Homebuilders Look Back at Year of ‘Carnage’

Homebuilders Look Back at Year of ‘Carnage’
By Einat Paz-Frankel
– Memphis Business Journal –

Fewer construction starts, soft homes sales and mounting foreclosure filings — largely the result of the national subprime lending crisis — continue to negatively impact local developers and homebuilders say the market may not turn around until the end of 2008.

"It’s carnage right now," says homebuilder Jon McCreery, president of Chamberlain & McCreery, Inc. "This is the worst year we’ve had in 20 years."

Home sales in the area have steadily dwindled since the beginning of 2007 and year-to-date sales totaled 15,698, down 14.4% from the same period last year, which was a record year, according to the Memphis Area Association of Realtors.

Home construction starts fell by 36.6% in November in Shelby County, from 3,074 in 2006 to 1,948 in 2007, according to the Memphis and Shelby County Office of Construction Code Enforcement. The fallout from the subprime meltdown was equally felt in DeSoto County. Permits issued through November totaled 1,638, down 33.7% from 2,472 during the same period in 2006, according to the DeSoto County Planning Department.

In addition, the Memphis MSA has seen a wave of foreclosure filings in the past year, putting it at No. 14 among the nation’s metropolitan areas. In the third quarter alone, 6,239 foreclosures were filed here, up 38.6% from the third quarter of 2006, according to RealtyTrac, Inc.

Shelby County’s largest homebuilder, Matthews Brothers Builders LLC, took the greatest hit this year, struggling with multiple lawsuits, liens and foreclosures amounting to millions of dollars.

Other homebuilders are taking cost-cutting measures to keep their businesses viable in the aftermath of the credit crunch. McCreery says his company has had to lay off 12 employees in the residential division. Carrying the costs of unsold inventory has caused the builder’s principals to "move inventory, sometimes not profitably," he says. The average Chamberlain & McCreery home price dropped from $227,000 in 2006 to $217,000 this year and its marketing budget was cut by 50%. Home sales dropped by 25%, from 165 in 2006 to 124 year-to-date.

"We’re managing it the best we can," McCreery says. "It’s been very, very painful."

McCreery has started only 20 new homes since June.

"Our mantra is to move inventory, not to build," he says. "Everybody has to cut debt."

What caused the meltdown locally was that, similar to the rest of the nation, people who couldn’t afford it before were able to get a mortgage and buy a house, which over-stimulated the market in 2006.

"Subprime lending allowed our market to increase production by 30%," McCreery says. "Everybody got swept up by it: developers, builders, vendors. We had to meet that new demand. We all had our chips on the table when it went bad."

Residential developer Gary Thompson, vice president at Boyle Investment Co., says 2007 has been a "retooling year" for his division. But despite some drop in production, he says this past year has not been "terrible."

"Everybody got scared," he says. "The headline was ‘the sky is falling’ every single day."

And it’s not, Thompson says. Memphis’ real estate market doesn’t boom like Las Vegas and other hot markets nor does it slump like them. 2003 through 2006 were "crazy good years" and Boyle was quick to regroup at the very first sign of a slowdown in 2007, he says.

"We’re conservative. We pay attention and when we see it slowing we cut back," Thompson says. "We didn’t load up, so we don’t have a lot of inventory."

Boyle, which develops subdivisions and sells lots to individual homebuilders, has slowed down some on one of its flagship subdivisions, Spring Creek Ranch, located in the reserve area outside Collierville. Of the 520 lots planned, 106 have been sold and 52 will be delivered in the spring. Boyle had originally hoped to deliver them by year-end.

"Historically, people get out and start looking for houses in the spring," Thompson says.

McCreery speculates that the national market will turn around in the third or fourth quarter of 2008. Doug Collins, owner of Sovereign Homes LLC and Prudential Collins-Maury Realtors and the incoming president of the Memphis Area Home Builders Association, says the market may pick up as late as the first quarter of 2009.

In 2008, the Memphis market will see a lot of absorption, not new construction starts, Thompson says.

Absorption will likely cause the variety to shrink, Collins says.

"There will be fewer selections of new homes in 2008," he says.