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Signs of life in the home-building industry

January 14th, 2010 10:27 AM by Lehel S.

A construction site in Irvine is alive with the sound of the boom years.

Workers hammering fresh wood beams shout orders at each other in Spanish. Diesel trucks rumble through newly paved subdivisions. Men with scrolls of construction plans tucked under their arms bark instructions into mobile phones.

The cacophony emanating from the Irvine Co.'s newest project -- 685 houses and town homes in the company's Woodbury and Woodbury East developments -- is rare these days. To get the project off the ground, Irvine Co., which typically sells land to builders, is financing the project itself after enlisting six builders to put up the homes for a fee.

"All of these people were probably unemployed or underemployed," Thomas G. Veal, Irvine Co.'s vice president for residential marketing, said as he stood on a stack of plywood surveying one of the company's work sites. "It's our own little stimulus program."

The work belies a building industry that is still reeling from the housing crash. New homes face competition from steeply discounted foreclosure properties, and a high jobless rate keeps many potential buyers on the sidelines.

Few experts predict that other developers and builders will begin similar such risky, large-scale projects this year. Nevertheless, signs are emerging that the residential construction industry could be starting a tentative turnaround.

On Tuesday, Los Angeles building giant KB Home, one of the six builders putting up homes at Irvine Co.'s site, reported a fiscal fourth-quarter profit of $100.7 million, or $1.31 a share, benefiting from new tax laws. Miami builder Lennar Corp., which is also constructing homes for the Irvine Co., last week posted fourth-quarter net income of $35.6 million, or 19 cents a share. It was the first time either builder was in the black since the housing market collapsed in 2007, though KB Home executives predicted in a conference call Tuesday that they wouldn't be profitable for the first quarter of 2010.

Jeffrey Mezger, chief executive of KB Home, said although the company's performance in the three months ended Nov. 30 was heartening, the outlook for the home-building industry was rocky.

"There are indications that housing market conditions may be stabilizing in some regions, reflecting, among other things, relatively high levels of affordability," Mezger said in a statement. "This is tempered, however, and could ultimately be undermined by persistent economic weakness and unemployment, changes in federal government monetary and fiscal policies and programs, and by the impact of rising foreclosures and mortgage loan delinquencies."

Real estate has traditionally brought the U.S. economy out of recession, but the housing bubble of the last decade was so large and the subsequent decline so deep that the malaise probably will take years to shake off. The best many experts hope for is that housing won't drop again and drag the economy into a double-dip recession.

There have been some recent signs of improvement. Residential investment increased 18.9% in the third quarter on a seasonally adjusted basis compared with the prior quarter, according to figures from the Commerce Department's Bureau of Economic Analysis. The third-quarter lift was the first increase in residential investment since the fourth quarter of 2005 and helped the overall U.S. economy grow at a revised rate of 2.2%, the government said last month.

Yet many of the other indicators remain mixed.

New-home sales in November plunged 11.3%, a sign of just how dependent the fragile housing recovery has become on government support. The drop reflected uncertainty over a first-time home-buyer tax credit initially set to expire Nov. 30. Federal lawmakers in November extended the credit through April and expanded it to include some buyers who already own a house, but the extension didn't come in time to entice purchasers to enter into new-home contracts in November.

Also, builder confidence in the home construction market receded in December to its lowest level since June, according to a closely watched housing market index from the National Assn. of Homebuilders. Nevertheless, builders broke ground on new residences at a faster clip in November than in October, up 8.9% to a seasonally adjusted annual rate of 574,000 units.

"It's a long, slow recovery," said Bernard Markstein, a senior economist with the builders group.

Another sign of optimism: Both KB Home and Lennar are buying land again. Lennar executives, in their conference call last week, also said they were reducing some of the incentives they had offered buyers as sales pick up in some markets.

To compete with scaled-back consumer sentiment, KB Home launched a new design of smaller, more affordable homes in March that it called its Open Series. In KB Home's conference call with analysts Tuesday, Mezger said the company would continue to build homes made to order -- that is, with buyers lined up -- but added that it was considering putting up some partially built houses in some select communities. That would speed up the construction process and potentially allow more consumers to take advantage of the home-buyer tax credit before its April expiration, he said.

Mezger also told analysts the company was increasing prices where it could. "It's the same product and you push a thousand here and thousand there and get what you can," he said. Home prices and sales picked up steadily during the second half of 2009 in Southern California, and some economists have said the worst is over. Yet whether the nascent recovery will translate into wide-scale construction in the region remains doubtful.

"Economically, we don't need any more new homes," said John Burns, an independent Irvine economist who follows home builders.

Irvine, in particular, is a unique market. In the master-planned community designed by the Irvine Co., jobs are steady and the school system is highly rated -- and real estate there remains strong. The company is hoping that when it begins to sell homes in the project, called the 2010 New Home Collection, at the end of this month, its gamble will pay off.

"The goal is to go meet what we consider the next market for new-home buying," said Daniel Young, president of Irvine Co. Community Development. "We believe the marketplace for homes has sufficiently cleared and that people want to have a choice of either a resale home or a new home."

"All of the data suggests our timing is just right."

Posted in:General
Posted by Lehel S. on January 14th, 2010 10:27 AM

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