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REVIEW SUMMARY
Industry. Home building
Trend. Construction returns
Key. Fewer foreclosures and new lending could spur new construction in devastated cities such as Cape Coral.
Cape Coral, known nationally for its high rate of home foreclosures, is starting to see an increase in what some thought unthinkable just a year ago: Construction of new homes.
Consider Bob Knight. His company, Paul Homes, recently built a model home on Cape Coral Parkway, one of the first outside a subdivision since the downturn wiped out 75% of the residential subcontractors here.
“We're being watched very carefully,” Knight says with a smile. After 25 years building in Cape Coral, Knight thinks stabilization has arrived and buyers are starting to appear.
Cape Coral is Florida's second-largest city by landmass, measuring 120 square miles and connected by three bridges to Fort Myers. The city has 400 miles of saltwater and freshwater canals that helped drive real estate sales to a frenzy of speculation during the boom and subsequent collapse.
Cape Coral builder Gary Aubuchon is also sensing a change. Aubuchon Homes' pipeline of prospects is four pages long, up from a half page during the downturn. “We have moved past the survival mode and we're now into building and expanding our organization,” says Aubuchon, who is president of the company and a state legislator.
Builders still continue to face the foreclosure headwinds, however. “The problem that a builder is going to have is we're selling homes that cost less than building new,” says Steve Koffman, a Realtor with Century 21 Sunbelt Realty in Cape Coral. Data Koffman compiles show Cape Coral median home prices have fallen about 60% from their peak in 2005.
Among the buyers of foreclosed homes are companies such as Carney Properties & Investment Group, which buys foreclosed homes and rehabilitates them to like-new condition. The company sold 158 homes last year, most of them in Cape Coral.
Foreclosure peak
Knight acknowledges that foreclosures will remain a challenge for builders. “I think you've seen the worst of the foreclosures, but I don't think you've seen the end of it,” he says.
But the tide is turning. Lee County Clerk of Court Charlie Green says the number of foreclosure filings today are half what they were two years ago, including the hotbed of Cape Coral. “I think it's run its course,” he says. “Sure there's more coming, but it's not coming in the same numbers.”
Currently, the backlog of foreclosures in the Lee County court system totals about 21,000, down 9% so far this year. In recent months, the courts have disposed of more cases than were filed and Green expects the backlog to shrink to 10,000 by the end of the year.
In addition, Green has noticed an increase in recordings of traditional real estate sales and mortgages that aren't tied to foreclosures and short sales. “That indicates the market is stabilizing,” he says.
Meanwhile, the recent surge in home sales shows the inventory of foreclosed homes is getting absorbed by buyers attracted by relatively low prices. For example, off-water Cape Coral home sales surged through last year at pace of 300 to 400 per month, up from 100 a month in 2007 and early 2008, Koffman's data shows.
Smaller parade
There are buyers who prefer to buy new homes. In many cases, buyers have acquired one or two waterfront lots at deep discounts and need a builder. Lot prices have fallen by 70% from their peak, Knight says.
“We have been writing new-home contracts, three a month since December,” says Aubuchon. While 60% to 70% of his buyers are baby boomers who pay in cash, he's lined up a half dozen lenders willing to finance homebuyers in the Cape. These include BB&T, Florida Gulf Bank and TIB Bank.
While foreclosures present a tough challenge, there are fewer builders to compete with. For example, Aubuchon says there were only a dozen homes in the area's parade of homes this year, down from 67 at the peak.
As a result of the small number of homes available for viewing in the parade of homes in February, the traffic through Aubuchon's model was the best in years, he says. On three consecutive weekends, 200 to 300 a day visited the Aubuchon models.
While most of Cape Coral consists of scattered lots, one of the few residential master-planned communities in this city has captured most of the new-home business. From January through April, 58 of the 84 home-building permits pulled in Cape Coral were in Sandoval, a Bonita Bay Group community.
Sandoval opened in January 2005 and is about halfway through selling its 1,579 home sites to builders such as Pulte, Taylor Morrison and D.R. Horton. Homes in that community cost from $150,000 to $200,000 and fewer than 10% are in foreclosure.
Originally designed as a community for families, the majority of buyers now are second-home buyers and early retirees. That's because families don't have the financial resources to borrow. “Retired folks are at the stage where they have the money available,” says Jennifer Laderer, director of strategic marketing for Bonita Bay Group.
Market held back
Builders say low appraisals and stringent financing are holding back the market. “The whole system is not geared to a recovery,” says David Diaz, chief operating officer for Carney Properties.
Because foreclosures are sometimes the best comparable sales appraisers can use, that hurts companies like Carney because they spend a lot of money to fix up foreclosed homes. For example, the company might spend $30,000 for a home and spend another $70,000 on renovations. “We're getting beat up on the appraisals,” Diaz says.
Financing also remains difficult for all but the most creditworthy buyers. Banks are shoring up their capital by selling loans and raising capital, not lending. “It's all about financial good behavior,” Knight says.
Still, for those whose personal balance sheets have survived the downturn, there is financing available now. “We have found with this recent surge in sales that lenders are once again lending money for construction,” says Aubuchon. “Lenders are still very reluctant to loan to builders, but to the end consumer, they are making those loans.”
If you believe government is encouraging homebuilding because of the recession, Gerald Howard says think again.
Howard, the president and chief executive officer of the National Association of Homebuilders, recently spoke to builders in Collier County, one of the most anti-growth areas on the Gulf Coast.
State and local governments are starved for revenues and will extort builders for more money. Builders are in such a struggle for survival that they don't have time to lobby local government officials. “It's hard to worry about that when you're not building any houses,” Howard says.
Indeed, Collier County has the highest taxes in the state on new construction, commonly called “impact fees.” Despite Collier's 12.3% unemployment rate, government officials have done little to alleviate the tax burden, nor have they eased the area's notoriously difficult permitting process, builders say.
Meanwhile, in Lee County, county commissioners are putting large swaths of land off-limits to construction based on questionable scientific evidence. Howard says other areas of the country are experiencing similar government takings at a time when the homebuilding industry is at its weakest and doesn't have the resources to fight back. “Bankrupt municipalities are trying to squeeze builders,” Howard says.
Government roadblocks of excessive taxation and increased regulations will be factors that delay a housing recovery for another two years, Howard estimates. It will take another two years beyond that, to 2015, for commercial real estate to recover, he adds.
“There has to be a very strong government-backed market for residential housing,” Howard says. “The pendulum has swung too far the other way.”
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