Despite May Boost, Southwest Florida Builders Must Cope With Leaner Times

As reported yesterday, new home construction staged a rally in May after three straight down months, but in Southwest Florida, the Herald-Tribune reports, local builders don’t see this as any cause for celebration. Despite this recent bump, the rowdy sales of 2004 and ’05 are still long gone.

Even the huge, custom Southwest Florida real estate builders, as well as developers, are being frugal, living for the moment off up to 18 months of backlogged orders for new houses. Three of the area’s influential builders — John Cannon, Pat Neal and Lee Wetherington — are coping with sales that are off by at least half from last year at this time.

Wetherington is thanking his wisdom in paying down his debt during the heady sales days. Cannon has instituted a hiring freeze.

They expect that the pain they are feeling is magnified considerably among smaller, less well-financed builders in struggling segments of the Florida housing market. Neal expects a “thinning” among builders in this phase of the boom-and-bust cycle. There is the potential, he says, to use his size advantage to pick up new, talented subcontractors as things shake out.

As usual, the tale of the times is told by the numbers.

Neal said the industry as a whole “built maybe 10,000 new homes in the region” last year, while the real demand “was perhaps 8,500.”

Even the backlog of homes to be built has fallen in the last two quarters, says Tony Polito of Tampa’s Metrostudy, a leading national provider of housing market information. Meanwhile, the number of units finished and vacant has grown and overall inventory levels are up. To Polito, a key number is the “units completed” compared with “move-ins.”

In the Sarasota-Bradenton housing market, the units completed exceeded the move-ins each of the last five quarters with the biggest gap to date in the first quarter of this year. That led to an overall increase of finished vacant units from 780 in March 2005 to 2,004 by March 31, 2006, Polito said. That is a growth in supply from 1.4 months to 3.2 months.

“Sarasota-Bradenton has the highest level of months of supply among major cities in Florida,” Polito said.
Despite the one-month improvement this May, analysts said higher Florida home loan rates will continue to buffet the once high-flying market in the next two years. The state’s home builders have been calling for a decline for some time now. Home buyers are seeing some benefits in the form of more builder incentives being offered to move inventory.

The Commerce Department says builders started construction at a seasonally adjusted annual rate of 1.957 million units last month, a 5 percent gain (better than expected) from April when construction fell 5.5 percent. Some analysts attributed the increase to an unusually dry spring in many parts of the country that allowed builders to start work on more homes.

Construction activity is likely to slide further in coming months, analysts caution, as the housing sector continues to slow, but not crash, under the impact of rising Florida home mortgage loan borrowing costs. Applications for new building permits, considered an accurate gauge of future activity, fell for a fourth straight month, declining 2.1 percent.

“The longer-term trends are downward, but it is not a disaster,” said David Wyss, chief economist at Standard & Poor’s in New York. “We are not expecting a housing bust, just a housing slowdown.”

Cannon, Neal and Wetherington said they are building at a pace that is largely unchanged from the past couple of years.

“We still have sales contracts we’re working through, as do most of the builders,” said Wetherington, who thinks crunch time will arrive in the late fall.

Cannon’s got “18 months worth” of homes that he still needs to complete and “zero inventory,” a position leaving him well-prepared to “ride this thing out,” as he put it.

Neal’s soft-market strategy is to keep core employees intact while possibly picking up talent from struggling builders to help work through his backlog while maintaining market share.

Cannon, Neal and Wetherington all have heard the tales of small builder distress and expect some failure in that market. Some of the smaller builders are at risk, especially the ones that have little more than a truck, a leveraged home model and a list of subcontractors. Despite slower times, Neal said he is prepared to build additional speculative homes this year and beyond.

“Sure, it’ll be quite a lot more risk,” Neal said, “but all the leading builders have made record profits during the last few years and are in better shape to manage risk now than at any other time.”

In 2007, Neal expects to build 40 percent to 50 percent of his homes on a spec basis. He is pushing ahead on his newer communities, such as Forest Creek in Manatee County, where buyers are seeking lower price points. In the first five months of 2005, Neal sold 104 homes at an average price of $594,000 — about $61.7 million in gross revenues.

This year, he has sold only 57 homes, but at an average price of $706,000, or about $40.2 million. That means his revenues may be off by about one-third, despite the increase in unit prices.

What does the rest of 2006 hold for new construction sales? How long before South Florida’s builders can no longer ride out the shifting South Florida housing market? What is the threshold at which Florida mortgage rates become unaffordable to a large enough segment of the population to really thwart the region’s growth? We can only wait and see.