East Valley builders put brakes on homes

Valley homebuilders are scaling back production, as they continue to battle an oversupply of new and existing houses on the market.

GRAPHIC: New residential Valley building permits

Some 26,807 residential building permits were issued in the Valley in the first seven months of 2007, a 14 percent drop from the same period last year, according to real estate research firm Hanley Wood Market Intelligence.

Permits also fell 30 percent in 2006 from the year prior.

“The brakes are starting to happen, which is good news for everybody,” said Greg Doyle, managing director of Hanley Wood’s local office, meaning this will cut down on the massive oversupply of both new and existing homes in the market. Until then, the Valley won’t see an upward swing in building permits again until that inventory is whittled away, experts say.

The drop in permits reflects a nationwide trend.

In August, residential building permits fell to a seasonally adjusted annual rate of 1.3 million units — 24.5 percent below the same month last year, according to the U.S. Department of Commerce.

Corporate homebuilders are watching their earnings drop and tightening their belts, Valley real estate analyst RL Brown said. They’re no longer building speculative homes and are pushing back construction schedules, he said.

“There are scores of subdivisions that have little if any activity in them,” said Brown, who takes plane rides over the Valley every two weeks to note movement in various developments.

The drastic rise in the number of existing homes for sale — now totaling more than 55,000 across the Valley — has hampered builders’ efforts to rid themselves of the excess.

Builders have seen healthier sales rates but still suffer from high cancellation rates because potential buyers can’t sell their existing homes, said John Fioramonti, senior managing director at Meyers Builder Advisors in Scottsdale.

Fioramonti said he’s seen cancellation rates as high as 40 percent in some cases.

At Shea Homes, employees help potential buyers set realistic asking prices on their old homes, “which is a hard pill to swallow” for some people, said Ken Peterson, the builder’s vice president of sales and marketing. That’s because some homeowners owe more on their properties than they’re worth.

Tightened lending standards stemming from the mortgage crisis also have made it more difficult for potential new home buyers to get financing, he said.

Peterson added that the Valley has many different sub-markets and some areas, such as parts of Gilbert and Chandler, are still seeing positive building activity.

Despite the overall slackened pace of production, Hanley Wood’s Doyle said he had expected builders to slow down sooner.

Valleywide, the active new home inventory — including vacant lots, speculative homes and homes under construction but not sold — was 104,989 units in the second quarter of 2007, up from the 94,694 in the same period last year.

Another 360,165 housing units also have been proposed for future development, though a large chunk of those may never come to fruition, Doyle said.

In the long term, however, there isn’t a better market for builders than the Valley with its population growth, employment opportunities and affordability, he said.

“This is one of three top targets in the country for builders and developers to make sure they’re in for the long haul,” he said.