Real estate:

Homebuilders finding it tough to hang on

Chris Morris

By Brian Wargo (contact), In Business reporter

Fri, Apr 17, 2009 (2 a.m.)

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Sun business and economy coverage

Real Estate in Crisis

Some Las Vegas homebuilders, especially small private ones, are going the way of the dodo. And if they have not gone away forever, many have shuttered their operations until the housing market turns around.

The numbers are telling. Home Builders Research reports only 38 builders pulled permits in 2008, down from 112 in 2004. Many of those 112 were smaller builders who constructed a handful of homes a year.

Bill Hoover, president of Southern Nevada Home Builders Association and the southwest region president of Pageantry Homes, estimates there are a few more than 20 private builders left.

Even large private builders have been affected.

Chicago-based Kimball Hill, which filed for Chapter 11 bankruptcy reorganization, announced in December it would close its doors after finishing homes under construction. It built 225 homes in Las Vegas in 2008.

Utah-based Woodside Homes filed for Chapter 11 last year. It built 397 homes in 2008.

Astoria Homes, one of Las Vegas’ private builders, announced in January it stopped constructing homes after lenders foreclosed on three of its neighborhoods.

Earlier this month, Las Vegas-based Rhodes Homes filed for Chapter 11 after it was unable to meet its debt payment.

On the public side, Florida-based TOUSA, which operates in Las Vegas as Engle Homes, announced last month its winding down its operations and working to sell off its assets after filing for Chapter 11 in 2008.

Other public builders have stopped construction, sold land and have skeleton crews in place for customer service only, Hoover said.

But it’s the private builders that have been hurt the most because they lack the deep pockets of the larger public companies. Many private builders don’t have a line of credit and haven’t been able to obtain loans to build homes.

“We are all just hanging on the best we can,” Hoover said. “Each private builder is probably in a slightly different situation depending on how they managed their business in the last two to three years. But we are in a similar boat in working with our lenders and taking one day at a time.”

Pageantry is an example of what is happening to private builders. It finished its last homes at the end of 2008 and now has none under construction and has no sales office.

Pageantry built 473 homes in 2005, but that declined to 273 in 2006, 154 in 2007 and 61 in 2008 — 12 percent of the business it had three years earlier.

It had as many as 75 employees in 2005, but is down to six, including Hoover. No need to have a full staff if the company can’t build homes, he said. That’s evident marketwide: Only 311 building permits were pulled by builders in the first two months of 2009, minuscule compared with the 2,500 a month pulled in 2005.

Pageantry dropped condominium prices to $165,000 to $170,000 that two years ago sold for $235,000. Town houses that recently sold for $200,000 sold for $275,000 two years ago, Hoover said.

“I know of few private builders that are building anything,” Hoover said. “We are just looking for ways to keep employees. We are all just trying to keep our doors open.”

In Pageantry’s case, it is seeking opportunities it wouldn’t normally pursue, Hoover said. He declined to talk about them all, but mentioned one is talking with lenders about completing other builders’ unfinished, foreclosed homes.

“In the short term, builders have to come up with some creative ways to keep themselves in business,” Hoover said.

Unlike large public builders that can operate on lines of credit, private builders rely on loans that are specific to a project and tied to its performance, Hoover said.

Lenders see the difficulty builders are facing to construct homes at a profit because of the price competition from the existing-home market triggered by foreclosures.

“The construction loans have dried up completely,” Hoover said. “Banks are simply not lending money. We all had good lender relations. It wasn’t like anybody made horrific mistakes. It was that our industry is one that doesn’t function right now.”

Even if they wanted to build, demand is weak. SalesTraq reported new-home sales were down 66 percent in January and 59 percent in February compared with a weak first two months of 2008.

The economy and concern about jobs and decline in the stock market have contributed to people’s apprehension in buying a new home, Hoover said.

“There is no motivation to build given the prices the public is willing and able to afford,” Hoover said. “It is not prudent. It is like selling a house as a short sale, and they won’t do it.”

It’s going to take land owners and lenders who have foreclosed on property to realize that it is overpriced and must be revalued if they want to sell it, Hoover said. That will make it affordable for builders to start constructing homes again because they can sell them at prices that can compete with existing homes.

SalesTraq reported the median price of new homes in February was $216,334. That’s $60,000 more than the median price of existing homes sold in February.

Long term, builders know there will be a housing shortage because of the limited amount of land and expected population growth in the valley, but the question is can they hold out until then.

“Who know how long that is going to take,” Hoover said. “We have not seen the end of it yet, but it has been frustrating.”

In December, Hoover and other Nevada builders called on Congress to address the housing crisis with a homebuyer tax credit and below-market 30-year fixed-rate mortgages.

The homebuyer tax credit enacted this year hasn’t had much of an effect on home buying like they had hoped, Hoover said. The focus by Congress now should be on encouraging banks to lend money, he said.

Even though it’s not prudent for builders to construct homes because of the prices they can charge, they need to be prepared to buy land as that market drops, most likely by the end of the year. The large public builders are already in position to purchase that land when it comes on the market at reduced prices, Hoover said.

For now, the builders are simply trying to hang on.

David McEntire, owner and president of Amstar Homes, is one of two remaining employees at his company. Over the past two years, McEntire said his company has seen only 2 percent to 3 percent of the buyers it had before. Amstar closed on 11 homes in 2008.

Mick Galatio, owner and president of Desert Wind Homes established in 1994, said his company closed on 55 homes in 2008, down from 262 in 2007. His company had 26 people at the height of the market and reduced that to fewer than 10 at the end of last year.

“It’s one of the hardest things we builders have to face — letting so many good people go,” he said.

Galatio said it’s frustrating because he always considered his company a strong builder, but the demise of the marketplace came so quickly. Even by operating prudently, builders can’t overcome the lenders and the credit crunch that are preventing buyers from becoming qualified, he said.

Discussion: 10 comments so far…

By mcmc_john

4/18/09 at 8:07 a.m.

Suggest removal

Mr. Hoover said. "It wasn't like anybody made horrific mistakes."

Every builder in this Country made 'horrific mistakes', when they continued to raise the prices of homes without regards to what the public could afford. The increase cost of a home was about 5% yearly until 2001, when it skyrocket to over 15% yearly.

Clark County commissioners rallied a group of industry experts and community activist to evaluate this unbelievable increase around 2007; under the banner of "affordability of homes." They wanted to find out why the prices of homes rose so drastically. The builders and subcontractors took control of this committee and changed the slogan of the day to be "availability of homes." Two African American community activist asked to evaluate the increase in prices by examining what the cost was to build a home, and was told that the committee would talk about the cost of construction at a later date. Unfortunately for people who wanted to the the dirty truth about construction cost that date never came.

After one year of listening to every bogus reason why the prices increased the committee never looked at the construction cost. The reason is the home construction industry giants knew that the profits rose 300% and the actual stick and stones to build a house rose less than 15% from 2001 to 2006. That is why they changed to slogan and the kept the public from knowing the truth about the cost of homes. One of the biggest lie was that the increase cost was because of land prices. Keep in mind two truths; the first is the home builders bid on the land and kept raising the prices themselves; the second is that even though an acre of land doubled in price, the builders went from putting eight homes per acre instead of four homes. This meant the per lot price never really increase the price of individual homes. But it always played well in the public.

The home builders instituted the funny mortgage paper in the early 80's in hopes of selling more homes through their own mortgage companies. They put people into homes that they knew they could not afford. The builders mortgage companies also knew that if the buyer could stay in the home for just two years before they surrendered it back to the builders mortgage companies the builders could resale the home at a new profit level.

The non-builder mortgage industry took control of this crazy idea in order to compete with the home builders mortgage companies. The builders then stepped back and watched it grow out of control in the late 90's. Until they realized the could increase profits on homes beyond what people could afford and the industry would still write more and more bad paper. The builders actions not only led to the debacle of the funny mortgages paper but gave birth to it.

So Mr. Hoover ... "the home builders did make horrific mistakes"

AND NOW THE AVERAGE AMERICAN IS PAYING FOR THEIR MISTAKES
By perry161492

4/18/09 at 9:21 a.m.

Suggest removal

this housing bubble has imploded and it will continue to implode for the remainer of the year u don't need to be a expert to know that. if u want to fix this housing problem u must passed that bankruptcy bill this year. yahoo news report this month lender sent out million foreclosure notice. i do not feel sorry for homebuilder they made this problem u can put realtor, mortgage broker. i bet if u look how much it cost to build these house with illegal alien it be under 80,000 dollars
By davidwayneosedach

4/18/09 at 9:42 a.m.

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What a disaster for construction workers! What can they do until the economy turns around?
By okra

4/18/09 at 10:35 a.m.

Suggest removal

It's no mystery why the builders didn't want to talk about the actual costs to build a home and the prices they were selling them for. While land prices indeed may have been rising, the use of (low, lower, and still-lowering) wages paid to illegal immigrant piece workers insured them their hefty profits.
Shame!
By Purgatory

4/18/09 at 3:13 p.m.

Suggest removal

...the absolute truths I learned in Econ 101 ain't always pretty...unless we can have an endless succession of 'benevolent dictators,' it is still the only sustainable system available...hope they can all recover and help bring the economy (and good jobs) back...
By stevem

4/18/09 at 3:21 p.m.

Suggest removal

it's amazing how many people, like the first poster up there, do not understand basic economics.

companies charge what the public will pay. anything over that, they stop selling and lose customers.

homes went up in price because people PAID those prices.

i would not hold my breath waiting for the las vegas market to turn around.

tourism and convention business is down...and it's still going down, that's the gas in the engine for everything local. now you have a glut of rental homes in las vegas with not enough people to fill them, forcing rent prices lower and making buying a home for investment not so attractive.
By Bodytalk555

4/18/09 at 6:22 p.m.

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I was thinking about this disaster in the 90's when the valley started to build up at a fever pitch. It never made sense to me.
By BTP

4/18/09 at 8:04 p.m.

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You think its bad now wait till the projects on the strip finish up, That will put 18,000 more workers out of work for quite a while. There won't be any new projects started for years. The building crane won't be the state bird again for a long time.
By bdover

4/18/09 at 9:23 p.m.

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Sadly funny that a friend of mine, a housing construction superintendent, has been telling me that the City of Henderson building inspectors have become a royal PIA because they have little or nothing to do. Sometimes 3 inspectors in Henderson will show up together. They are nit-picking and rejecting everything, so they have to be recalled to inspect the same things over and over. You know-something to do. It's a sad day that they fire their City manager, while they allow these loafers to pull this stuff off. Plus, if they really need to be hidden, the inspectors are transferred work in the Redevelopment Department, home of such bright ideas as spending 33 Million on the disaster known as Lake Las Vegas, and more on the beautiful downtown Henderson, with foolish murals and shabby casinos dominating the sorry area. Thanks, Mayor Jim.
By Sabibaby

4/18/09 at 11:26 p.m.

Suggest removal

This is what homebuilders are up against.

Unemployment.

Checkout this eye-popping animation-> http://www.slate.com/id/2216238/

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