Two builders—one that is starting up and another that is starting over—are banking their futures on a Houston market that continues to be one of the few functioning parts of America’s housing sector, even if it is still a remnant of its former self.

The startup, J. Kyle Homes, expects to complete construction of its first model by November at Park Place, a new neighborhood within Cinco Ranch, Houston’s top-selling master-planned community. Jason Hammonds, J. Kyle Homes’ president (Kyle is his middle name), says that market conditions have reduced lot prices to where his company can now get into a premium location that would have been out of its reach two years ago.

David Jarvis, Houston director for the market research firm Metrostudy, estimates that at least 20 builders have closed their doors here during the recession, including major players Royce Homes and Kimball Hill Homes. “There are a lot of other builders our there with inventory and are struggling,” adds Hammonds.

His company has a head start over other new builders in that it was able to raise $6 million in cash from investors and out of pocket. (Hammonds’ father, Ron, sold his company, Hammond Homes, to Meritage Homes for $82.8 million in 2002. His other son, Greg, recently launched Treaty Oak Homes in Austin.) That seed money provided J. Kyle Homes with a foundation upon which to negotiate construction financing from banks.

Jason Hammonds projects that his company will start between 50 and 60 homes in 2010, ranging from 1,800 to 3,800 square feet and from the $280,000s to the $400,000s. Hammonds confirms local reports that his homes’ architectural design copies historic Houston neighborhoods that feature large front porches and Craftsman-style columns, gabled roofs, and detached garages. But he’s not putting a cap on how many homes he’ll build. “I’ll let the market tell me how many sales we can have," he says.

Newmark Homes has already closed its first homes since it repurchased its brand from TOUSA on June 15. Newmark has operated in the Houston market for 26 years, but a clean break from TOUSA—the Florida-based builder that is winding down its business under Chapter 11 protection—is allowing this builder “to hit the reset button,” observes Jarvis. Indeed, Newmark’s president, Mike Moody, speaks of 2009 as his company’s “startup year.” Over the past 90 days, its officers have met with nearly 800 real estate agents at a dozen luncheon events “to get the word out that we’re a separate company and to share our plans,” says Moody. Real estate agents are critical to any builder’s success in Houston, handling more than 70% of the market’s home sales.

Newmark is finishing up the homes it sold under TOUSA, which currently number fewer than 20, says Moody. Newmark will switch to calendar-year accounting in 2010, during which it expects to build 300 homes that will range from 1,800 to 5,000 square feet in size and average $275,000 in price. To finance that activity, Newmark has assembled $25 million in construction financing commitments from seven lenders, most of which are local banks that Newmark has done business with in the past.

Moody says his company will confine its construction and sales to master-planned communities in the Houston market exclusively “for the next five years.” In fact, it plans to launch a Web site that will specifically target Houston buyers by the end of this year. And Moody is sanguine about a market that has “stabilized since June, and has become more predictable, although it’s still way off from 2006 and 2007.”

A recent series that aired on National Public Radio presented Houston as a tale of two cities, one whose population and economy are among the most diverse in the nation, but a metropolis that is in danger of being overwhelmed by its own sprawl. (Houston’s city limits alone stretch across 620 miles). Its expansion is being abetted by the construction of new highways that can only exacerbate this metro’s standing as one of the country’s worst in terms of air quality.

How Houston answers its growth and transportation questions will undoubtedly impact its housing sector, which over the past 12 months closed 50,000 new and existing homes. Jarvis says Houston’s housing industry is on track to start about 16,000 houses this year, which may be a far cry from the 50,000 it started during its peak year in 2006, but still compares favorably to virtually every other market in the country. He also points out that a Houston market with “no zoning, cheap lots and lots of land” still poses few barriers to entry for new builders, although those conditions are also likely to keep home prices and profits relatively modest.

On the positive side, the market keeps minting new potential buyers. Despite the loss of 90,000 jobs over the past year, Houston’s employment is still 2.6 million, and it has become a magnet for job seekers from all over the U.S. as well as other countries. The question for builders is whether Houston’s quality of life, which is its major draw, is sustainable if it keeps bursting its seams.

In an effort to get some Houstonians out of their cars in the future, city officials last month unanimously approved zoning and policy changes that would encourage walkable developments around the city’s expanding light-rail network, according to the Houston Chronicle. At least one developer, Grayco Partners, has been offering to pay part of the transit fare for a year to any resident who rents an apartment at Grayco’s 224-unit luxury complex at Venue Museum District, which opens in two weeks a stone’s throw from the district’s rail stop.

John Caulfield is senior editor for BUILDER magazine.

Learn more about markets featured in this article: Houston, TX.