Out-of-state homebuilders enter cooling Arizona market

The housing market decline has Valley builders slashing production, but some out-of-area developers see the slump as an ideal chance to expand into Arizona — though it means taking risks.

Several companies have recently entered the local housing fray with plans to build hundreds of homes in the East Valley. Newcomers, such as Pennsylvania-based Orleans Homebuilders, are looking to establish themselves as long-term players.

“Arizona has always been considered one of the better housing markets in the United States,” said Ray Leppien, president of Orleans’ local division.

The company is building a 267-home subdivision in Gilbert.

Arizona’s market isn’t as robust as it was a year or two ago, but a tremendous number of homes are still being built here compared with other states, said Elliot Eisenberg, an economist for the National Association of Home Builders.

“They know getting into Phoenix will be beneficial at some point,” Eisenberg said. “There’s too much business for them not to be in it at some level.”

When times are tough, it’s a little easier to jump into the game, he said.

Builders are struggling to offload thousands of speculative homes, postponing projects and selling swaths of land to improve their balance sheets.

And that has translated into lower land costs for new arrivals and smaller builders.

“During tumultuous times is where the deck gets reshuffled, and you can really improve your hand,” Eisenberg said.

ORLEANS HOMEBUILDERS

Orleans moved into Arizona in late 2005 as part of an ongoing expansion that included Florida, Illinois and New York. The Valley has great jobs and population growth, Leppien said. “There are signs of recovery,” he said. “But there’s still an over abundance of (speculative) inventory.” The upside is that land values have declined to pre-2004 prices, which makes building a new community easier to work out financially, Leppien said.

The risk is how quickly excess homes will be absorbed, he said.

Industry observers say the future of new homebuilding also depends, in part, on the resale market. That’s because many new home buyers must first sell their own homes. That conflict has caused many to pull out of builder contracts.

More than 50,000 existing Valley homes are currently for sale — the largest inventory many in the local real estate industry have ever seen.

The resale market hasn’t adjusted itself yet, Leppien said.

“I think getting public confidence back will be a big thing,” he said.

Leppien said he hopes to work up to 300 to 500 new homes a year but is taking it slow for now. Orleans plans to open model homes at its Gilbert neighborhood this fall.

MATTAMY HOMES

Canada-based Mattamy Homes has stretched into four new markets — Arizona, Florida, North Carolina and Minnesota — in the past five years.

The builder recently started work on two subdivisions, totaling nearly 250 homes, in the Queen Creek area.

When Mattamy first started looking at the Valley, builders were pulling more than 60,000 permits a year — far above the more traditional 40,000 to 45,000. Even when the market first started to slow, it was tough to find land, said Mark McHone, president of Mattamy’s local operation.

That changed about a year ago. Now builders, such as Mattamy, have been able to buy up finished home lots.

Those ready-to-build-on lots have already been titled — received all the needed government approvals — a lengthy and expensive process.

How much money the company ultimately saved will depend on how well the homes sell, McHone said.

“There’s risks. There’s no question about it,” he said.

The market is still showing mixed signals with hot pockets where permits are up and others that have a year’s supply of excess homes, McHone said.

“There are probably 400 communities we’ve been investigating,” he said. “Of those, we’ve probably discounted 90 percent of them.”

Though large inventories are the biggest hurdles for builders, the recent subprime loan crisis and tightening lending standards also are concerns, McHone said.

“The gray clouds, do they have silver linings?” he said. “We don’t know.”

JOHN LAING HOMES

California-based John Laing Homes is so new to the Valley, that division president David Walls doesn’t have an office.

“My cell phone is my office,” Walls said.

The company doesn’t have any projects planned yet, but Walls said he thinks the south East Valley has potential.

Chandler and Gilbert are great opportunities, he said, but he’s ruled out areas, such as Coolidge and Florence — at least in the short term.

Those are the areas where prices have been slipping and “it’s been toughest to sell,” Walls said.

He said he would like to be building roughly 500 homes a year by 2010 with 10 to 12 communities going at any one time.

“The soonest we would be selling anything would be about a year from now,” he said. “Hopefully the market will settle out by then.”