State of Southwest Florida Housing Market Has Home Builders, Suppliers On Edge

A massive drop in the number of building permits in the Southwest Florida housing market is providing the most disturbing evidence yet for one of the state’s all-important industries.

According to the Sarasota Herald-Tribune, builders will face tough times in the year ahead. But it is not just the housing industry that is going to suffer, economists and home builders say.

A massive drop in new construction will mean continued layoffs in the building trades and might even push the economy into recession.

A Herald-Tribune analysis of U.S. Census data shows that home builders only got 426 permits in the unincorporated parts of Manatee County, Sarasota County and Charlotte County during October. That is a whopping 66 percent decline from the 1,239 during the same month in 2005.

Many in the building trades have talked about the recent slowdown as a return to the pre-boom days, but in Sarasota and Manatee counties, the permitting rate during October was half that of the same month five years ago.

“It will be very difficult for small builders to ride this out,” said Jay Brady, executive director of the Gulf Coast Builders Exchange. “It will be difficult for the large ones, too, but they have the capital to survive big swings. Those companies that don’t have the capital will go out of business before all this is over.”

The driving force is the tremendous number of homes already built in the region. They were constructed under the apparent notion that the boom of 2004-05 would never stop. But Florida mortgage demand has fallen off en masse, and has left Southwest Florida with - by some experts’ estimation - an oversupply of perhaps several thousand new homes.

The impact of the downturn in the housing sector is by no means limited to this region. From coast to coast, home builders are recoiling from the speculative madness of the past three years and are drastically cutting production and expenses.

While economists say the pullback in housing starts and building permits is just what is needed to bring the supply of new homes back in line with demand, some worry that the contraction of the housing sector will cause a dramatic slowdown in the economy.

The housing sector played an unusually important role in bolstering the U.S. economy during the past few years, and now that the sector is in free-fall, the economy as a whole may follow, Kasriel said.

Most economists contacted by the Herald-Tribune do not believe a recession - if one comes at all - will last long, especially in Florida. They predict that the overriding demographic trend of retiring baby boomers will spur population growth help the state’s housing market rebound quickly.

But there is no disputing that the current problems in the housing industry stem from the excesses of the past few years — a time when Florida home mortgage loan rates were near historic lows and speculative fervor reigned.

Looking to take advantage of the sharp rise in home prices, investors plunged into the market for new construction, placing orders for homes in the hope that they would be able to resell them at a significant profit after receiving the title.

Builders themselves contributed to the madness by building “spec” homes ahead of demand. In the summer of 2005, the bubble burst. Speculators started dumping properties on the market, and inventories of unsold homes began to rise.

The first significant drop in Southwest Florida building permits occurred in March, with a 30 percent reduction in Sarasota and 40 percent reduction in Manatee from the same month a year earlier. Since then, the decline in permits has become more severe. Charlotte County did not experience the same trend until September, when building permits fell by 25 percent.

In turn, builders and suppliers have been cutting staff and expenses.

“If sales are down 50 percent, you can pretty much bet that companies will reduce overhead by something similar,” said Larry Kemick, an Ellenton-based home builder who has cut his staff from 14 to eight people during the past year. “I know for a fact that other companies in the area are cutting employment significantly.”

Some economists and home builders believe the bottom of the market already has been reached in terms of production and prices of new homes, and that building activity will pick up again in the months ahead as people realize that now is the time to buy.

But most experts contacted by the Herald-Tribune expect tough times to last at least six months, even as Florida home mortgage rates remain low, as the rate of appreciation has just exceeded what people earn by too much. As a result, the industry will not fully recover until 2008.