Phoenix-area homebuilders surviving slump

One thing can be said with certainty about the Phoenix-area homebuilders still operating in 2010: They aren't building and selling houses because it's easy.

With an estimated one in 10 homes vacant, foreclosure rampant, local unemployment nearing double digits and area banks reluctant to lend, the Valley has never been more inhospitable to members of the building profession.

The past three years of global financial meltdown, closely tied to reckless mortgage-lending practices, have wiped out more than half of the builders active during the Phoenix area's housing boom.

Even more dramatically, the number of Phoenix-area subdivisions where new homes are being sold has shrunk to fewer than 450 today from 1,250 in 2006, a local builder analyst said.

Eligibility ended April 30 for a first-time-homebuyer tax rebate that had helped spur new-home sales in 2008 and 2009, and no other federal tax incentives are planned.

Despite such obstacles, executives at four of the area's remaining homebuilders - Meritage Homes, Shea Homes, Lennar Homes and Joseph Carl Homes - said recent sales have been strong enough to sustain their stripped-down business models.

Beyond that, the builders said the harsh environment has transformed their companies - permanently - into tougher, leaner and more disciplined operations.

Meritage Homes

As the only publicly owned homebuilder based in the Valley, Meritage Homes Corp.'s financial performance always has been an open book.

The Scottsdale company's most recent quarterly earnings figures might not look like much compared with those of five years ago, but they have improved dramatically since the housing-market crash.

Meritage Homes' net profit of $4.2 million in the second quarter was less than one-tenth of its second-quarter 2005 earnings.

But Meritage Homes CEO Steve Hilton is prouder of the recent quarter's performance. He and the company worked a lot harder for it.

"You learn more about your business during the down times than in good times," he said.

After three consecutive years of losses, stemming largely from the devaluation of its extensive land holdings, Meritage Homes is now buying and selling lots at today's prices, rather than just selling.

Hilton said keeping new-home prices low enough to compete with foreclosure homes is critical to the company's near-term success.

In addition, he said, new homes must be energy-efficient to provide a noticeable reduction in monthly utility bills.

The rest of it - financial recovery, job growth and economic stability - are beyond the company's control.

"I expect it to rebound here in the next several months, but I could be wrong," Hilton said.

Shea Homes

The Phoenix area's largest privately owned homebuilder, Mountain View, Calif.-based Shea Homes, has been through a few housing slumps in its 127 years of operation.

Still, the current downturn has been among the worst, said Ken Peterson, vice president of sales and marketing.

"I don't think anybody really expected homebuilders to be bopping along the bottom for this long," he said.

Despite the country's uncertain economic future, Peterson said a series of wise decisions both during and after the housing bubble have helped keep Shea Homes among the Valley's top-performing builders.

One of those decisions was to discourage investors from buying homes in its communities during the housing boom by tacking a $100,000 premium on to the investor price, Peterson said.

That decision seems to be paying off, he said, as the incidence of foreclosure has been lower than average in Shea Homes communities, even in investor-heavy areas such as Maricopa.

Like nearly all homebuilders, Shea Homes' post-bubble strategy is to acquire and develop affordable lots in the partly built communities left behind by former competitors, especially in relatively popular areas such as Gilbert.

Like Meritage Homes and others, Shea Homes is focusing on energy efficiency and the benefits of buying a home that is move-in ready, without a frustrating search process.

Peterson said he is concerned that many consumers are still nervous about the area's economic future. He said homebuilders are not going to be truly successful again until the area's widespread foreclosure activity stops.

Lennar Homes

Part of the downturn-related learning curve for Miami-based Lennar Homes, one of the largest homebuilders operating in the Valley, can be summed up by the old saying, "The enemy of my enemy is my friend."

Alan Jones, Lennar Homes' Arizona Division president, said most homebuilders have come to regard low-priced existing homes as the true threat to their businesses.

They are far less concerned about fellow builders, he said, despite a long history of intense competition.

That perspective is leading to new ideas about how to survive the current slump, Jones said. One of those ideas is that it may not make sense to go it alone.

"That's what I see evolving," he said. "Homebuilders need to mass-market a little better the benefits of buying a new home."

In the meantime, Lennar Homes and other builders continue to partner in more limited ways.

For instance, the company recently invited Shea Homes to sell and build its homes inside Layton Lakes, a Lennar Homes community in Gilbert.

Such partnerships are not unusual, but Jones said today's competitive landscape warrants taking things a step further.

"We need to promote it together," he said.

Like his colleagues, Jones said he doesn't think the economic threat has passed for Phoenix-area homebuilders.

Regardless, the companies still in business today have shown considerable grit, he said. "There's pretty good evidence that if you've made it this far, you're going to make it going forward," Jones said.

Joseph Carl Homes

Recent startup homebuilder Joseph Carl Homes, based in Phoenix, is counting on a boost from Baby Boomers until better days return.

Many of the homebuilders in business today are focused at least partly on the Boomer market, via age-restricted developments commonly referred to as "active-adult" communities.

Joseph Carl Homes founder Carl Mulac is a veteran of the industry and most recently was president of Engle Homes, which went bankrupt in 2008.

Mulac decided to get back into the building game in June 2009, but this time as his own boss.

"I had really matured and gotten a lot of confidence to where I felt like I could do this on my own," he said.

Mulac said active-adult housing is a good niche for a bad economy because the buyers tend to have more money and better credit scores. And most are retired, he added, so the unemployment rate does not affect them.

As a young company in a dismal housing market, part of the Joseph Carl Homes survival strategy is to be extremely cost-conscious, Mulac said.

Joseph Carl Homes keeps just 20 vacant lots in its possession, despite having the option to purchase up to 2,000 lots from a land-bank partner.

Another key is diversification, said Susan Williams, the company's vice president of sales and marketing.

In addition to CantaMia, its active-adult community in Goodyear, Joseph Carl Homes also sells homes priced for first-time buyers, Williams said, and a more expensive product line for so-called move-up buyers, those who already have owned a home.

Although it may have been a bold move for Mulac to open a home-building company while dozens of other builders were shutting down, Williams said being new has some distinct advantages.

"We don't have a bunch of unhappy residents," she said. "We don't have a bunch of people who bought in at a bad time and paid a higher price."

by J. Craig Anderson The Arizona Republic Sept. 2, 2010 12:00 AM


Phoenix-area homebuilders surviving slump