BIG BUILDER Magazine - Starts: Slip Sliding Values
As if getting houses sold wasn't a big enough challenge, builders in what were some of the fastest appreciating markets in the country are beginning to experience more challengesfalling appraisal values and greater loan scrutiny right before closings. Appraisals became almost cursory. A computer records search for comparative prices and a drive-by to make sure there was a house on the lot often sufficed... First, the company is starting up mortgage and title businesses in conjunction with First American and Market Street Mortgage. The new services intend to provide customers with a more complete home buying experience while injecting the company with additional revenue streams...the company is pulling up the stakes in San Antonio after an arguably frustrating five-year run that produced roughly 225 homes.
Starts: Slip Sliding Values
As home prices appraise lower than contract prices, lenders balk at more and more deals.
Source: BIG BUILDER Magazine
January 9, 2007
By Sarah Yaussi
As if getting houses sold wasn't a big enough challenge, builders in what were some of the fastest appreciating markets in the country are beginning to experience more challengesfalling appraisal values and greater loan scrutiny right before closings.
Appraisals are coming in lower than sales prices because appraisers say prices have slid since the original contract was signed. In addition, some builders report lenders are scrutinizing sale prices more closely, asking for updates within a couple of days of closing, even asking builders to supply copies of HUD-1 closing statements for other, more recently sold homes in the neighborhood. They're looking for builder incentives listed on the form that effectively lower the actual sales price of the house from the on-paper sales price.
While this kind of last-minute barrier to closing may play into the hands of buyers looking for a way out of a contract or a negotiating tool to get a lower price, it wreaks havoc on builders that, in the face of a under-sales price appraisal, have no choice but to lower the price of the house or lose that sale and face finding another buyer who will demand a similar, if not greater, price cut. And, of course, once the price of one home falls, it's like the first domino, lower values in subsequent sales are inevitable.
Such are the signs of a devaluating market. During the boom years, the chances of an appraisal coming in low were remote. Even if they were slightly low, lenders worried little because the market was climbing so fast that the difference could be wiped out in few months. Appraisals became almost cursory. A computer records search for comparative prices and a drive-by to make sure there was a house on the lot often sufficed.
Not anymore in markets like Phoenix, says Ann Susko, of Valley Wide Appraisal Services. "One of the biggest problems that [local appraisers] are coming up with is [for a house] that was contracted for at the end of 2005. Now when they go to do a final inspection and a re-inspection of value, it's like, 'Uh oh.' Depending on the area, the market has decreased, sometimes 30 percent."
Even in markets where values haven't fallen through the floor, lenders are starting to pay attention to appraisals again, says Keith Gumbinger, vice president of HSH Associates, a mortgage-tracking and financial publisher in Butler, N.J. "Lenders are very concerned right now, not that prices have fallen, but that they might fall tomorrow," he says. "I am not surprised lenders are taking extra steps [to discern value]. Market conditions are really shifting under a lot of feet right now."
Triggering some of those worries are some early numbers that show more borrowers are not even making the first payments on home loans, says Gumbinger. Those early indications of default make the entities that buy the mortgages from the original lenders go back to the loan originators and say, "Cover me for a piece of that" loss, says Gumbinger. If loans were written with "recourse," loan purchasers have a right to make those kinds of demands. "I bet right now more loans are being written with recourse," he says.
In addition, buyers of mortgages are beginning to take a closer look at the loans in their portfolios to determine if they have, with the housing slowdown, become uncertain investments. The recent years of easy-credit loan products allowed borrowers to buy homes with little, if any, equity, and sometimes cursory appraisals for value may have left them holding loans that are suddenly riskier investments in a slowing market.
The worst case scenario: A buyer who now owes more than the house is worth because it was purchased at an inflated value, perhaps by 20 percent, using a loan that allowed a low down payment or no down payment and was financed at an artificially low interest rate or even no interest rate.
Just how many of those homeowners are out in the market now is a matter of speculation. But Rachel Dollar, a California-based attorney and certified mortgage banker who handles fraud recovery litigation for lenders and secondary market investors, worries the fallout could be huge if those homeowners walk from their homes. Foreclosure rates will climb, resulting in more homes on the market and lower sale prices.
"I expect that there are some significant losses to be had out there," Dollar says.
Blocked on the Ballot
Voters prevent developers from gaining an easy path to prime property.
Developers gained little ground with voters in the last election season. Voters in 10 states told their elected officials in no uncertain terms that they were against state and local governments seizing private property for economic redevelopment purposes.
The ballot initiatives stemmed from a 2005 Supreme Court decision that validated such eminent domain claims, giving governments extensive leeway to seize private property and turn it over to developers for new uses. Local governments can condemn nonblighted residential or commercial areas and sell them for new private redevelopment. The seizure of property often benefits the public in the form of additional tax revenues for the local governments, but private developers also pocket the development profits.
"It was a bad day for developers," says John Echeverria, executive director of the Georgetown Environmental Law and Policy Institute in Washington, D.C., of voter sentiment. David Goldberg, a spokesperson for Smart Growth America, agrees, noting that voters made it clear they felt "that developers have too much sway over local government."
The issue is far from settled. With state legislatures all over the country debating eminent domain, future ballot initiatives and legislation that could make it harder to condemn land and make it available for new development are a strong possibility.
Mick Pattinson, president of Barratt American, a private California builder that closed about 500 homes last year, says that local governments can, in some cases, abuse their power to take away private property for development. But much of the renaissance of downtowns across the country, and in California in particular, has occurred because local governments seized infill and encouraged urban development.
"I believe that people are entitled to their property, and there should be a minimum of government interference, but we all understand that in many cities across the country there is a need for renewal," Pattinson adds.
This fall, 12 states had measures on their ballots to limit government's power to force the sale of private property for economic development. Voters in 10 of the 12 states succeeded in putting the slap down on eminent domain. Here's the roundup of where these measures passed and failed.
- Arizona passed by 65 percent
- Florida passed by 69 percent
- Georgia passed by 82 percent
- Louisiana passed by 55 percent
- Michigan passed by 84 percent
- Nevada passed by 63 percent
- New Hampshire passed by 86 percent
- North Dakota passed by 68 percent
- Oregon passed by 67 percent
- South Carolina passed by 84 percent
- California failed by 48 percent
- Idaho failed by 26 percent
Choice Homes attracts new talent to improve operations and retool product and market position.
The months-long corporate upheaval that threatened to topple Choice Homes in the spring of 2005 left many doubts whether the Arlington, Texasbased builder would ever regain stability enough to survive. Owners vacated their positions, cashing in on their stakes and essentially leaving the company with financial strain, a leadership vacuum, and an outdated competitive strategy. But now, more than a year since the hemorrhage culminated, Choice's management team has stopped the bleeding and put the company on the road to recovery.
CEO Bob Ladd and his inner circleDan Couture, who moved from COO to president, and Steve Garza, CFOare unveiling a newly conceived strategy to rebuild the company's competitive position.
Part and Parcel
First, the company is starting up mortgage and title businesses in conjunction with First American and Market Street Mortgage. The new services intend to provide customers with a more complete home buying experience while injecting the company with additional revenue streams.
Second, it's overhauling its entire purchasing process. Couture says in light of what national builders have accomplished on this front, it was obvious that Choice's decentralized purchasing system wasn't allowing the company to capitalize on its volume. "With competition [what it is], you have to be using all your efficiencies," he explains. "Going forward we'll be operating more like a national builder." Gene Skrabanek will shepherd that transition as the new director of purchasing.
A similar reorg is in the works for marketing. As the new director of marketing and merchandizing, Julia Gibson is working to update Choice's image with a new logo, fresh marketing collateral, and standardized sales offices.
To better manage new and existing talent, Tom Justus joins Choice as its new director of human resources.
Expand and Contract
But the redefinition of Choice doesn't stop there. Although Couture says that the company doesn't "anticipate vacating the entry level," it will launch a move-up product line. No official timeline for first deliveries is availablethe company is on the hunt for landbut Couture estimates that the homes will fall in the 2,000- to 3,600-square-foot range and hit a price point between $200,000 and $300,000. New hire Bob Carter will manage the product launch as Choice's architectural design manager.
"We do feel like we're not participating in an active segment of the market,"
Couture explains of the decision to branch out of its entry-level niche. "And we want to be able to offer that [option] to our loyal customers."
And while the company looks to widen its product breadth, it's also taking a critical look at the value of the company's presence in each of its geographic markets. In fact, the company is pulling up the stakes in San Antonio after an arguably frustrating five-year run that produced roughly 225 homes. Despite favorable demand for new homes, a limited land position has prevented the company from gaining significant traction among the competition.
Hot Button Q&A
Do you think private builders will capitalize on declining land values to pick up prime parcels?
"They are not stepping up and buying land. There's no credit for [private builders]; banks aren't lending to them." Steve Hilton, Meritage Homes Corp.
"I've seen no evidence that private builders are being aggressive on land.
We have been very acquisitive. I see the balance sheets of many, many private companies, and they are in no position to be buying land.
They are leveraged three to one and they are using 90 percent of their capacity right now." Ara Hovnanian, Hovnanian Enterprises
*percentage of buyers rating each reason "extremely important" Source: J.D. Power and Associates New-home Builder Customer Satisfaction Study
"There are a few people taking advantage of the public builder mentality and moving up in the market. They are doing good deals with their takedowns. They aren't out aggressively buying big chunks of land, but they're just getting good takedown terms and a good price with limited risk because their initial takedowns are fairly small." Chuck Fuhr, The Ryland Group
"Smaller companies that bought shares back won't have capital to acquire land opportunities." Jim Fielding, S&P
With the housing market on the skids and nearly $1 trillion in exotic loans resetting in 2007, the industry is left wondering whether a spike in foreclosures is just around the corner. After more than six months of Indianapolis, Atlanta, and Dallas as the hottest spots for foreclosure activity, a new report shows three new cities leading the pack. RealtyTrac, a national database of pre-foreclosure and foreclosure properties, finds that Detroit, Denver, and Fort Lauderdale, Fla., are the newest metro areas to sit atop the list. The top 10 cities with the highest foreclosure rates are below.
- Fort Lauderdale, Fla.
- Fort Worth, Texas
- Las Vegas
- Memphis, Tenn.
Pulte Pulls Out of Purchase
Pulte Homes let the contract expire on a $70 million land deal to acquire 16 acres in Santa Clara, Calif. The site, which serves as the Silicon Valley headquarters for Extreme Networks, was designated by the city for as many as 40 homes per acre with retail. The Ethernet network provider says negotiations for a second purchase agreement are possible; however, the housing slowdown makes a new deal seem unlikely.
Kettler Wins Award
Robert C. Kettler, founder of Kettler, won the Northern Virginia Building Industry Association's Lifetime Achievement Award. Kettler founded his namesake building company, formerly known as KSI, in 1977 and has since grown the operation into one of the nation's top 20 multifamily developers. The business, which does both for-sale and rental communities, brings to market roughly 2,000 units a year.
Winchester Readies for Boomers
Bethesda, Md.based Winchester Homes, a subsidiary of Weyerhaueser Real Estate Co., takes a major step toward the launch of a new active adult division. Allen L. Rector Jr., director of the newly conceived division, will play a pivotal part in the launch, developing the initial plan for the brand and then assuming financial and operation responsibility for it post-launch.
Bluegreen Corp., in which Levitt Corp. has a significant vested interest, sees the departure of its president and CEO George F. Donovan. He spent 15 years with the company. Executive vice president and COO John M. Maloney Jr. will succeed him.
Beth Fischer, an eight-year veteran at Pardee Homes, a subsidiary of Weyerheauser Real Estate Co., moves up to division president. She will manage the company's local community development, marketing, multifamily, sales, construction, and purchasing departments.
Holiday Builders promotes Kris Ellis to vice president of business development and strategic planning. Formerly the company's director operations/marketing, Ellis' responsibilities now include optimizing purchasing operations and driving efficiencies in new divisions and acquisitions.
Gerald "Gerry" Lewis joins the team at First Home builders of Florida as an assistant sales director. Lewis previously was the director of financial services at Purdue University in Indiana.
Please send information regarding all staffing changes to Sarah Yaussi at
Overhaul at Orleans
Longtime Masterpiece Homes division president is out.
With cancellation rates in its Florida operations closing in on 100 percent, Orleans Homebuilders is consolidating its Florida operations, shedding a management team that had been together for more than a decade.
Although Bob Fitzsimmons was expected to step down from his position as president of Masterpiece Homes, a division out of Orange City, Fla., in January, his exit came a bit earlier. Fitzsimmons left the company in November 2006, taking with him two of his top managersMike DeAngelo, vice president of operations, and Geri Davis, sales directorwho had worked with him since he launched Masterpiece Homes in 1994, which he then sold to Orleans in 2003.
Bob Razler will now head up the downsized division. Before joining Masterpiece in 2006, Razler was a community manager for Hovnanian Enterprises.
Dean Amann, Orleans's executive vice president, says the decision is a result of its Florida operations "oversupplying" the market. Masterpiece averaged about 300 homes a year in the state, hitting a peak of 500 homes in 2005 at the height of the housing boom.
In the wake of the consolidation, the Masterpiece name won't completely disappear, Amann says. However, only two or three locations will continue to carry the name in coming months.
As for Fitzsimmons, he's hoping to get back to his original mission, which was to produce affordable housing. And he has no regrets. Orleans, Fitzsimmons says, wants "to go in a slightly different direction. The slowdown is an opportunity to reorganize [its] Florida division."
Changes at corporate followed closely behind the announcement of the management changes in Florida. Joseph A. Santangelo resigned as CFO in favor of a position with another Philadelphia-based real estate company.
At a Glance: Bozzuto Homes
7850 Walker Dr.
Greenbelt, MD 20770
Curious to know who's got the biggest builders on the run in some of the most attractive markets? Check this one out.
- The company was founded in 1988 and is part of The Bozzuto Group, which includes subsidiaries that develop both commercial and residential properties.
- Specializing in development close to Washington, D.C.'s core, Bozzuto Homes anticipated selling roughly 350 homes in 2006.
- Bozzuto Homes offers a wide product mix, including single-family homes, townhouses, condos, and active adult, ranging in price from $200,000 to
Tom Baum, president of Bozzuto Homes and Bozzuto Development Co., says the recent weakness in the market has proven that even with good fundamentals, such as job and population growth, the Washington, D.C., market is susceptible to a housing downturn. However, he says being diversified has given the company a competitive advantage. "When we're seeing a downturn in the for-sale side, we see an uptick in rental," he explains.
Power Plan: Living Large
History Maker Homes appeals to value buyers with a bigger-is-better plan full of flexibility.
Despite the national housing downturn, North Richland Hills, Texasbased History Maker Homes increased their closings by nearly 12 percent in 2006thanks in part to the company's lifestyle communities and the appeal of home designs like Plan 2650. Focusing on entry-level buyers in the Dallas/Fort Worth market, History Maker has distinguished itself from the region's heavy competition by "selling space," says Karen Shaver, vice president of marketing. "We've learned our buyer's top priority is useable space, so our business model is to give them more for the money."
At Patriot Estates, located south of the Metroplex, more for the money means amenities such as walking trails, a club house, soccer fields, and a junior Olympic-size pool at prices starting in the $90,000s. In Plan 2650, the business model translates into spacious closets, an open design, and an amazing amount of flexibility for the value-conscious consumer.
On the first floor, the foyer opens into a space that runs the full depth of the home and includes a family room. Adjacent to the family room is another space that can be designated as a more formal dining or living room, depending on the buyer's needs. As in most homes, the central kitchen serves as the heart of the design. But recognizing that homeowners use their kitchens differently, three unique layoutsoffering choices in square footage, pantry position, and cabinetryare available at no extra charge to the buyer.
The master bedroom, with a generous sitting area, is located upstairs, along with a game room and two additional bedrooms. For larger families, the game room can easily be turned into a fourth bedroom. The flexible design also allows for an additional full bath to be incorporated as an option.
Although the 2650 is not History Maker's best selling plan, Shaver thinks its tops in popularity. Our target buyer group is driven by budget, so it makes sense that we tend to sell more [Plan] 1550s," she says. "But given the choice, they would all go for the 2650."
Lisa Marquis Jackson
Delivering on the Dollar
- Plan 2650 is offered in 16 of History Maker Homes 17 Dallas area communities with a base price of $131,950.
- The plan is full of flexibility: a maximum of four bedrooms can be configured and, at no extra cost, the 2,650-square-foot design includes a choice of three kitchen configurations that tailor the useable space to each buyers needs.
- in all of History Makers homes, prices are targeted to reflect basic offerings, but option upgrades are also available through the 10,000-square-foot sales center.