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Swimming in surplus

Are there too many new home in Columbia? Real estate professional aren't sure. In the meantime, builders are re-examinging their strategies.
Sunday, October 1, 2006 | 12:00 a.m. CDT; updated 8:47 p.m. CDT, Monday, July 21, 2008

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Real estate signs line Longfords Mill Drive in Mill Creek Manor Subdivision, southwest of Columbia.

(JERONIMO NISA/Missourian)

Take Scott Boulevard south to Thornbrook, or Nifong Boulevard west to Mill Creek Manor, or take a short drive to any of the new subdivisions surrounding Columbia, and you’ll see empty houses.

It’s not that new homes aren’t selling. New-home sales in the first three quarters of this year were down just a little from last year, according to the Multiple Listing Service real estate database. But 2005 brought a significant increase in newly built homes in Columbia, and there are just not enough prospective buyers to match the number of vacant houses.

“In general, every new subdivision probably has more new homes on the market than needs be,” said Brent Jones, a Columbia real estate agent.

In the first eight months of the year, 419 newly built homes within the boundaries of the Columbia Public School District were sold through the Multiple Listing Service, the system used by Columbia Realtors. During the same period in 2005, 437 new homes were sold through the system. Real estate agents use public school boundaries because they’re the most reliable way to track which houses are bought and sold within Columbia.

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Although sales have seen a slight decrease, developers haven’t sold off all the houses built during 2005, a year of record production. The city’s division of protective inspections, the entity responsible for issuing building permits, issued 1,239 permit applications for single-family residential construction in 2005, up from 743 in 2002. These numbers indicate an increase in builders’ interests to begin new developments.

“The number of new homes started last year was significantly higher than in previous years,” Columbia real estate agent Rob Wolverton said. “The growth in sales didn’t keep up with the growth in production.”

The increased number of new homes in Columbia mirrors a national trend. In July, the National Association of Realtors reported that the inventory of unsold homes in the U.S. “rose modestly.” In July 2005, the group estimated that it would take 4.2 months to sell all of the recently built homes. By July 2006, the inventory increased to a 6.5-month supply, according to data from the association.

While buyers in an overbuilt community enjoy lots of options and reduced prices, sellers face tight competition to win buyers.

Builders have pressure to sell homes because unlike most products, a house costs a builder more money the longer it remains unclaimed. In addition to minor expenses like utilities, insurance, lawn care and cleaning, builders make monthly interest payments on construction loans. Each month, with another interest payment, the builder loses more money. And in a market where supply outweighs demand, the builder can’t pass that expense along to the buyer by raising the list price of the house.

The result, Boone County real estate professionals say, is that the situation could squeeze builders out of the business.

“I think we’re having a correction,” said Brent Gardner, a real estate agent. “Experienced builders know which house plans are going to sell. I don’t think you’re going to see any experienced builders take it on the chin. It’s going to be the people who thought, ‘Hey, let’s make a lot of money.’ ”

Gardner said he thinks the saturated market will weed out builders who don’t have the savings or the business model to compete.

“When a flood happens on a river, at first everyone’s freaking out. Then it washes out, clears out some things that shouldn’t be there, and (the river) is healthier for it,” Gardner said.

As competition tightens, different builders are using different strategies to stay afloat in a flooded market.

In his fifth year as a general contractor, Andy McVey has fewer years of experience than some local builders, but he considers himself a career builder who is committed to the business in the long term.

McVey sat in the office of the Home Builders Association of Columbia on Friday, holding a stack of application forms for houses he hoped to enter in Columbia’s Parade of Homes, a showcase of new houses run by the association.

McVey finds he’s more successful at the Parade if he enters a lot of houses, especially some of the houses he’s built since last spring. But because the Home Builders Association changed an entry rule this year, McVey won’t get a discount for entering a large number of houses. He was more concerned with the rule change Friday than he was with the state of Columbia’s housing market.

“I always stay positive when the Parade of Homes comes along,” McVey said. “It’s a good opportunity to show off what we’ve got.

“Of course, once Thanksgiving hits, we’ll be dead until Christmas, but I don’t lose sleep over that.”

While some builders worry about an already saturated market, McVey continues to build. He has five houses under construction, and says he plans to start at least two more before the end of the year.

Spring is typically his best time of year for sales, he said, and he wants to be ready.

In Mill Creek Manor, a subdivision west of Columbia where McVey is building several homes, “for sale” signs already line the streets in front of newly built homes. Each lot is in a different stage of completion: Some are just dirt mounds, waiting for workers to build frames and foundations; others will be ready for their new inhabitants once the cabinets have been installed.

The sight isn’t unique to Mill Creek Manor. “For sale” signs abound in most of the new subdivisions that surround Columbia. As of Friday, Columbia had 394 new construction homes listed on the Multiple Listing Service, up from 381 about a year ago, according to Carol Van Gorp, executive director of the Columbia Board of Realtors.

With the increased number of houses going up, some general contractors find themselves busy juggling the new developments.

“My truck is pretty much my office,” McVey said while driving to the Highland Springs subdivision to check on the progress of a nearly finished house.

The house, about 3,000 square feet, is listed at $424,900. McVey said he is confident that his higher-end houses will sell even when the market slows down.

“People in that market have money,” he said. “They may not be affected by things like gas prices and interest rates.

“I’m starting another house down the street,” he said. “I wasn’t going to start that until I had this one under contract. But I ... have a feeling this house is going to move.”

McVey has had trouble moving some of his houses in medium price ranges.

He said he has lowered the list price of several of his houses from $204,000 to $199,000, hoping they will sell before the end of the year.

“I do well the first part of the year, run to the end of summer,” he said. “Then you’ve got a decision to make: Do I give a better deal and just try to sell it?”

“I hate to lower prices,” McVey said. “It’s not fair to the people who bought the houses at the original list price. But I saw a couple of builders go in and lower prices. There’s a point where I have no choice.”

A pair of subcontractors doing trim work in the garage of the Highland Springs house said the market affects their business.

“How many houses did we turn in Eastport Village last summer? Twenty-four? Twenty-five?” carpenter Roy Guill asked co-worker Robbie See. “For a while, it was like boom, boom, boom, boom, boom.”

“I haven’t done a thing for the last two weeks,” Guill said. “Most of the time we have work, it’s just not ready in advance.”

Guill works for Show-Me Trim, owned by See. But See has also built houses and understands the pressure on builders to sell in an overbuilt market.

He said that on a $250,000 house, the general contractor pays about $1,500 per month — that’s $50 per day — in interest on construction loans.

McVey likes to work hands-on with the subcontractors he hires, like See and Guill. McVey worked for a remodeling firm when he first entered the building business after he graduated from Rock Bridge High School. After three years of remodeling, he decided to make a career out of building houses and became a general contractor.

“I paid my dues,” he said. “(It was) the experience I got from remodeling, doing actual work hands-on, that prepared me. I did Sheetrock, framing, plumbing — every single trade, I did it.”

McVey said that he thinks some local builders saw sales increases in the last few years and may have jumped into the business unprepared.

“It’s not like being a doctor or a lawyer or a nurse where you’re licensed or you have to meet minimum requirements,” McVey said. “Anyone can go out and become a builder. Some guys, they get into building without ever swinging a hammer.”

Although McVey had nine unsold houses as of Sept. 22, he pointed out that he has started 34 houses since the beginning of the year. He has a hard time calling the market “slow” in a year when he has sold 25 houses.

“Yeah, the houses that I’ve got now have been on the market a little longer than I would have liked,” McVey said. “But three years ago, I was selling houses as soon as I got the concrete down on them. I’ve only been slow for three or four months.”Not every builder has taken McVey’s aggressive approach.

C&C Construction scaled back its production to cut its losses in anticipation of a potential slowdown. Kas Carlson, co-owner of the company, said he could go the rest of the year without breaking ground on a new house.

“Unless something changes, we’re not going to gear up for next spring,” he said. “If (the market) doesn’t turn around, when the end of the summer comes, we’re going to be sitting on all these houses.”

Carlson has co-owned C&C for nearly 28 years. He builds houses and his wife, Rhonda, sells them. He said he hasn’t seen a new-homes market this bad since the early 1980s.

Carlson said one indicator of the glut in the market is the fact that work has slowed down for his subcontractors.

“They’re usually booked up two to three months in advance,” he said. “They’re just out there beating the bushes for work. For my framer, it’s just day-to-day now. If they’re not busy, it’s not busy.”

Kas Carlson also relies on Rhonda, a real estate agent, who advises him on the attitudes of potential home-buyers. At a weekly company meeting last October, they implemented a conservative policy: They would start building a new house only when they sold one.

“We were selling anywhere from five to eight houses per month,” Kas Carlson said. “Then you could see it dwindle down in June and July, but it didn’t scare you. But then after school started, it was just a weird time.”

Rhonda Carlson said that by looking at her real estate office’s showing logs, she could see that agents were showing fewer houses to clients, resulting in fewer actual sales.

The Carlsons’ strategy paid off. Going into the time of year when they expect slow sales, they have five houses for sale, which is about half what they would normally have.

They supplemented their income by working on commercial developments and doing independent contracting work for commercial builders. The two sold about 90 percent of the office units in the Seven Oaks business center, behind Grand Cru, as an extra project.

Even though they have tried to limit their losses, Rhonda Carlson said the overbuilt market still creates a painful situation.

While sales for the company have slowed, fixed expenses like gas, payroll, rent and utilities continue. C&C has an office, showroom and warehouse, and Rhonda Carlson said she and Kas are trying to contain the cost of operation.

Rhonda Carlson is sure some builders won’t survive if the market doesn’t turn around, but she isn’t sure who they will be.

“Builders and developers are the biggest group of gossips known to man,” she said. “A few weeks ago, I had someone tell me that they heard we were selling everything, closing our doors and moving to Lake Tahoe. The only truth in the tale was that we were scheduled to go to Lake Tahoe for our annual vacation.”

“We’re just fortunate to be in the position we’re in,” she said. “Any business you look at, people get great guns when it’s going good, but then there’s a contraction. For people who’ve only been in the building business for a year or two, it’s hard to have that stockpile saved up for a rainy day.”

While those in the business of building and selling houses stand to lose the most from a surplus of new homes, they aren’t the only ones affected.

Van Gorp of the Realtors board, said she thinks the perception of the market has an impact on potential buyers. There are buyers sitting on the sidelines, she said, who aren’t sure it’s the right time to buy, even if they’re able to. She thinks one factor keeping buyers off the field is the perception that a housing market slowdown means that buying a new house is a bad investment.

The local economy drives the local real estate market, Van Gorp said, and because Columbia’s economy is strong, house values should continue to appreciate at a steady rate. She points to low unemployment rates and steady growth as indicators that the new-homes market will stabilize and continue to grow. Unemployment in Columbia was 3.3 percent as of July, below the state rate of 4.8 percent, according to Department of Labor statistics.

Coastal and tourist markets saw volatile swings in house values in the last few years. Van Gorp said that in some tourist areas on the east and west coasts, houses had double-digit appreciation in the last five years. And yet, she said that reports of the bursting bubble by the national news media don’t reflect what’s happening in Columbia.

“What you hear a lot about in the national media are the coastlines, where they had huge meteoric rises and now they’re cooling down a little bit,” Van Gorp said. “Columbia is more of a steady-as-she-goes type of place.”

Even when people are unsure whether it’s a good time to buy, Columbia attracts people who need to buy a house, often because of a change in their lives, Van Gorp said.

Blake Moore moved to Columbia from Illinois in May, planning to open a branch of an upscale telecommunications store.

Moore said he wanted a new house because there was such a large selection available in Columbia. He looked in the Cascades and Thornbrook subdivisions, and settled on a house in Mill Creek Manor. He said he liked the neighborhood because the consistent look of its houses assured him that his house would appreciate in value.

But some residents in new neighborhoods worry that the infrastructure won’t keep up with the pace of development.

“Scott Boulevard is not a very big road,” Thornbrook resident Janis Lang said. “We’ve still got awhile before it’s slotted for improvements, and I don’t see how it will be able to handle the traffic with all these new houses.”

Lang added that she thinks people have been talking about Columbia being overbuilt for decades, and that despite the new construction that surrounds her house, she likes her neighborhood and is confident that it will fill up.

Many Columbia real estate agents think the number of new houses on the market will return to normal by late winter or early spring of 2007. Given the reduction in construction this year, heavy sales from January through the early summer months will allow the number of buyers to catch up with the number of empty houses, Van Gorp said.

“It goes crazy after the Super Bowl,” she said.

Real estate agent Glen Strothmann said now is the best time to buy, especially for first-time buyers. Like Van Gorp, he thinks the number of empty houses will return to normal by early next year, and in the meantime, buyers are in a position to take advantage of a high selection of homes at reduced prices.

Strothmann and many of his colleagues in real estate think the market is going through a correction phase.

He said that in the last few years, too many people started working as general contractors, many of them without enough experience or enough of a long-term commitment to the business. He said that if some builders can’t survive in this market, maybe they should fall back to a line of work to which they’re more committed.

“That sounds kind of cruel, but it’s a fact and it’s always been a fact,” Strothmann said. “I really think that there are far too many people that, just because it looked like the grass was greener on the other side of the fence, they jumped over. Those people have kind of created a little extra glut in the market that doesn’t help.”

Strothmann, who has been a real estate agent in Columbia for 16 years, said that during 90 percent of that time, sales have steadily increased and houses have steadily appreciated. Periods of correction help keep the market stable, he said.

“I think a lot of these small-time, inexperienced outfits create instability,” Strothmann said. “It really shows when you get into a little tougher market. But just because you see periods of correction, we’re not really going down. It’s very healthy, very good to buy and build houses in Columbia, Missouri.”


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