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Home builders facing tougher-than-expected downturn: Local building permits down 18 percent from last year

September 4, 2006

Alan Goldsticker, president of Ryland Homes of Indiana, said builders have a mound, not a mountain, confronting them.

The walls might not be caving in on the Indianapolis housing market, but the current softening in home building is expected to continue for months.

That's the prospectus from Steve Lains, CEO of the Builders Association of Greater Indianapolis. While the outlook is not as bad as it could be, it is worse than most experts expected entering 2006.

BAGI predicted then that the market for new homes would remain essentially flat. But building permits, a sign of future construction, are down 18 percent through July this year compared with the first seven months in 2005, according to the association.

"The industry and the economy have been on a pretty strong ride the past six years," Lains said. "But the industry right now is just trying to make sure the supply doesn't outstrip demand."

Builders obtained permits for 6,275 new homes in central Indiana through July, a decline from 7,622 during the same time last year, according to BAGI.

The industry blames the slowdown on rising mortgage-interest rates, high gas prices and uncertainty over the war in Iraq. In Indiana, executives point to tepid job creation as another factor.

Bernard Markstein, director of forecasting for the Washington, D.C.-based National Association of Home Builders, concurred.

"You're still getting a blow from the domestic auto downturn," he said. "Michigan has pneumonia; you have a bad cold." Home builders in January told IBJ they

"This isn't the first [downturn] we've gone through, and it won't be the last," he said. "You just have to run a little leaner and use your efficiencies. You tighten your belts a little."

Residential subcontractors and employees searching for more work might find it in the commercial sector, where worker shortages are more prevalent. Several large-scale local projects such as the midfield terminal at the Indianapolis International Airport and the Colts stadium are keeping crews humming.

Although some opportunities might be available, safety and training issues make the crossover difficult, said J.R. Gaylor, president of the Associated Builders and Contractors.

"For the most part, everybody already has their niches," he said. "There are a lot of trappings that go into commercial and industrial building."

Shaky earnings

Documents filed by publicly owned builders paint a gloomy picture of the national market. Atlanta-based Beazer- Homes USA, the country's sixth-largest builder and second biggest in the Indianapolis area, reported in July fiscal thirdquarter declines.

Beazer's total home closings dipped 10.3 percent from the same time last year, while new-home orders dropped 15.8 percent.

"Conditions in each of the company's major markets have become considerably more challenging as the seasonal strengthening of sales trends did not materialize to the extent previously anticipated and historically experienced," the report said.

Bloomfield, Mich.-based Pulte Homes Inc., the largest U.S. builder by stock-market value and the sixth largest in the metropolitan area, said in August that secondquarter earnings dropped 20 percent. The company cut its 2006 earnings forecast for a second time this year after orders in the quarter slumped 30 percent.

And Dallas-based Centex Corp., the area's fifth-largest builder, reported in July fiscal first-quarter earnings decreased 17 percent while orders dropped 21 percent. Two-year low

Overall, housing construction in the United States dropped in July to the lowest level in almost two years. Housing starts fell 2.5 percent to an annual rate of 1.7 million, a Commerce Department report showed. Building permits fell 6.5 percent, the most since September 1999.

With little chance of a rebound in demand expected this year, builders will focus on selling off inventories rather than starting new homes, Lains at BAGI said.

"The natural reaction from the industry is to slow down and just meet demand instead of overbuilding the marketplace," he said.

Sales of previously owned homes are slow as well. Sales plunged in July to the lowest level in 2-1/2 years, and the inventory of unsold homes climbed to a record high, according to the National Association of Realtors in Washington, D.C.

It reported that sales of existing homes and condominiums dropped 4.1 percent in July from June to a seasonably adjusted annual rate of 6.33 million, the lowest level since January 2004.

The inventory of unsold homes in July rose to 3.86 million. At the current sales pace, it would take 7.3 months to exhaust the surplus, the association said. That is the longest period since the spring of 1993.

For five consecutive years, home sales had hit record highs as attractive mortgage rates lured buyers. The same held true in central Indiana, where 2005 sales in the nine-county area grew 1.08 percent over the previous year, according to the Metropolitan Indianapolis Board of Realtors.

But the housing sector has lost its luster this year as rates have climbed and potential buyers have grown cautious amid high energy prices and a slowing economy.

The sluggishness prompted the Federal Reserve earlier this month to halt its string of rate increases that had pushed interest rates steadily higher during the past two years to fend off inflation.

Even so, lower interest rates are available. Sensing rates would climb, Ryland bought up-front commitments, allowing the builder to offer lower rates in some cases, Goldsticker said.

But rates have been falling lately, anyway. The mortgage company Freddie Mac said Aug. 24 that average 30-year, fixedrate mortgages fell to 6.48 percent that week, down from 6.52 percent the previous week. That was the lowest level for 30-year mortgages since they averaged 6.43 percent the week of April 6.

[That] is still not a bad interest rate," Lains said. "It will just take time for the consumer to adjust to that."

The average home price in the metropolitan area in June was $160,210, nearly 1 percent higher than last year.
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