IF YOU LOOK AT THE NUMBERS, THE DENVER MARKET WOULD seem to be in good shape: Job growth is outpacing the country, and new homes remain relatively affordable because price appreciation has lagged behind the red-hot coastal markets of the last five years. Yet after I perhaps foolishly painted this somewhat optimistic scenario in a speech last month, a high-end production builder asked me how come his traffic and sales dropped 50 percent in one week.
Well, that's a question for the times. Maybe it had to do with the incentives offered in the newspaper that weekend: Centex promoted up to $43,000 off of closing costs “for a limited time.” Richmond American Homes touted 3.975 percent financing and no money down, plus up to $7,000 on upgrades and free air conditioning on select models. Buyers could get up to $75,000 off on select D.R. Horton models at Sapphire Point in Castle Rock.
One of the problems in Denver, as our Local Leaders data starting on page 126 clearly shows, is the high concentration of big builders duking it out for market share. As in many Western markets, the top 10 builders in Denver—seven of them public—command more than half of the market. And they are under orders to grow, even at the expense of margins, to prove that the best companies can increase earnings during a housing decline.
FASTEN YOUR SEATBELTS It also doesn't help that many people don't think this is a good time to buy a home. The University of Michigan Surveys of Consumers show that while overall sentiment isn't that bad, when asked whether this is a good time to buy a home, people respond with a level of pessimism that hasn't been seen since the last recession.
It appears that the public has taken to heart the relentless series of stories about an impending collapse. Seventy percent of Americans polled by the Gallup Organization believe that a “housing bubble” will burst within a year. Buyers fear that they won't be able to sell their existing home to buy a new one.
Clearly, these are turbulent times. New-home sales were down 8 percent year over year in the first quarter. In many big markets, according to data compiled by Hanley Wood Market Intelligence, the falloff in detached housing is much worse: Las Vegas is off 17.3 percent, Washington 34.1 percent, Chicago 37.8 percent, and Phoenix 46.9 percent.
IS THIS THE END? Executives at our BUILDER 100 conference, held last month in Santa Barbara, Calif., wondered aloud whether this is a short-term market correction—due to a glut of investor resales and higher mortgage rates—or whether this is the first leg in what could be one of those old-fashioned housing declines.
“The party is over in Florida,” says Richard Hawkes, CEO of Holiday Builders, noting that sales are in a free fall. “Right now, you can buy land anywhere in Florida that you like.” John Fels, president of Avatar Holdings, adds that his “salespeople are spending more time on the phone trying to talk people out of canceling than they are prospecting for new business.”
Stephen Brooks, president of Grand Homes in Dallas, has been dealing with this kind of choppy air for five years. His salespeople are used to writing two contracts—sometimes more—for every one that sticks, but they believe in what they sell. “Product design is critical when people have a choice,” says Brooks.
Instead of conditioning buyers to expect discounts, builders need to convince buyers that they are receiving real value. How? By emphasizing floor plans that accommodate today's lifestyles, low-maintenance materials that won't co-opt weekends, elevations that give homeowners pride, and neighborhoods that make coming home from work a joyful occasion.
Learn more about markets featured in this article: Denver, CO, Santa Barbara, CA.
