Homebuilders finding it tough to hang on

By Buck Wargo

Friday, April 17, 2009 | 2 a.m.

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.