Is the worst behind? Builders see business picking up

 

Veteran homebuilder Gary Larkin says the condition of Columbia’s construction and real estate markets in 2007, when the number of construction projects plummeted and some builders were forced out of business, was the worst he’s seen since the early 1980s, when he was just getting into the profession.

Larkin started building his first house in 1979, when the interest rate was 10 percent.

“I built my house on the weekends, so by the time I got finished seven months later, it was three points higher,” Larkin said. “That was my final mortgage; it was 13 percent. I could not sleep at night.”

Interest rates kept rising, the market stalled, and the nation went into recession. The same thing, on a smaller scale, happened in the early 1990s.

Three years ago, speculative homebuilding accounted for about three-quarters of Larkin Construction’s business. In 2006 Larkin halted his speculative building altogether. Just in time.

Now, with spring approaching, Larkin senses “a nervousness in our industry.”

But Larkin is sleeping just fine; he and other residential and commercial builders and developers say business is picking up.

Larkin has sold two of the five town homes and one of the four cottages his company built at the new Brookside Square subdivision in north Columbia, and he’s contemplating doing something he hasn’t done since 2006—starting construction of a house.

“In January, more people were looking than we’ve had in months,” Larkin said as he supervised carpentry taking place inside one of his townhouses. “With interest rates dropping, I’m mystified we’re not selling more.”

While economists are debating whether the nation is entering another recession, the cost of borrowing is a key difference between the previous recessions and today’s market.

By comparison, a typical current rate for a fixed 30-year mortgage is about 6 percent, down from 6.4 percent last year, according to the Boone County National Bank Web site. Boone County home values have appreciated more than 2 percent in the last two years, according to Boone County Assessor Tom Shauwecker. While that’s lower than the boom years, many other areas of the country are seeing declines in housing value.

Also, unemployment was relatively high before previous recessions but currently is low nationally and particularly low in Columbia—just above 3 percent.

Developers say the local numbers underpin a healthier industry and the supply and demand of residential and commercial buildings is leveling. They blame last year’s correction on overbuilding of speculative homes, especially by investors who didn’t have a solid background in building houses.

Optimism took hold among developers from 2002 to 2006 as Columbia built homes in record numbers.

“In ‘05 we were going great guns,” Larkin said. “We knew something was cooking in ‘06. You can just kind of feel it sometimes. You keep watching that inventory creep up. You have this momentous weight rolling down the hill and when you see something coming up it takes a while to slow things down. Some of our projects take a year to plan. Once you get there, you have to start.”

By 2007, builders’ enthusiasm for speculative development was fading.

The number of residential building permits last year dropped 61 percent from 2006, according to the city’s protective inspection department.

“We sold significantly more new homes in 2007 than were built,” developer Rob Wolverton wrote on Jan.17 in his 2007 Residential Real Estate Market Report.

The correction hit real estate professionals and the community as a whole. City sales tax revenue from construction and home improvement last year dropped $425,000, or 15 percent, from 2006, and speculative builders were forced to change their strategies or eat their losses. Some builders got out of the profession. Membership in the Homebuilders Association of Columbia has fallen from a high near 250 to 175.

“It’s been hard for a lot of people,” Annie Pope, director of the Homebuilders Association, said. Credit requirements are tightening for construction loans, she added.

“Credit is definitely more careful,” Larkin said, “but it’s available if you’ve got the track record.”

But there have been many legal notices in the newspapers announcing foreclosures on real estate, including those involving builders who bought lots and were unable to keep up with monthly payments.

Developer and Realtor Tracy Arey said he knows a handful of “code-plus” builders, owners of family businesses that made quality a priority, who aren’t in business anymore. He thinks the slowdown hit hardest on family operations that were low volume but high-quality builders.

“It’s human nature to get optimistic and that’s what happened to a lot of people,” Arey said. “Everyone saw these houses selling quickly. You tend to get every laborer in the construction field becoming a builder, and that’s what happened.”

For his own part, Arey got out of new home construction this year, preferring to focus on development and real estate sales.

“Sometimes I felt like a builder wouldn’t give me the listing just because I was seen as competition,” he said. “I think two days after I announced my decision to stop building, I received a call from a builder and listed all his buildings.”

The correction put pressure on subcontractors as well. One example is Tom Overkamp, who started framing buildings in
Columbia in 1987 but went to work in sales at Mid-City Lumber at the end of 2006.

“Before that, I would turn down more work than I would actually do in a year,” Overkamp said. “It got a little slow that summer, and I was trying to pick up other jobs and stuff just to keep my help busy.”

While speculative builders bemoaned the state of their market, Rod Glidewell, whose Glidewell Construction primarily take on remodeling and custom building projects, said he hasn’t felt the squeeze of the speculative homes oversupply.

“I’ve continued to stay very busy,” Glidewell said. “There hasn’t been a slowdown there at all. What you’ll find there is the old builders that have a big clientele of customers.”

Nevertheless, Glidewell understands the crunch speculative builders face. In the past, he built one or two speculative houses per year. A house he built two years ago on speculation still hasn’t sold.

“I could easily lose $75,000 on the project. If that was the only income I had, it would bankrupt me because I’m not a rich man,” he said.

Builders are optimistic that the coming year will be better. The supply of new houses is inching closer to the demand.

“The total supply of homes on the market at the end of the year was 1,100, as opposed to 1,238 at the end of 2006,” according to Wolverton, a partner in R. Anthony Development.

“If there are more than 100-125 speculative homes built in Boone County in 2008, we should all be institutionalized,” he wrote in his year-end report.

Wolverton said he thinks sales will drop again in 2008 but emphasized the local housing market, supported by strong economic fundamentals, is not in crisis.

The aspect of the market that does worry him is the oversupply of high-end houses and lots.

“I believe we have a 10- to 15-year supply of high-end lots in the market today,” he wrote. “The number of choices the high-end new home buyer has is staggering: Old Hawthorne, Bristol Lake, Copperstone, Heritage Woods, The Woodlands, Magnolia Falls, Steeplechase, Southern Hills and the upper end of Thornbrook.”

Wolverton said another problem that will remain in the market is the oversupply of developed building lots.

“I believe it will take three to five years to bring our supply of ‘affordable home’ [$400,000 and under] lots into balance, and I believe it will take 10 to 15 years or more to absorb the supply of highend lots currently in the market,” Wolverton wrote.

The value of commercial building permits in the 2007 calendar year sunk 39.2 percent from 2006.

But several commercial builders contacted by the CBT said they’d had a good year.

“What we are seeing is that overall, commercial construction starts are down from last year,” said Eric Peterson, president of Septagon Construction’s Columbia branch. “Couple that downtrend with national chains coming in with their own traveling construction crews or construction managers and competition from out-of-town contractors bidding on jobs that did not used to attract statewide attention and there are fewer general contracting opportunities for local contractors.”

Peterson said Septagon’s revenue was down a little last year but that he had record years in 2005 and 2006.

Jeff Herigon, owner of Hercon Construction, said his company had steady work last year and added, “There is quite a bit of activity that has broken loose since the beginning of the year.”

Randy Coil, owner of Coil Construction, said that, despite a little sag in retail construction, his business was steady in 2007, compared to prior years.

“Currently we have some extra inventory in the retail sector,” Coil said. “There’s still strong activity out there on churches, health care and other miscellaneous sectors.”

“From our perspective, it was still a good year in Columbia,” Coil said. “I think the volatility here is not near what the residential is. We do have a slowdown in retail construction, and part of that slowdown is just because we brought a lot of inventory into the market in 06 and 07.”