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West USA Realty
Homebuilders are buying land again in metropolitan Phoenix.
So far this year, according to the Arizona brokerage firm Land Advisors, homebuilders here have spent $90 million on land purchases for new homes. That’s the most builders have invested in the region’s land in any year since the peak of the housing boom in 2006.
New land purchases are a sign the cycle is stirring to life again in a retooled housing industry.
The parcels of land and the pool of builders buying them are both much smaller than before the real- estate crash. But residential lot prices are climbing as a steady stream of purchases by builders the past six months restarts the region’s new-home industry.
Home building had a predictable pattern in the Phoenix area prior to the 2007 housing-market crash. Builders bought lots in the newest edge communities, built and sold homes and then bought more lots. Big builders bought land years ahead of construction.
The crash disrupted that pattern and left builders with unsold homes and vacant lots. Houses and lots were sold off at sale prices. Some builders lost large parcels of land to foreclosure. Other builders slid into bankruptcy or simply closed. Home building slowed to levels not seen since the 1970s.
Builders who survived the crash have cut operating and building costs and are trying to eke out smaller profits on fewer home sales. Many of the big builders have cash to spend on land again but are buying only what they can sell homes on quickly.
Federal aid from a new tax break and a shift by homebuyers away from foreclosures are also driving the recent land purchases.
“Builders are buying Phoenix-area land now because they expect to make money on it in the near future,” said Arizona home-building analyst RL Brown. “Builders are more optimistic about the housing market now, but the smart ones are still being very cautious.”
The $90 million in recent land purchases by builders reveals new trends and different hot spots for the new-home market stirring back to life in Phoenix.
Homebuilders are more selective now, buying fewer lots and in specific target areas. Sites closer to Phoenix’s core and near freeways are drawing the highest prices. Builders want lots prepped and ready for new homes for faster, less-expensive turnaround in the buy-build-sell cycle.
“Most builders now will buy 50 to 100 lots in a development, instead of the 200 lots they would have purchased before the boom,” said Nate Nathan, president of Scottsdale-based land brokerage firm Nathan & Associates. “Builders have adapted to the new market reality in Phoenix. The profit margins are tight.”
Mesa, Chandler and Gilbert, land brokers say, are now the hot spots for homebuilders. Lot prices in those southeast Valley communities have almost tripled in the past two years. Home sites are selling for more than $80,000 in parts of Chandler, prices similar to what builders paid in the pre-boom years of 2003-04.
More than 50 percent of metro Phoenix’s new-home sales during April were in Mesa, Chandler and Gilbert.
Developments along the Interstate 17 corridor north to Anthem and in Avondale and Goodyear in the West Valley are also popular with builders. Land prices in these areas are climbing as well, but lots are still typically selling for below $40,000.
Parcels in metro Phoenix’s most far-flung communities including Buckeye west of the White Tank Mountains and the Pinal County communities of Coolidge and Eloy aren’t drawing a lot of builder attention now. The areas are too far out for most current buyers because their tastes have changed, no matter how inexpensive new homes are priced.
Despite recent increases in new-home construction and sales, the home-building industry is still dealing with the worst housing market in Phoenix history.
About a dozen of the region’s builders have figured out ways to make money constructing less-expensive homes. These builders have cut costs on labor, materials and marketing. Builders no longer own the expensive land purchased during the boom. That land was sold for a loss or lost to foreclosure. Now, builders are repurchasing the same land for less than half what it sold for in 2004-06.
“Smart builders have cuts costs to the point where they can sell homes for less but still see a slight profit,” Brown said. “Construction costs are half of what they were five years ago. Builders’ office and marketing overhead is one-third of what is was then. Homes have been streamlined with fewer expensive amenities and extras.”
Brown said to save money, the president of one of metro Phoenix’s biggest homebuilders serves as salesperson at one of his subdivisions every Friday.
Most builders also are receiving some federal help. A change in the federal tax law last year allows companies to apply recent losses against profits during the boom years. As a result of the change, U.S. homebuilders have collected billions of dollars in tax refunds.
“The nation’s biggest builders are sitting on more than $12 billion in cash,” said Greg Vogel, chief executive officer of Scottsdale-based Land Advisors Organization. “These builders can buy land and hold it longer. But it has to be the right land to draw the homebuyers.”
He said there are subdivisions in metro Phoenix where 20 to 30 new homes are selling a month. Last year, builders were reporting fewer than five home sales a month in most of the area’s subdivisions.
A recent shift in metro Phoenix home-buying tactics also is helping homebuilders.
More homebuyers have become frustrated with the bidding wars and delays in foreclosures and short sales. During the past few months, a growing number of people have opted to buy new homes or existing homes sold through a regular sale.
“We are competing with the resale market in the Valley,” said Steve Hilton, chairman of Scottsdale-based Meritage Homes. “People will pay a small premium for a new home now in prime locations.”
The median price of a metro Phoenix new home sold during April was $199,362, up from $188,000 a year earlier, according to the “Phoenix Housing Market Letter.”
Many builders ramped up home construction in anticipation of the federal homebuyer tax credit. The deadline for the credit was April 30. Buyers have until June 30 to close on home purchases signed by the deadline. That means sales spurred by the federal tax credit could boost new-home sales until July.
Josh McNeil is shopping for a new home in Gilbert or Queen Creek. He didn’t make the deadline for the federal tax credit but thinks he will find better deals on homes now.
“Prices have gone down some in a few places where I am looking,” he said. “I think the builders built homes for buyers they thought would move faster for the tax credit.”
New-home sales in metro Phoenix climbed slightly to 823 in April from 789 during the same month a year ago.
McNeil is planning to buy in the next six months and wants a new home because he has friends who have failed multiple times trying to buy foreclosures or short sales.
The increase in land purchases is one of several early signs of higher expectations for the new-home market.
Nationally, builder confidence is the highest it’s been since August 2007, according to the monthly National Association of Home Builders/Wells Fargo Housing Market Index.
Through April, new-home permits in the Phoenix area were up 90 percent from last year.
But to keep that increase in perspective, 2009 was the slowest year for home building since the early 1970s. For the first four months of this year, 2,964 new-home permits have been issued in metro Phoenix, compared with 1,561 for the same period in 2009. May figures aren’t yet available.
“I think Phoenix’s housing market will gradually get better. But I am not looking for it to get dramatically better anytime soon,” Hilton said. “Some builders are overpaying for land now because they are too optimistic.”
Land prices have climbed faster in metro Phoenix than in almost any other part of the country, according to a report from the national housing-research firm Zelman & Associates. California’s Inland Empire area has also seen big jumps in land prices
The forecast for metro Phoenix home building during the next few years is for small annual increases until at least 2012.
Housing analyst Brown expects 8,500 new homes to be built in metro Phoenix this year, up from 8,000 in 2009. But his forecast calls for 22,000 new permits in 2012.
Market watchers are waiting to see if new-home sales continue to climb later this summer, after the final deadline for the federal homebuyer tax credit. No one is expecting big monthly increases in metro Phoenix home building this year, but small gains could lay a foundation for the industry’s recovery.
Author: Catherine Reagor
The Arizona Republic
West USA Realty