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Business Observer Thursday, Sep. 17, 2009 12 years ago

Survive to Win

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Lee County has been at the epicenter of the residential real estate bust and the ranks of homebuilders there have been decimated. But the survivors will benefit from the eventual rebound.

Lee County has been at the epicenter of the residential real estate bust and the ranks of homebuilders there have been decimated. But the survivors will benefit from the eventual rebound.


By most measures, it would be fair to say Lee County has been Florida's worst housing market in this downturn.


But even in this downturn, there is a group of homebuilders that hasn't quit despite overwhelming odds. They've slashed overhead, expanded geographically and they've been willing to do almost any remodeling job to stay in business.


These builders reason that if they can make it through the worst downturn their industry has faced in decades, they'll be in a position to benefit from the rebound. Many of their competitors have disappeared, most national builders won't return to the market for years and lenders are unlikely to fund new competitors.


“The construction industry has been decimated. It's as simple as that,” says Bob Knight, vice president with Paul Homes in Cape Coral.


“When it's over and we come through it, there will be a core group of builders who are going to be the primary players in the market,” says Richard Durling, president of Marvin Development Corp. in Fort Myers, which has been in business in the area since 1972. Durling is one of the survivors who plans to be around when that happens.


“It's sort of reset the clock to where it was in the mid-90s from a competition standpoint,” says Gary Aubuchon, president of Aubuchon Homes in Cape Coral and a state legislator. “Clearly there will be an advantage to still be standing when the rebound happens.”


Many of the national builders have pulled out of the Fort Myers market and they're unlikely to return soon. “They're going to remember what happened in Lee County,” Durling says. “It's going to be told like a horror story around a campfire.”


Already, builders are starting to see signs of a possible recovery in the Cape Coral-Fort Myers area. Existing home sales have been rising at triple-digit percentage clips (up 104% in July), foreclosure filings are dropping and median existing-home prices have stabilized at just below $90,000 for several months.


Builders aren't overly optimistic that a strong rebound is imminent, but most believe business won't get worse and that buyers will reemerge this winter tourist season. Some builders are confident enough that they're contemplating building model homes again.


“Before we start to hire, we want to make sure it's not a false bottom,” Knight cautions. Such a false start appeared briefly in early spring, but demand died just as quickly, he says.


The challenge is to maintain enough of a presence to be ready for the eventual rebound even though no one really knows when that will be. “We're trying to keep the core people and not take it where we've destroyed our entire company,” Knight says.


For the home building rebound to truly take hold, most agree that prices will have to rise. With the avalanche of foreclosures, the cost to build is in some cases twice as expensive as buying a recently completed home in foreclosure.


“We've lost more sales due to that than we've made,” says Shawn Harvey, co-owner of Greencastle Construction in Cape Coral. “I've heard that many times [from customers]. It's heartbreaking,” says Harvey, speaking recently at a meeting of the Cape Coral Construction Industry Association. Harvey anticipates it will take several years before buyers return and he plans to continue his focus on the remodeling business.


And buyers have no sense of urgency today, even as prices stabilize and the inventory of homes on the market starts to shrink. Buyers now take as long as a year to make up their minds, up from 60 days during the boom. “There's no belief that prices will go up,” Aubuchon says.


Still, builders hope buyers this winter season will be more motivated because prices have stabilized and builders can't build for less than they do now. What's more, rising home sales in northern states combined with a rebound in the stock market may free some cash.

Foreclosure competition


The biggest obstacle to homebuilders in Lee County is foreclosures. One out of 88 housing units in the Cape Coral-Fort Myers area is in some stage of foreclosure, the ninth-highest rate in the country, according to August data from RealtyTrac.


Foreclosures impact builders two ways. First, recently built homes in foreclosure cost as much as half to buy as the cost of building new. “You can't compete with foreclosures and short sales,” says Ray Scalero, president of Oyster Bay Homes in Fort Myers.


Second, foreclosures and bank sales depress the real estate market to the point where appraisals come in lower than the cost of construction. That makes it impossible for anyone to finance the purchase of a newly built home without a substantial down payment.


The majority of sales of existing single-family homes lately have been bank-owned or bank-forced. That's pushed the median sales price down 72% from the peak of $322,300 in December 2005 to $89,000.


Skittish appraisers stung by criticism they helped inflate prices during the boom are ultra conservative today. To builders' dismay, appraisers are using comparable sales data from the foreclosures.


“Most of the people who are buying our homes are buying with cash,” says Knight. “Credit is tough for anyone with less-than-stellar credit.”


While U.S. buyers remain uncertain, European buyers have been more decisive. “On the high end, almost all the people we're dealing with are from Europe,” says Aubuchon.


A relatively weak dollar combined with the decline in real estate prices has persuaded some Europeans that now is a good time to buy. “We have two people on staff who speak German and we just hired a third for our title company who speaks German as well,” Aubuchon says.


The declining dollar reflects concerns that the U.S. debt will grow so much that inflation will roar back. Builders have started promoting real estate as an effective hedge against rising prices, though it hasn't been particularly effective yet because inflation isn't currently a problem. But for retirees who make up the bulk of the second-home market, inflation is the biggest threat to their fixed-income portfolios.

New models


Despite the challenges, some builders are moving ahead with plans to build new models and even speculative homes that haven't been sold yet. Some of them are getting around the lack of bank financing in creative ways.


“I don't think there's a bank in Florida that's willing to finance a spec home of any sort,” says Dennis Cantwell, president of Sand Springs Development in Estero. “We're talking to a couple of investors and we'll let them share in the profits from that job,” he says.


Cantwell says there are investors who are earning measly yields on their cash and are looking for opportunities to make a higher return. He's considering building a $1 million spec home if he's successful in raising money from private investors. “By the time it's done, in about a year, the market should be healthy enough,” Cantwell says.


“We're going to start a model home on Cape Coral Parkway,” says Knight. With so many builders out of business, Paul Homes' model may be one of the few on that high-traffic road.


Aubuchon plans to build a model home at Magnolia Landings in North Fort Myers for golf-course homes that will cost under $200,000. “We're planning on doing 44 homes over the next 18 months,” says Aubuchon. “We see real opportunity at the $200,000 price point,” he says. “The key is to stay agile and to go where the market is.”


Some builders are venturing beyond the borders of Lee County. For example, Marvin Development is building homes in rural inland counties such as Hendry, DeSoto and Glades counties. That's because those counties didn't match the overbuilding that took place in Lee County. “We don't have inventory in those inland counties,” Durling says.


Other builders, such as Paul Homes, have expanded to more densely populated areas such as Tampa despite the logistical challenges that the distance presents. “A year ago I wouldn't have gone up to Charlotte County,” quips Knight. While the downturn in Lee County forced Knight to build in Tampa, he says the experience has been so positive that he's thinking about opening a satellite office in that area.

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