Homebuilders in Pierce County are getting up off the dirt.
In the past few months, new homes have started to appear, here and there, across the county. One or two go up at a time, filling in neighborhoods that have sat, pockmarked with empty lots, for almost four years.
The new-home market seems to be at the beginning of a true recovery – one driven by customer demand. Permits shot up in 2010 because of federal stimulus, in the form of a tax credit for new home purchases. But when the credit expired, customers disappeared. Last year was almost as bad as 2009, now viewed as the bottom of the market.
In the first four months of 2012, the rate of permitting for single-family homes is up about 10 percent in the county from 2011. Builders from small and larger hometown firms report more closed sales in the first quarter of this year than in all of last year. A few companies have even announced openings of new neighborhoods this past month, in Sunrise and Gig Harbor.
“One of the things we’ve been struggling with is, what’s the new normal?” said Dennis Hanberg, Pierce County’s director of Planning and Land Services.
Builders say the new normal is low prices and high style. A combination of cheap lots, trouble with sales of existing homes and changing customer expectations has moved almost all builders into the $200,000 price range or lower.
These aren’t typical starter homes. They have granite counter tops, hardwood floors and outdoor living areas. Some are even fully automated, with all the electronic systems integrated so they can be controlled through the Internet.
First-time homebuyers, the major driver of new home construction, are getting second-tier homes with mortgages at record low interest rates.
SURVIVING THE RECESSION
Ron Hendrickson has been a builder in Pierce County for two decades. He used to sell houses for at least $500,000. Now his average home sells for $255,000 and usually includes things that used to be upgrades, like granite, hardwoods and stainless steel appliances.
Hendrickson’s putting those things in at cost, because buyers now consider such things standard. “I’m not trying to make money on my extras,” he said in an interview last week. “I’m just trying to get my houses to sell.”
For two decades before the recession, the county averaged about 208 single-family permits a month. In 2009, that fell to 64.
“People didn’t want to spend any money. There was no confidence in the economy,” Hendrickson said. To survive the downturn, “I got lucky. The builders who had the most trouble were the ones who were doing land development. Then they couldn’t finance and get rid of the land.”
So the banks, or bankruptcy trustees, took them. Surviving builders have been snapping up finished or almost-finished lots across the county at cut-rate prices.
Rush Residential, a Gig Harbor-based builder of high-end custom homes, bought 82 lots at Harbor Crossing in Gig Harbor last fall for $2 million, according to data from New Home Trends, a Bothell-based real estate data company.
Developing a single lot from raw dirt can cost at least $40,000. At $24,000 per lot, Rush got a half-price deal.
“The land prices that we’re seeing now have created the ability to offer finished product at prices that haven’t been seen since 2002-2003,” said Scott Walker, vice president at Rush Residential. He said Rush sold about four homes last year. So far this year, it has closed 18.
Rush also is broadening its products. Once a builder of large homes in Gig Harbor’s Canterwood neighborhood, where the average sale price is about $700,000, Rush recently announced plans to build 10 homes there that are slightly smaller and would cost around $400,000.
The company also plans to offer its signature luxury approach to smaller homes in Rainier Gem in Puyallup, and in Harbor Crossing. Those homes will start at $210,000.
“That is a huge departure from what we’ve done in the past,” Walker said. “The message that we want to give is we are not getting into affordable housing. These are all feature-rich homes built to high standards of quality.”
LAND DEALS TAKE OFF
Deals on land were so good last year that some longtime regional land developers formed a new building company, Oakpointe Communities, after acquiring almost 100 acres that Seattle mogul Michael Mastro lost to the bank during his bankruptcy.
In early May, Oakpointe announced plans for Emerald Pointe, which will be 600 homes in the master-planned development of Sunrise, near South Hill. Phase One is 178 homes, and 10 already are going up. These homes are being built on spec, but Oakpointe marketing director Sean Johnsrud is confident they’ll sell.
“Emerald is in the huge draw area of (Joint Base Lewis-McChord), just east of the east gate,” he said. “One of our first buyers is a military guy. They know when they’re deploying and know when they’re moving around. They need to have a house right now.”
Emerald Pointe will have homes from $160,000 to $260,000, and each will have an automation system. Such a high-tech amenity typically has been done only in custom homes. It’s an example of how builders are trying to stand apart from each other, since price alone doesn’t do it any more.
“The market has demanded that. The public says, if you really want to sell homes and be cool and be different, you have to innovate,” Johnsrud said. “Even the bigger guys, they’re putting more into that.”
NEW STRATEGY FOR QUADRANT
Washington homebuilding powerhouse Quadrant Homes used the downturn to roll out new designs that allow for more custom options. But they’re trying to make their mark by directly addressing the economic concerns that are stopping people from buying, including mortgage-payment guarantees in the event of job loss, and a program to help people rebuild their credit.
Quadrant’s signature program is a partnership with Smart Move Advantage, a Utah-based company that will lease your existing home and guarantee that income for three years after you move into a Quadrant home.
Participants would have to have credit strong enough to qualify for a second mortgage, since the company guarantees rental income but doesn’t assume ownership. The idea is to allow people to move up to a bigger home while buying time for the market to recover before having to sell the first home.
“That really shook up the market,” said Quadrant CEO Ken Krivanec. “Innovation culturally is a big deal for us. It’s one of the main tenets of our culture. We decided we have to succeed no matter the market conditions.”
Krivanec said contract obligations prevented him from disclosing specific numbers. But he did say the Smart Move Advantage accounts for about a third of the company’s sales. He also said Quadrant’s sales are up 40 percent from a year ago.
Quadrant is looking for new lots to buy, focusing on north Pierce County and the Gig Harbor area. Now that almost all the cut-rate finished lots have been gobbled up, the price of development will go up again as competition for land increases.
Meanwhile, the existing home market’s struggles will benefit the homebuilders by erasing the premium new-homebuyers used to pay. Before the recession, new homes would sell for about 20 percent more than existing home. Customers accepted that as the trade-off for fewer maintenance concerns and more modern features.
That margin is down to single digits, if it exists at all. The sales market for existing homes is dismal. Underwater mortgages prevent people from moving; short sales can take up to a year; buying a foreclosure comes with the risk of major unforeseen expenses.
“When someone owns a home they have debt on it. They’re stuck on how far they can drop the price without going underwater,” said Matthew Gardner, a Seattle-based real estate economist. “Builders can meet the market.”
‘WE HAVE TO KEEP THE DOLLAR HERE’
Through April of this year, the county has issued 348 single-family home permits – a rate of about 87 a month. That’s up from about 80 per month from last year.
Hendrickson’s company limped through the Great Recession by using savings to buy a few lots at a time, usually from banks that had foreclosed on another builder. Then he’d build one or two homes a year for cash.
Now his company has seven homes in some stage of construction, which means jobs for an average of 10 people each day.
He strives for 75 percent of his material to be made in the United States. The closer to home, the better. He buys his cabinets from a manufacturer in Spokane, and his windows from a company in Lakewood.
“We have to keep the dollar here, so our economy keeps moving,” Hendrickson said. He also has come up with new add-ons, including an outdoor stone patio with a fire pit for $3,500 and an upgraded bathroom sink and mirror for $750.
Small builders will have to stay on their toes.
“National builders are buying up all the land, there’s no doubt about that,” Hendrickson said.
Miami-based Lennar Homes recently moved into the Western Washington market by buying 650 lots from Pierce County’s Premier Communities. Several local builders said Fort Worth-based D.R. Horton, which already has homes in four Pierce County communities, is looking for more. Those companies have economies of scale that make it hard for small builders to compete on price.
Hendrickson, who started his company with his father 20 years ago, paused a long time when asked if his company can last another 20.
“I’ll survive,” he said at last. “But will I be building as many homes as I would like? Ask me in two years.”