Homebuilders succeed by moving down market

Homebuilders who have managed to readjust their business operations to get their pricing in line with consumers' ability to pay are beginning to see rebounding sales in Washoe County.

But other homebuilders including privately held companies who are based in the region continue to struggle and are in danger of losing their land holdings to foreclosure, says a real estate broker who tracks the land business closely.

The good news, says Mark Krueger of Grubb & Ellis|NCG, is found in subdivisions where big, publicly held homebuilders have introduced smaller homes and reduced their base pricing to about $125 to $150 a square foot levels that have not been seen since 2003.

Those subdivisions notably, Cyan Communities by Centex Homes and Monte Sereno by KB Home, both in the south part of Reno have seen strong sales, said Krueger and his associate, David Wood, in a study released last week.

Homes are selling most strongly in the $250,000 to $325,000 price range, and condos are selling best in the $175,000 to $250,000 range.

Lower prices open the market to more buyers who no longer could afford homes when prices skyrocketed during the 2003-2005 boom.

Brian Bonnenfant, a project manager with the Center for Regional Studies at the University of Nevada, Reno, recently noted that a family needs an income of about $95,000 a year to afford a 30-year mortgage at 6.25 percent with 10 percent down. That prices nearly 72 percent of Washoe County families out of the market.

But a $250,000 home requires an annual income of only $82,000 and that opens the market to nearly 10,000 additional families.

Says Krueger, "Projects that have able to adjust to the market are selling homes."

But in nearly the same breath, he cautions that most of the success stories in recent months have been recorded by big builders, and conditions for smaller residential builders are getting increasingly dire.

They borrowed heavily to buy expensive land in 2005 and 2006, and now they can't build inexpensive homes on expensive land. "As a result, they are waiting for the lenders to decide their fate," Krueger writes. "Notices of default have been filed on nearly two dozen residential projects. Whether we like it or not, lenders will become the owners of new home communities in the months to come."

The distress of landowners, meanwhile, is creating opportunity for vulture funds that look to buy land cheap and hold it until the market recovers in three to five years.

Reynen & Bardis, a Sacramento homebuilder, recently sold 425 acres at Stonebrook in Spanish Springs to Regent Properties for $26.6 million a price that pencils out to $19,130 for each of the 1,546 lots in the subdivision. The price, Krueger notes, is comparable to the original price for Stonebrook in 2001.

In another instance, he says 21 acres in Wingfield Foothills recently sold at a price that's 25 percent of the property's value in 2005.

Centex Homes and Lennar Homes also have sold off big chunks of their land holdings, Krueger says, and more sales are on the horizon.

Curiously, he says, some of the big publicly held builders who are selling the land today or writing down the value of parcels and building away may find themselves short of land in 2009.

As that happens, Krueger says, land prices may stabilize and begin to rebound.

In the meantime, he says, builders and developers continue to hold fairly high inventories of lots that are ready for construction.

At the current slow pace of construction, the approximately 3,000 finished lots and 5,000 parcels with final maps available in the Reno-Sparks area would meet demand for four years although a pickup in demand could chew through the inventory more quickly.

In addition, the Grubb & Ellis study notes, thousands of paper lots lots in early stages of planning are in limbo while their owners wait

to see if the market will come back to life.