The cooling housing market has homebuilders throughout the nation girding for fewer sales, larger inventories and stiffer competition for people in the market for new homes.
Rising mortgage rates and overbuilding are largely to blame, yet the pace of construction continues as builders rebalance their holdings, move from single-family to attached-home projects, and search for lucrative niches to fill.
Last week, Denver-based MDC Holdings, which operates as Richmond American, reported a 25 percent drop in quarterly profits, blaming fewer orders and a growing inventory of unsold homes. The nation’s largest homebuilder, D.R. Horton, also cut its profit outlook for the year, joining Toll Brothers Inc., Hovnanian Enterprises Inc. and KB Home.
Federal Reserve Chairman Ben Bernanke called the slowdown a safe landing for the once high-flying industry.
“The downturn in the housing market so far appears to be orderly,” he told the House Financial Services Committee.
Yet at least one analyst considers the nine-month shift from seller’s to buyer’s market “a very fast transition.”
“The magnitude of this drop-off is about as quick as we’ve seen in a long time,” said Stephen East, a homebuilding analyst with Susquehanna Financial Group.
Homebuilders’ strategies vary as they attempt to weather the storm.
A competitive market caused orders for new MDC homes in Colorado to decrease from 594 for the second quarter last year to 291 for the same period this year. The decrease was partially offset by a 38.1 percent increase in orders in Utah.
MDC plans to maintain just a two-year supply of lots, which should help it avoid overexposure and stay flexible enough to react to changing market conditions. As a result, the company chose not to exercise some of its options on building lots.
The two-year land supply is a strategy MDC has been following since the early 1990s, chief financial officer Paris “Gary” Reece said.
“We saw, in a market where land values cannot be maintained, certain builders can be hurt by holding too much land,” Reece said. “We decided to recast our company as more of a merchant builder.
“We are a manufacturer of homes using land as a raw material. It doesn’t make sense to stockpile a lot of raw material. We pursued a strategy to buy land only when we needed it.”
MDC’s conservative approach serves it well, said Alex Barron, a homebuilding analyst with JMP Securities. “They’re not going to grow just for growth’s sake,” he said.
Most homebuilders try to keep a four- to five-year supply of land, but because home sales have slowed, many have as much as an eight-year supply, Barron said.
“A lot of them realize they bought too much land in the last couple of years,” he said. “Now they’re trying to sell the land to somebody else.”
It’s not an easy sell, said Mike Kboudi, a senior vice president of Fuller Real Estate who specializes in land sales.
“Even if builders are having good sales,” he said, “they’re not looking for new projects because they have enough lots to continue to build.”
Some are changing their focus from single-family homes to condominiums, townhomes and other attached housing.
In metro Denver, homebuilding permits were up 15.8 percent in the first five months of 2006 over the same period in 2005, to 9,733 permits, according to the Home Builders Association of Denver.
All of the increase can be attributed to attached housing, which rose 131.7 percent to 3,445. Single-family detached permits were down 10.7 percent to 6,484 metro-wide.
Centex, traditionally a builder of single-family suburban homes, sees greater opportunities at the moment for townhouses in the city.
Through its City Homes division, which has not been active in Denver until now, Centex is building 40 townhouses at 32nd and Blake streets. It also has an option to buy several other sites near downtown Denver.
“We’re confident that’s a market that has stayed really strong,” said Bill Anner, president of Centex’s Denver division.
The company also has been broadening its appeal beyond the first-time buyer with move-up communities such as Wheatlands in Aurora and 22 home sites in Morrison.
“A lot of builders are also scrambling to get close to rail,” said Rich Davis, senior vice president for sales and marketing at KB Home in Denver.
Beyond the transit corridor, sites west of Interstate 25 – and closer to the mountains – are in much more demand than locations in northeast metro Denver.
“Everybody loves to go to the mountains,” Davis said.
KB also conducts market research every two years to find out what consumers want.
“That research, coupled with our company’s business model, helps us in times when markets adjust and others feel pressure to offer incentives,” Davis said.
Using those studies, KB is now offering customers higher-end finishes through its KB Home Studio.
“You’ve got to be smart in this market today,” Davis said. “Research and paying attention to the voice of the customer is as important today in the marketplace as it’s ever been.”
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Staff writer Margaret Jackson can be reached at 303-820-1473 or mjackson@denverpost.com.
