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Rebuilding the Housing Market - Gulfshore Business
Date: Friday, September 30, 2011

 
Rebuilding the Housing Market
 Homebuilders are repositioning themselves, their floor plans and features to attract value-conscious buyers.
Author: Lori Johnston

Homebuilders are done keeping up with the Joneses.

After years of trying to outdo each other to sell the most luxurious homes, villas and condos, the region’s surviving homebuilders are still building beautiful residences. But some builders have made a visible adjustment to build smarter, by offering fewer high-end features, floor-plan options and amenities that often sent costs skyrocketing.

The “bigger and better” mentality is being replaced with a more humble attitude, as buyers are watching their dollars more closely and seeking value for their clients.

New-home prices have dropped 30 to 45 percent since the height of the market in 2006 and 2007, so value (to be clear: it doesn’t mean cheap) is being emphasized. As builders try to stay ahead of their competition (and the resale market in particular) in design and price, they’re not going overboard.

“We might be doing things slightly nicer or better, but it doesn’t need to be 50 percent better,” says Mark Wilson, president of Naples-based London Bay Homes.

Affluent clients are still willing to pay for what they want, but they’re most conscious of value, Wilson says. Builders selling million-dollar homes are prepared to show buyers where every nickel and dime is being spent.

“Without exception, from the first-time homebuyer to the multi-million dollar mansions, the builders have taken great strides in value engineering their homes,” says Randy Thibaut, president and CEO of Land Solutions, a Fort Myers-based commercial real estate brokerage that does market research. “What they’ve done is said, ‘If it’s not of a perceived value to the customer that’s important, we don’t put it on the house.’”

On homebuilders’ side these days, there are fewer of them, and the market appears to have hit bottom. The region has lost 75 percent of its builders since 2006, when there were dozens and dozens of them, Thibaut estimates. Builders predominately are local companies now, with only about five national names in the marketplace.

New home building permits in the region have risen to 3,000, much lower than the 30,000 annually submitted when the market peaked, but still better than two years ago, when there were little to no permits, says Doug Meschko, market research director/broker for Land Solutions. “Things have picked up progressively. We had a really good winter season. It continued on into the third quarter,” he says.

Southwest Florida appears to be heading back to a “normal” market, around 5,000 to 6,000 permits a year, which was last seen at the turn of the millenium. “Builders have to start thinking about what it was like in 2000,” Thibaut says.

WELL APPOINTED: A family room inside a Diamond Custom Homes model.Shaving square feet

Some builders no longer wait for clients. The financially able build model homes that could tempt people to purchase a property, and spec homes in hopes of attracting buyers ready to move.

The three furnished model homes Diamond Custom Homes is building in Quail West and Grey Oaks range from 3,100 to 4,000 square feet, quite a change from a few years ago, when they would have been twice as big. The base price of those homes range from $1.395 million to $1.75 million. Even affluent customers appear to be willing to sacrifice some size, says Michael S. Diamond, founder of Diamond Custom Homes.

“What we tried to do as far as our model was concerned was to appeal to more of the masses by building homes that are a little smaller than they were at the height of the market,” he says.

Rooms aren’t being hacked off, but made more efficient, says WCI Communities’ Doug Schwartz, the company’s senior vice president of homebuilding. Kitchens and master bedrooms, down to the closets, remain spacious. But in WCI’s floor plans, for example, less space is dedicated to hallways and open space that can’t be used daily. It also has reduced its number of floor plans from a dozen to five or fewer.

When custom clients in the high-end market are making choices, some are willing to do without the billiard room or the six-car garage, Diamond says. The overall design of the home also is becoming less ornate in favor of more classic, clean lines.

The changes are price driven. Tweaking the home size can further decrease the cost of building the home. As labor, materials and land costs have declined (land prices have dropped anywhere from 65 to 90 percent in the region), Land Solutions estimates the average price per square foot has dropped to $90 to $100 in Cape Coral, $115 to $120 in Fort Myers and $150 in Naples. In 2006, it was $200 in Cape Coral and Fort Myers to $300 per square foot in Naples.

At WCI, costs per square foot have dropped 35 to 38 percent from the peak, also resulting from cheaper prices for labor and some materials. London Bay was building luxury homes for as low as $181 per square foot earlier this year, compared with $275 at the peak. But Wilson says the price per square feet is on the rise again, increasing by about 4 to 5 percent this summer and fall.

Stripping away the features

WCI is beginning to reposition itself after emerging from bankruptcy in September 2009. The Bonita Springs-based builder had not sold or built new homes until summer 2010.

Before the bankruptcy, WCI was putting “everything in a home that any buyer could imagine,” Schwartz says.

In this market, it’s the buyer’s choice to upgrade their homes. For example, standard appliance packages in communities such as Tiburón were Viking; now they’re Whirlpool. Granite countertops are in the master bathroom but no longer come in all bathrooms or laundry rooms, unless the buyer pays extra.

“We still offer the buyers an opportunity to personalize their homes and put into those homes the things that are important to them. Our standard offerings don’t maybe include all the bells and whistles that the standard offerings used to include,” he says. “You could still build a home today that inside looks and feels like what WCI used to do in days of old. It’s going to be their decision.”

Wilson learned that if you gave buyers an option to pay extra for the lighting system, or the pool add-ons, the answer would be: “No and no. Good is good enough. We don’t need it to be fantastic.”

In the past, a builder would make a suggestion and the buyer wouldn’t hesitate, increasing the price with each decision. For example, in the secondary suite, the choices for something as basic as the ceiling could be numerous. Crown molding? A tray ceiling with recessed lights? Tongue and groove in the center? Painted or stained?

Now, customers are considering each of those options and saying no to keep their budgets from swelling. They’re more educated about mechanical systems and how those could impact their monthly costs.

Taking out many of the extras keeps new home prices affordable enough to compete with resales, Thibaut says. He’s seen changes in landscaping packages and countertop packages. Crown molding or extra woodwork is being removed. Even the exterior is becoming less extravagant, with multicolored roof tile and elaborate window trim going by the wayside.

“They’re looking at every part of the home to find out where they can make savings because the buyers, for the most part, are not willing to pay for those things,” he says.

Scaling back amenities
Buyers are analyzing all of the monthly costs, including homeowners association fees, and some are deciding that they don’t use the golf courses, country clubs, tennis courts and other amenities enough to pay thousands of dollars a year for them.

“The days of people ignoring what it costs to live in a community are well behind us,” Schwartz says.

Control has shifted from the builder to the buyer, who, during the boom, was at their mercy, Thibaut says.

“They’re very conscious of, ‘What is it going to cost for me to live in those communities?’” says Brian Stock, CEO of Naples-based Stock Development.

At Stock Development’s Secoya Reserve in North Naples, which starts at $284,900 and has no amenities, homeowners association dues are $158 a month. At Black Bear Ridge, which has homes in North Naples from $339,990 and limited amenities, such as a clubhouse, pool and playground, fees are about $175 a month. Meanwhile, homeowners at Paseo in Fort Myers and Naples’ Lely Resort (priced from the $150,000s to more than $1 million) pay about three times that amount—about $6,000 a year—for tennis courts, pools, a spa, fitness center, restaurants, theater and other amenities.

WCI’s gated Manchester Square, which has homes in North Naples from $219,000 to $420,000 and amenities, which include a clubhouse, basketball court, a pool, cable TV and lawn maintenance, costs homeowners $185 a month in dues. That’s compared with about $800 a month at Tiburón, which is home to a Greg Norman-designed golf course and also provides transportation to the beach.

By offering an “a la carte” menu of amenities in some WCI communities, homeowners can put their money where their interests are, whether it is joining the golf club or fitness and health club.

A house under construction at a Land Solutions property.Building back the communities

Builders believe this new value-focused, scaled-back mindset will keep them in business as the market slowly recovers.

“People are building again,” Diamond says. “We are going to start to see more activity.” WCI, which started building again in two communities during the third quarter of 2010, has sold 58 homes this year with another 60 set to close by the end of the year. Total sales volume is $39 million with the average sales price of $328,000.

Stock Development has seen about $86 million in total sales, since the beginning of the year, a 69 percent increase since the same period last year. Number of sales are up 40 percent with about 138 homes sold (as of August) and another 152 set to close by the end of the year. Average sales price also is up about 21 percent, just over $500,000, including upgrades.

Diamond has built six $1 million-plus homes since launching his new company in late 2010.

“We wanted to turn around to clients and say, ‘You’re in control of your budget.’” Diamond says. “To a great extent that has worked.”