Denver Real Estate Blog

Home builders move in a different direction in a changing market

The cooling housing market has homebuilders throughout the nation girding for fewer sales, larger inventories and stiffer competition for people in the market for new homes.
Rising mortgage rates and overbuilding are largely to blame, yet the pace of construction continues as builders rebalance their holdings, move from single-family to attached-home projects, and search for lucrative niches to fill.

Last week, Denver-based MDC Holdings, which operates as Richmond American, reported a 25 percent drop in quarterly profits, blaming fewer orders and a growing inventory of unsold homes. The nation’s largest homebuilder, D.R. Horton, also cut its profit outlook for the year, joining Toll Brothers Inc., Hovnanian Enterprises Inc. and KB Home.

Federal Reserve Chairman Ben Bernanke called the slowdown a safe landing for the once high-flying industry. “The downturn in the housing market so far appears to be orderly,” he told the House Financial Services Committee. Yet at least one analyst considers the nine-month shift from seller’s to buyer’s market “a very fast transition.” “The magnitude of this drop-off is about as quick as we’ve seen in a long time,” said Stephen East, a homebuilding analyst with Susquehanna Financial Group. Homebuilders’ strategies vary as they attempt to weather the storm. A competitive market caused orders for new MDC homes in Colorado to decrease from 594 for the second quarter last year to 291 for the same period this year. The decrease was partially offset by a 38.1 percent increase in orders in Utah.
MDC plans to maintain just a two-year supply of lots, which should help it avoid overexposure and stay flexible enough to react to changing market conditions. As a result, the company chose not to exercise some of its options on building lots.

The two-year land supply is a strategy MDC has been following since the early 1990s, chief financial officer Paris “Gary” Reece said. “We saw, in a market where land values cannot be maintained, certain builders can be hurt by holding too much land,” Reece said. “We decided to recast our company as more of a merchant builder. “We are a manufacturer of homes using land as a raw material. It doesn’t make sense to stockpile a lot of raw material. We pursued a strategy to buy land only when we needed it.” MDC’s conservative approach serves it well, said Alex Barron, a homebuilding analyst with JMP Securities. “They’re not going to grow just for growth’s sake,” he said.

Most homebuilders try to keep a four- to five-year supply of land, but because home sales have slowed, many have as much as an eight-year supply, Barron said. “A lot of them realize they bought too much land in the last couple of years,” he said. “Now they’re trying to sell the land to somebody else”. Real Estate Professionals who specialize in land sales all agree, it’s not an easy sell. Even if builders are having good sales. Some are changing their focus from single-family homes to condominiums, townhomes and other attached housing. In metro Denver, homebuilding permits were up 15.8 percent in the first five months of 2006 over the same period in 2005, to 9,733 permits, according to the Home Builders Association of Denver.

All of the increase can be attributed to attached housing, which rose 131.7 percent to 3,445. Single-family detached permits were down 10.7 percent to 6,484 metro-wide. Centex, traditionally a builder of single-family suburban homes, sees greater opportunities at the moment for townhouses in the city. Through its City Homes division, which has not been active in Denver until now, Centex is building 40 townhouses at 32nd and Blake streets. It also has an option to buy several other sites near downtown Denver. “We’re confident that’s a market that has stayed really strong,” said Bill Anner, president of Centex’s Denver division.

The company also has been broadening its appeal beyond the first-time buyer with move-up communities such as Wheatlands in Aurora and 22 home sites in Morrison. “A lot of builders are also scrambling to get close to rail,” said Rich Davis, senior vice president for sales and marketing at KB Home in Denver. Beyond the transit corridor, sites west of Interstate 25 – and closer to the mountains – are in much more demand than locations in northeast metro Denver. “Everybody loves to go to the mountains,” Davis said. KB also conducts market research every two years to find out what consumers want.
“That research, coupled with our company’s business model, helps us in times when markets adjust and others feel pressure to offer incentives,” Davis said. Using those studies, KB is now offering customers higher-end finishes through its KB Home Studio. “You’ve got to be smart in this market today,” Davis said. “Research and paying attention to the voice of the customer is as important today in the marketplace as it’s ever been.”

Many new home buyers believe if they buy directly from the builder they will save money. This generally is not the case. Most new home builders are members of the Builder Realtor Council. The BRC’s builder members agree to pay Realtors a selling commission if they are involved in the transaction on behalf of a buyer. If a Realtor is not involved in the purchase transaction, the builder retains that commission money. That money is not offered to the buyer in the form of a credit or a reduction in purchase price. Therefore, there is no financial savings for the buyer by not using a Realtor in the transaction.

More important is the fact that the buyer is negotiating with the builder without representation. In Colorado, the Colorado Real Estate Commission prepares and approves purchase contracts that are intended to protect the rights of both the buyer and seller. New home builders do not fall under the rules and regulations of the Colorado Real Estate Commission, and as a result, do not have to comply with standard regulations including the preparation and use of commission-approved forms. The builder purchase contract forms are traditionally worded to favor the builder – they are not drafted with the intent to protect the interests of the buyer.

Use a Realtor

Building a new home is a major event. Undertaking this event without the benefit of the representation and expertise of a Realtor is not a wise decision. Realtors can minimize the problems involved and can provide peace of mind for the new home buyer – making the new home building process a more pleasant experience.
Surprisingly, most buyers who attempt to save money by negotiating directly with the builder without the expertise and guidance of a Realtor also choose not to retain an attorney to review the builder purchase contract. Usually, the attorney and the Realtor are contacted after problems are discovered – often when it is too late to eliminate the problem. This “after-the-fact” approach can be very costly to the buyer.

Understanding that there is no financial savings to negotiate with the builder without a Realtor, it is important to know that Realtors are familiar with new home construction and are accustomed to working with builders and their purchase contracts. Realtors can recommend the inclusion of language in builder purchase contracts that protect the buyer. For example, most Realtors recommend to buyers that they retain the services of an expert (i.e., architect, building inspector, engineer) and have them visit the property while it is under construction and following the completion of construction to insure that any problems are addressed properly. The Realtor will often recommend the inclusion of language that provides for these inspections as well as “walk through” of the property as a contingency to closing.

Realtors can also address other concerns that protect the buyer’s interest (i.e., receipt, review and approval of title work and homeowner association bylaws and covenants) so that the buyer can terminate the builder purchase contract in the event conditions in any of the documents do not meet with their approval.

Realtors may also be able to negotiate upgrades at no additional costs, closing extensions without penalty, recommendations of experts, other improvements (i.e., landscaping, security systems, sprinkler systems), radon mitigation before and following the purchase of the property, and address a number of other significant issues that directly impact the buyer’s purchase and eventual resale of the property.

Realtor – Not a synonym for real estate agent

A quick reminder that a person who is a real estate agent is not necessarily a Realtor. A Realtor is a real estate agent who is a member of the National Association of Realtors and who subscribes to NAR’s strict Code of Ethics. This, code provides guidelines and rules for Realtors to practice real estate in an ethical manner, ensuring the safety of both the seller and buyer. Being a Realtor is voluntary, but those who choose to belong demonstrate an unwavering desire to provide the best services for their clients. Only real estate agents who are members of NAR can use the term “Realtor.”

If you would like additional information about real estate in Denver Colorado as well as anywhere in Denver Metro Area contact us at 1-800-791-3990 ext 232.

Jeffery McClintock, is a real estate broker in Denver and prides himself on providing clients with professional guidance in all phases of residential new construction, including market research, product development, consulting, marketing and advertising. His personal mission is to bring to you a level of knowledge, experience, commitment, high standards and results to answer your real estate needs. He believes, the most effective way to provide superior service is to build a strong working relationship with you. His system includes regular consultations and feedback, which is the best tool for identifying and clarifying your real estate objectives and help define strategic solutions.