Builders See Returning Florida Market

Companies Grab Cheap Land, Construct Less Expensive Homes as They Vie With Banks' Foreclosed Properties for Buyers

By ROBBIE WHELAN - From Wall Street Journal 6/15/10

SANFORD, Fla.—In Central Florida, one of the nation's most-hobbled housing markets, home builders are welcoming what they see as a returning market by snatching up cheap land and beginning construction on smaller, less expensive subdivisions.

Home builders have been able to slash prices on new homes, partly because land is still cheap —some say as much as 40% to 60% off boom-era lot prices.

"We went through a period of two years where no one bought any land, and they were actually liquidating land," says Tim Stapleton, a division president for Arizona-based builder Taylor Morrison Inc. "Demand wasn't that high, and you were eating the lots. Now, you see builders going out obtaining new lots."

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Builders have shown a renewed interest in the Orlando market recently, buying hundreds of lots. Above, Taylor Morrison's Terracina project in Orlando. Taylor Morrison, one of the most active builders in Orlando, has bought 142 lots in the past eight months, its first acquisitions in this market since 2007. Last month, the company closed on 19 lots in a large lakefront development called the Island Club.

Mr. Stapleton said that the homes Taylor Morrison plans to build there, which will range from 2,300 to 3,200 square feet, will probably sell for about $400,000 apiece, whereas in 2007, they would have moved for $700,000 to $1 million.

Despite the renewed interest, Florida is a bifurcated housing market—a reminder of the housing crisis with a glut of foreclosed homes, while new developments serve as examples of how home builders are positioning themselves to compete against banks selling foreclosed homes, even in markets like Orlando.

Last year, Taylor Morrison sold 62 townhomes in Terracina, one of its new developments in Orlando, ranging from $160,000 to $230,000 and 116 more are set to begin construction soon.

Charles Wayne Consulting, Inc., an Orlando-based research company, reported a 70% year-over-year increase in construction starts for single-family homes in the four counties that make up the Orlando metro area in the first quarter of 2010.

That's surprising because economists consider Florida ground zero for the nation's housing and mortgage crisis. The state had the largest percentage of mortgages, 20.6%, that were classified as "seriously delinquent" during the first quarter of this year, according to the Mortgage Bankers Association.

Sales of newly built single-family homes aren't doing much better: Closings are down 19% in the Orlando market since last year. Florida also has the highest percentage of homes in the foreclosure process, nearly 14% of all homes with a mortgage.

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Linnette Girau, an interior designer, visited three bank-owned foreclosure properties before deciding to purchase a $144,000 newly built, three-bedroom house built by D.R. Horton in Beacon Park, a sprawling subdivision near Orlando's international airport.

Yet, in a number of Florida markets, sales of existing homes are picking up. Orlando saw a 36% bump in sales in April, with similarly high jumps in Jacksonville, Tampa and West Palm Beach, indicating that the state is working through its inventory of distressed and existing housing stock.

That comes as builders ramp up construction of new subdivisions and snap up raw land and lots in anticipation of the market's return. In February, Miami-based builder Lennar Corp. optioned nearly 5,500 Florida lots that once belonged to small Florida home builder Tousa Inc. Lennar is now selling starter homes on some of the lots for prices starting at $160,000.

Not long ago, the conventional wisdom held that there wouldn't be any new demand for housing in Florida for years and that buyers instead would purchase foreclosures, which they could buy at bargain prices. But real-estate agents say that buying a foreclosure from a bank has turned out to be complex, time consuming and more costly than most buyers had expected.

Linnette Girau, an interior designer, visited three bank-owned foreclosure properties before deciding to purchase a $144,000 newly built, three-bedroom house built by D.R. Horton Inc. in Beacon Park, a sprawling subdivision near Orlando's international airport.

"The person who left the house, I don't know if they were mad or something, but the house didn't smell good, and the ceiling lights and carpets were gone," said Ms. Girau, adding that she didn't have the money to put into a home for renovations.

She and her husband closed on the Horton house in April.

Centerline Homes, an independent Florida builder, has also been on a buying spree. In November, the company bought 499 lots in three Orlando developments, and has begun building at all three developments.

Prices for 50- and 75-foot wide lots, like the ones at Turtle Creek, a development in southeast Orlando that is being constructed by multiple builders, are in the $22,000 to $24,000 range, roughly 40% lower than boom-era prices.

Because land is so cheap, said Steve Fusilier, an Orlando Realtor who sells homes in new developments and has a close relationship with many of the builders here, builders are able to turn a tidy profit selling small homes—about 1,800 square feet—built at a cost of $150,000, and sold in the normal retail price range of $160,000 to $170,000.

"I remember 12 years ago, going to a builders' meeting where they had glasses of champagne because they'd sold five houses in a month and they made $10,000 in bottom line profit on each one. Then in 2003 to 2005, suddenly they were making $100,000 per home." Mr. Fusilier said.

Officials from Meritage Homes Corp., a top-10 public builder, has 13 actively selling communities here, and with 77 sales in the first quarter (an 18% increase from a year earlier), the builder's Orlando division posted its first quarterly profit in three years.

"If you're looking at it from a 40,000-foot view, you'd sort of question what we're doing, but if you look at it the way we have, it makes sense to try and build more homes," said Rick Harvey, Meritage's regional president for Florida and Texas. Meritage said its strategy is similar for Denver, Las Vegas, Arizona and parts of California: to buy land at rock-bottom prices and begin building.

The company has acquired nearly 700 lots in the past 15 months, and says that job numbers in the area are encouraging for a market recovery.

Medical City, a 600-acre biotech park and hospital complex near Orlando's international airport, is expected to bring more than 7,000 jobs to Orlando in the next few years. Nine different builders, including Hovnanian Enterprises Inc., Beazer Homes USA Inc. and D.R. Horton, have opened new-home communities.

Home buyers in Orlando aren't likely to be affected much by the massive oil spill in the Gulf of Mexico, about 350 miles away, which is already threatening to devastate the tourism and fishing industries and put downward pressure on property values for many Floridians who live and do business near the water.