News and Events

May 16, 2008

Other builders stay cautious, but say market poised to rally

Other builders stay cautious, but say market poised to rally

By DONNELLE ELLER
REGISTER BUSINESS WRITER

Iowa's home-building season begins with uncertainty and turmoil in the wake of Regency Cos.' announcement to cease home construction.

The news that the West Des Moines company had laid off 130 workers and would halt home construction hit as some central Iowa home builders say they see the market nearing a recovery.

In the past two years, builders have reduced new-home starts to lessen a surplus of homes, pulled back on new developments and worked to avoid being overleveraged.

The central Iowa housing industry's rebound hinges, in part, on whether Regency's decision rattles consumer confidence, already shaken by a weak national economy and rising energy prices.

"Consumers second-guess the market, wondering if others might be in the same situation," said Ron Grubb, president of Jerry's Homes, a large builder based in Urbandale that has reduced new starts to tighten inventory.

Regency, the state's largest home builder, said about a week ago it would leave about 260 homes in the market, some finished and some still under construction.

Another builder is also facing trouble: A handful of lenders have filed lawsuits to foreclose on local projects by Oaks Development, owned by developers Randy Walters and John Kline.

Leaders worry about what impact the financial troubles will have on the market — from depressing home and lot prices to restricting credit available to home builders and developers.

"It's going to take a while to get everything sorted out," said Keith Butz, president of the Home Builders Association of Greater Des Moines. "We just have to see how the dust settles."

Butz and others say they're concerned about the backlash to the small businesses and contractors working with Regency.

"It's going to hurt a lot of them," said Bill Kimberley, owner of Kimberley Development, a high-end custom home builder in Ankeny. "Some of them, it will take them down."

Regency leaders, whose crews continued to work on some homes, said last week they were meeting with lenders and believed the company has enough equity in its properties to outweigh the obligations.

Banks have a vested interest in homes being constructed and mortgages paid, Regency officials said.

Regency has projects in communities ranging from West Des Moines and Waukee to Pleasant Hill and Altoona.

Regency's possible departure from home building occurred following a two-year industry drubbing.

Iowa home construction fell 30 percent to $1.45 billion in 2007 from a peak in 2005, building permit records show. U.S. building dropped 36 percent to $181.5 billion. In Des Moines, building fell 33 percent to $580.1 million.

Home construction in Iowa was off nearly 34 percent this year through March at $169.5 million, a slowdown many builders blame on a harsh winter.

Grubb said Jerry's Homes' first-quarter sales were down 15 percent from a year ago. But sales for April have rebounded and he expects them to match 2007 figures. The company sold about 400 homes in Des Moines and Cedar Rapids last year.

Grubb said the company has shrunk its work force along with construction since 2006 in response to slowing business. He declined to say how many workers have been laid off.

And depending on how sales continue, the company plans to approach new construction conservatively.

"We've made the appropriate adjustments," Grubb said. "We're doing OK."

Rick Tollakson, chief executive of Hubbell Realty in West Des Moines, said he expects 2008 sales to be 50 percent higher than 2007, a record year for the company. It sold a total of 220 homes.

Tollakson said the company has seen strong sales in homes priced from $140,000 to $250,000.

However, Tollakson said he's concerned about the impact of foreclosed homes in the market, which will likely drag down prices. Iowa foreclosures have climbed 50 percent to 20,625 from 2005 to 2007, a Register analysis of court records has shown.

Butz estimates the central Iowa home market has about six months of inventory, considerably less than an estimated 10 months of inventory nationally.

Still, Iowa's inventory is a little heavy, said Butz, owner of K-B Builders in Des Moines.

He is working with the national home builders association to get tax credits approved for first-time home buyers. "It's a good sign that inventory is starting to get cleaned up, but we need to kick-start consumers. First-time buyers are about 40 percent of home sales," and that movement helps sellers move up to bigger homes.

Kimberley said his company added no new developments in the second half of 2006 and in 2007 and cut back on building speculative homes — or houses built without an existing buyer. This year looks strong for custom demand, he said.

Kimberley said his company's approach has been conservative, having weathered high interest rates and little work in the 1980s. "We've always tried to be cautious," Kimberley said. "We're not overleveraged, we have a lot of equity in our projects and we haven't borrowed the maximum.

"That's meant that we had to walk away from some projects that others have done," he said.

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