Home builders expect tighter margins

By JESSE FRUHWIRTH
Standard-Examiner Davis Bureau jfruhwirth@standard.net


   Housing data show Utah homes are retaining and even building on their value, so home owners might think they are the rare Americans who will emerge unscathed from the national housing crisis.
   Utah home builders, however, have been wounded by shrapnel expelled by the bursting national bubble, and their misfortune is just now beginning to bleed onto existing homes.
   Layoffs, price reductions and handsome extras that attract choosy buyers are ways large-volume Utah home builders are dealing with a lack of credit available to buyers. Smaller builders are simply closing shop.
   Two Top of Utah builders believe the worst is perhaps behind them, but the negative impact of the downturn in 2007 may continue to hurt profits for the next 12 months to 18 months, even in Utah's relatively robust market.
   As builders sweeten their deals to spur sales, home owners likewise may have to re- duce their asking prices in order to compete. How long can existing homes retain their values when brand-new homes now come with $70,000 discounts?
   Housing metrics tell a mixed tale of Utah's housing market. Utah home values increased around 10 percent in 2007, and foreclosure rates climbed only modestly.
   Top of Utah housing building permit approvals, commonly called "housing starts," however, dropped 86 percent between August 2005 and December 2007 and may foretell a terrible 2008 for sellers.
   The drop is the result of a glut of houses on the market displayed by year-over-year sales declines of 30 to 52 percent in the greater Wasatch Front area during the last three quarters of 2007.
   Destination Homes CEO Brad Wilson said it's not all gloom, and February 2008 at his business was symbolic of the mixed-message news. Wilson reluctantly laid off seven employees in February after a dismal 2007, but simultaneously marked an encouraging month in sales spurred by $70,000 price reductions on some homes.
   "A 30-day surge in sales is a great sign, but it's not yet a consistent trend," he said. "Our (profit) margins are down. Our sales (beginning in February) are on target, but we're expecting our margins to go down. ... There's a lot of pressure on margin for every builder. ... ‘Starts are off 70 percent.' Oh, that sounds awful, but no, that's actually good news."
   Wilson said most important to Utah's recovery is a reduction in the number of homes on the market. As builders slow their output, existing homes will have less competition, then values will rise and building will become necessary once again.
   That's his sunshiny perspective, each step of which he estimates could happen this year.
   Perry Homes vice president Bill Perry mostly agrees. He thinks that adjustment could take 12 months to 18 months to come to fruition, but sales and starts might pick up in just 3 months or 4 months.
   "What you're seeing right now is a 1-2 punch. You got a decrease in overall sales primarily driven by the problems that emerged in the credit market. The abilities of people to purchase homes has decreased precipitously because the financing situation is so much worse," Perry said.
   "The second part of the punch is people who found themselves in mortgages they shouldn't have been in have had to unload homes, which led to a glut of available housing out there."
   Perry said his company has avoided layoffs, but reduced staff slightly through attrition. "From talking to our competition ... there have been a lot of layoffs," he said.
   Both Perry and Wilson agree that Utah's troubles began externally.
   Specifically, the veritable disappearance in sub-prime loans that has been blamed for much of the problem nationally.
   Wilson estimates it took approximately 20 to 35 percent of Utah's buyers - lowincome and speculation buyers - out of the market. That lack of credit at the bottom for entry-level homes has a trickle-up effect, dampening sales of Perry and Wilson's "move-up priced" homes.
   Perry said price declines are terrible for the long-term health of the market, so he's merely tried to amp up his houses with finished basements and other extras while his prices are steady, he said.
   Sales following the price reductions in February encouraged Wilson, however, and he said 2008 may be tough on profits, but sales seem to be coming up and profits will hopefully follow.
   "Our traffic in our models is up 30 to 40 percent," Wilson said. "We've seen a spike in traffic in the last 6 weeks."
   While Wilson said spring always marks an increase in traffic, he said this spike is extraordinary.
   Both builders agree the heady days of 2006, while exciting and profitable, should not return in order to avoid painful corrections like the current one.
   Utah's housing market - oiled with low unemployment and net in migration - is poised to recover this year to a modest middle ground. Meanwhile, many other markets that had more speculators - like California, Nevada and Florida - may not. Wilson said one variable in particular will decide whether 2008 will be a bang or whimper for Utah housing.
   "If the lenders retreat from their extremely skittish position on making loans, you would see a lot of buyers come back to the market," he said. "Liquidity needs to return to the markets "
Zach Forbes, of Sherrow Masonry, lays brick Wednesday at a new house in the Destination Homes development in Layton.