permits—290—than any other local builder between Jan. 1 and July 16 of this year. “The market is returning to normalcy, where people buy homes because they like the architecture or the neighborhood,” says Barnes. “We've been practicing for the last five years for where we are today, and San Diego is right where it should be, so I feel good about the market's future.”

Jennifer Bonasia, president of Lennar's San Diego division, says her company's confidence about San Diego's rebound is accentuated by the fact that Lennar is one of the few builders here that “hasn't pulled starts off the table.” (Lennar expects to close between 716 and 720 homes in San Diego this year, compared with 748 in 2005.) While her division isn't “land heavy,” its land acquisition department remains on the prowl for deals as prices modulate. Cornerstone is also “hoarding cash” to take advantage of land-purchasing opportunities that Kretowicz thinks will emerge as San Diego becomes more competitive and some builders pull back.

Kretowicz expects permits to settle at around 10,000 to 11,000 per year, compared with 15,000 in 2005. CAR's Appleton-Young projects that while the market would continue to slow over the next 18 to 24 months, “I think we're taking the brunt this year.” But real estate consultant Burns warns against predicting how long San Diego's turnaround might take while it is transitioning from a single-family detached market into one where attached sales dominate. Constraints on available land are driving more builders to construct and sell attached products; for example, half of Shea Home's 600 deliveries this year will be attached, says Barnes. Burns notes that Fieldstone Communities left San Diego last year because it wasn't making enough money selling detached houses.

Last year, nearly half of the attached homes that came onto the market were condo conversions, says Morafcik. San Diego was converting condos at a rate of 20,000 per year, but the city now imposes regulations meant to slow that trend by making conversions less profitable. That's not necessarily a bad thing, says Hall, because conversions “weren't adding to the market's housing stock.”

As they plan for the future, builders here are banking on the continued expansion of San Diego's diversified economy that adds between 20,000 and 23,000 new jobs annually (which translates into a 1.6 percent annual clip, ranking 176th in the nation in May), even as its population growth flattens. Real estate consultant Marcus & Millichap recently identified San Diego as the country's No. 1 retail market, and Barnes cites surveys that rank San Diego among the nation's top vacation spots. “It's a phenomenal place to live, and the economy is vibrant,” he says.

AFFORDABILITY AND JOB CREATION will be the pillars that support demand for housing in San Antonio over the next 18 to 36 months, say builders and market watchers.

The city recently passed San Diego to become the nation's seventh-largest city, with an estimated population of 1,256,509. And since the mid-1990s, it has emerged as one of the country's leading meccas for corporate relocations and expansions. This fall, Toyota will start pumping out Tundra trucks from a huge new manufacturing plant here. Washington Mutual recently moved 2,500 employees to this market. Fort Sam Houston, a military post that provides medical training and support, was recently expanded. And biomedical is now San Antonio's largest industry, surpassing the military and tourism. “It's become San Antonio's turn,” Steve Murdock, the state demographer, told the Houston Chronicle in June.

While employment in San Antonio was up only 1.8 percent in May 2006 over the same month the year before, many of the companies arriving here are “manpower intensive,” observes Ted Wilson, who owns Dallas-based housing research firm Residential Strategies, which recently opened an office in San Antonio.

All of this has been good news for the 350 or so builders active in this market. “I can't see a falloff in demand for at least the next five to seven years,” says Greg Mikesell, president of Definitive Custom Homes, which specializes in on-your-lot construction and expects to build 41 units this year. “Job formation is what stimulates our business model,” adds Craig Westmoreland, divisional president for KB Home, the market's second-largest builder, which produces between 2,000 and 2,500 homes here annually. Westmoreland expects his division's revenue to increase by between 10 percent and 12 percent this year. But he's cautious about being too bullish. “Ten years ago, San Antonio pulled 6,200 permits; this year it will pull more than 18,000. That growth can't continue, but I don't know where it's going to land yet.”

One of San Antonio's more attractive features continues to be its affordable cost of living, which extends to houses for sale here. Travis Kessler, CEO of this market's Board of Realtors, told The San Antonio Express-News in July that 28 percent of all home buyers still look for a house in the $100,000 to $150,000 range.

So far, says Wilson, San Antonio has avoided the wild swings in price appreciation so common in other growth markets. But through the first half of this year, the market's median sales price rose 8.6 percent to $139,600, and home prices here are expected to hit record levels this year. The median household income in San Antonio is only around $41,000, but builders here don't seem to think some price appreciation will deter sales.

“Homes we sold in the Garden Ridge section for $115,000 in 2004 now cost up to $150,000,” says Mikesell, whose company's average price has risen to between $104 and $108 per square foot, from $88 three years ago. When KB first entered the San Antonio market in the mid-1990s, between 60 percent and 75 percent of its homes targeted entry-level buyers. Now, says Westmoreland, KB's product is more “balanced,” with homes ranging from the low $100,000s to $440,000. Mark Sparrow, divisional vice president of land and development for Standard Pacific Homes, notes that buyers looking for homes in the $80,000 to $100,000 price range are served almost exclusively by the resale market. (Standard Pacific's homes range from $120,000 to $300,000.) And D.R. Horton's price “core” is around $300,000, says division president Bryan Rome.

D.R. Horton wouldn't disclose its closings in San Antonio, but competitors say its market share is significantly ahead of KB's, and that Horton has been purchasing land steadily. “Horton is the market's No. 1 builder, and our focus is to remain No. 1,” says Rome, who notes that there's still “plenty of land” available. Like everyplace else in the country, though, land here costs more to acquire and develop. “There's been a continual increase for raw land, which is now going for $25,000 to $40,000 per acre,” says Sparrow. John Sanchez, owner of Sanchez Custom Home, which builds two or three 4,000- to 4,500-square-foot units per year on half-acre and three-quarter-acre lots, says the price of a half-acre in a good location has gone up 30 percent to 40 percent and is now between $80,000 and $100,000.

Those numbers rise exponentially when infrastructure costs—which municipalities are asking builders and developers to bear more of—are tacked on.

Land prices, though, might be the least of these builders' worries, as San Antonio has some nagging issues that could affect home construction and sales over the long term. Access to water is one of these. This area's primary water source has been the Edwards Aquifer, and San Antonio has been prone to droughts in recent years. “No one knows how much of the aquifer is water or mud,” says Mikesell. Sparrow says that water availability hasn't been a buyer concern yet, but a recent engineering report by the Texas Water Development Board projects that San Antonio could lose 50,000 people by 2030 if its water needs aren't met with alternative sources, reports the Houston Chronicle.

Of more immediate concern to builders is the threat of tougher immigration laws coming out of Washington. More than half of San Antonio's population is Hispanic, and nearly all of its residential construction is done using Hispanic subcontractors, an unknown but sizable percentage of whom are in this country illegally. Sanchez, a Mexican-American whose family has been in the United States for five generations, says access to “these artisans from Mexico” gives builders here a real advantage. Mikesell adds that immigrant labor keeps the cost of homes low: “It would be problematic for all of us if the laws restrict access to immigrant labor.”

SOURCE: HANLEY WOOD MARKET INTELLIGENCE

SOURCE: HANLEY WOOD MARKET INTELLIGENCE

SOURCE: HANLEY WOOD MARKET INTELLIGENCE

AFFORDABILITY:

Average, 1995–2002: 78.3%

1Q2005: 42.6%

1Q2006: 22.7%

EMPLOYMENT:

1995–2002: +22.0%

2004–2005: +6.4%

June 2005–June 2006: +3.1%

FORECLOSURES:

Change from 2Q2005: +21%

Change from 1Q2006: +18%

AFFORDABILITY:

Average, 1995–2002: 70.3%

1Q2005: 60.1%

1Q2006: 32.9%

EMPLOYMENT:

1995–2002: +30.3%;

2004–2005: +6.2%

June 2005–June 2006: +5.3%

FORECLOSURES:

Change from 2Q2005: +53%

Change from 1Q2006: -25%

AFFORDABILITY:

Average, 1995–2002: 60.6%

1Q2005: 30.1%

1Q2006: 24.8%

EMPLOYMENT:

1995–2002: +9.7%

2004–2005: +0.8%

June 2005–June 2006: +1.0%

FORECLOSURES:

Change from 2Q2005: +85%

Change from 1Q2006: +129%

AFFORDABILITY:

Average, 1995–2002: 57.5%

1Q2005: 64.5%

1Q2006: 50.1%

EMPLOYMENT:

1995–2002: +19.1%

2004–2005: +4.1%

June 2005–June 2006: +4.7%

FORECLOSURES:

Change from 2Q2005: +27%

Change from 1Q2006: -12%

AFFORDABILITY:

Average, 1995–2002: 66.2%

1Q2005: 30.9%

1Q2006: 17.4%

EMPLOYMENT:

1995–2002: +13.6%

2004–2005: +3.5%

June 2005–June 2006: +5.0%

FORECLOSURES:

Change from 2Q2005: -30%

Change from 1Q2006: -37%

AFFORDABILITY:

Average, 1995–2002: 67.4%

1Q2005: 77.3%

1Q2006: 71.2%

EMPLOYMENT:

1995–2002: +21.7%

2004–2005: +2.4%

June 2005–June 2006: +2.2%

FORECLOSURES:

Change from 2Q2005: +22%

Change from 1Q2006: -36%

AFFORDABILITY:

Figures unavailable for this market

EMPLOYMENT:

1995–2002: +7.0%

2004–2005: +1.3%

June 2005–June 2006: +1.5%

FORECLOSURES:

Change from 2Q2005: +53%

Change from 1Q2006: -25%

AFFORDABILITY:

Average 1995–2002: 38.8%

1Q2005: 63.1%

1Q2006: 42.5%

EMPLOYMENT:

1995–2002: +12.2%

2004–2005: +2.9%

June 2005–June 2006: +2.3%

FORECLOSURES:

Change from 2Q2005: +207%

Change from 1Q2006: +237%

AFFORDABILITY:

Average, 1995–2002: 38%

1Q2005: 7%

1Q2006: 5.2%

EMPLOYMENT:

1995–2002: +22.3%

2004–2005: +1.7%

June 2005–June 2006: +1.4%

FORECLOSURES:

Change from 2Q2005: +175%

Change from 1Q2006: -7%

AFFORDABILITY:

Average, 1995–2002: 64%

1Q2005: 71.4%

1Q2006: 59.6%

EMPLOYMENT:

1995–2002: +17.6%

2004–2005: +2.6%

June 2005–June 2006: +1.8%

FORECLOSURES:

Change from 2Q2005: +18%

Change from 1Q2006: -20%

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.

HOLDING THE LINE: Most builders insist that they've resisted dropping their prices, although Hanley Wood Market Intelligence found that price deflation occurred in certain markets through the first half of this year. Buyers in markets such as Sacramento, Calif., have also benefited from generous enticements from builders, including mortgage buy-downs and free options upgrades.

PILING UP: Speculative inventory—what's standing or under construction—has been mounting, and a growing number of production builders have grudgingly cut back on their construction for this year. Some analysts, though, think this inventory backlog could persist through 2007.