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Florida’s Hurricane Season a Time to Wait for Home Sales Recovery
Florida’s housing industry appears poised for a return to growth in 2007, possibly as early as the first quarter, but first builders will have to work off a growing inventory in a chilly sales environment and return to a more customer-friendly approach to selling homes in the process, according to market analysts appearing at the Florida Home Builders Association’s (FHBA) Southeast Building Conference (SEBC) in Orlando, Fla. on Aug. 5.
Builders are also hoping for a respite during this year’s hurricane season from the major storms that have pounded states in the Gulf Coast for the past couple of years. In addition to destroying or damaging some 750,000 homes in the region last year, the hurricanes have given northerners pause about relocating to traditional retirement areas and have sent home owner insurance costs skyrocketing.
Also undermining affordability in Florida are high property taxes and a state homesteading law that limits annual tax hikes to 3%, creating a widening disparity between taxes on existing home owners and new residents and a major financial disincentive for trading up to a more expensive home, or even down, said panelists attending the annual builders’ show.
More than 16,000 housing professionals, a record, made their way to the Orange County Convention Center for the Aug. 2-6 SEBC, reported FHBA President Len Tylka.
Boca Raton-based Brad Hunter, director of Metrostudy’s South Florida Region, said that his company’s Market Sentiment Survey of builders in Florida and Atlanta for this year’s second quarter indicated significant deterioration in traffic volume, sales conversion rates, traffic quality and contract cancellations. “It’s back to the fundamentals,” he said. “Builders waiting for buyers coming to them are going out of business.”
Builders in the poll were also not optimistic about interest rates, Hunter said, with 81% of them expecting to see further increases over the next 12 months. Thirty-eight percent said that an increase of a full percentage point over current mortgage rates would have a significant impact on the industry.
To get over the hump and spur sales, builders in the survey indicated that they are reducing prices on their inventory (33%), paying closing costs (14%) and buying down the interest rate (7%), Hunter said. Forty-five percent of the builders said that the average value of their incentives was $15,000 or below, and 28% estimated it was in the $15,000 to $30,000 range.
Twenty-eight percent said they expected to see declining land prices, but 39% were projecting some further increases in building materials prices over the next six months.
Confusion Among Bottom Feeders
Home buying incentives are destabilizing some of Florida’s markets, said consultant Louis Ludwig, of Ludwig & Associates in Boca Raton. “Buyers don’t understand where the bottom of the market will be, and the consumer is confused.” Reducing home prices is generally inadvisable, he said, and financing buy downs, paying closing costs and throwing in features is a more effective way to proceed.
The ongoing recovery from the hurricane devastation of 2005 alone guarantees high demand for supplies, materials and labor, Ludwig said. “The cost of homes won’t go down and we have to relay that information to the customers.”
The task of changing the mindset of prospective buyers who are sitting on the fence and waiting to see fire-sale prices is a major challenge in the state’s current downturn, which analysts said is now more than a year old. And where sales have weakened the most, a major part of that effort will entail controlling the inventory coming back onto the market from “investors” with contracts on homes they intended to flip for a higher price before they closed on them.
Louis also reminded builders that this is a good time to use Realtors® to help step up sales, and they deserve incentives as well. “Realtors® need to be serviced, or they will eliminate you from the list of communities they show,” he said.
Big builders in the Tampa area have been providing Realtors® with thousands of dollars in home-closing bonuses, gas cards to encourage home showings and shopping spree points, the St. Petersburg Times reported last month. Commissions have risen from last year’s standard 3% to 5% at Beazer Homes, 6% at Lennar and 10% at Standard Pacific for second closings.
A Condo Glut
Condominiums are the most susceptible to the state’s housing slowdown, Hunter said, not only because they have been a magnet for speculation but also because the supply is glutted, with 77 active communities in Palm Beach County, 93 in Broward County and 203 in Miami’s Dade County. On the drawing board are an additional 148, 249 and 312 in those counties, respectively, but Hunter was skeptical that many of them would actually be built.
A rundown of some of the state’s most populated counties shows a mixed-bag for housing inventories. Establishing 1.5 months as a normal supply for finished vacant homes, Hunter said there is a five-month supply in Martin County, on the northern edge of Palm Beach, but this area has been undersupplied historically and will improve once its inventory is worked off. Palm Beach and Broward counties have both been declining in recent years because vacant land is scarce and builders have had a hard time keeping up with demand. Miami/Dade is improving, with its supply trending down. Collier County (Naples) and Lee County just to the north are both grappling with a surge in finished vacant homes, he said.
Nationwide, Hunter said that the $1 trillion in adjustable-rate mortgages that will be reset next year could cause some problems for home owners. For example, on a $300,000 loan going from 4.75% to a new rate of 6.5%, which may be on the conservative side, monthly mortgage payments will increase from $1,565 to $1,896. “Those who bought in 2003 and 2004 can refinance because they have home equity,” he said, but buyers from 2005 “have no equity and will have a tough time getting the bank to refinance them into a lower payment.”
Virtually nobody will be buying during the hurricane season, Hunter said, but it is possible that buyers will start returning to the market in December. In the meantime, selling high-impact glass, safe rooms and generators could be a lure for the relatively few buyers out there.
Trading on a Good Reputation
“Resume old-style selling,” he said, which will mean getting used to selling “10% in pre-construction and not 100%.” Builders who haven’t pulled in their horns, a healthy strategy for those who want to play it safe, should keep an eye out for “deals for land coming up at better prices,” he said.
“We are no longer selling a fungible commodity to investors, but a service to end users,” said Geoff Graham, president and founder of Atlanta-based Guild Quality. “The end user is interested in service and experience,” he said, and the builders who will do well in today’s environment are those we are operating a service business and able to trade on a reputation for the quality of their work.
“There is a tremendous amount of inventory and buyers have a lot to choose from,” Graham said. Nationally, less than 70% of new home buyers say they would recommend their builder, and in some markets it’s much lower than that. Builders with scores starting in the 85% to 90% range are in a position to excel, he said.
Architect Mark Jones, principal, Looney Ricks Kiss, said that hard times require “doing something special and better to get traffic to our product,” with an emphasis on creating a community and “the great place to sell your product.”
“Create value for the whole community, not just one house,” Jones advised. “The house doesn’t have to be the most important place on the street.” Restaurants and cafes; a beach, lake or river; a natural preserve, pedestrian walkways, architecture, parks, recreational activities and shopping all make the community better, he said.
Giving Buyers What They Want
Jones touted the value of surveys to determine how people are living in their homes and what they want, and said that a big focus in new homes should be placed on the kitchen and family room.
High-impact glass is a standard feature now that Florida appears to have become a frequent bulls eye for hurricanes, and even in an inland market like Orlando, where there as many wood-framed as masonry homes, “the perception in the market is that masonry is better.”
Green building can be another effective approach for grabbing the attention of prospective buyers, the panelists said.
People are starting to look more closely at their monthly utility bills, said Ludwig, especially in Florida where the summers are long, hot and humid, and “they will look at lower energy costs as a plus.”
But “even without a payback,” most people perceive a green-built home as a healthier place to live, said Edward Del Grande, from HGTV Pro in Atlanta.
Adding a few simple features to the home will also yield encouraging results, according to Del Grande. “Don’t look for extravagant add-ons,” he said. Examples of what will turn on buyers include: a radiant heat loop off of the water heater for the bathroom floor, at a cost of under $2,000; a pot filler by the stove in the kitchen; and a sink that can also cook.
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