Custom Home Construction Cushions Upscale Market During ’07 Downturn

Lee Scarlett can give you the good and the bad of the area’s housing market; he’s dealt with it all.

Scarlett, owner of Celtic Construction Inc., is completing construction on a 7,000-SF, $1.5 million custom home. He’s also making mortgage and interest payments for six unsold speculative homes.

“I will never, ever sign my name to a construction note on a spec home again,” Scarlett said. “I saw what others were doing in the spec market and I got greedy, and now I’m paying for it.”

Scarlett’s completed but unsold homes are a testament to the housing market’s dramatic decline in 2007.

It’s no secret the entire housing market took a hit last year, but some sectors fared better than others. Custom home construction slowed but remained a reliable source of work for area builders while the speculative housing market took a turn for the worse. Those that continued to build throughout 2007 mostly did so in the custom home market where sales were a given.

According to the Arvest Bank commissioned Sklyline Report, construction of new homes declined by more than 51 percent in 2007 compared to 2006.

However, construction of upscale homes in 2007 – homes valued at $250,000 or more – decrease by only 34 percent compared to 2006.

Continued demand for upscale housing, and continued construction in that market, helped keep the area’s residential construction industry rolling.

Upscale homes have become a larger percentage of single family homes built in Northwest Arkansas. Last year 17.6 percent of all homes built were valued at $250,000 or more. The number was 12.9 percent of all homes built in 2006.

From 2006 to 2007, sales of all homes, both new and existing, declined by more than 35 percent in Benton and Washington counties. In 2007 sales of new homes valued at $250,000 or more declined by only 13.4 percent compared to 2006.

The construction slowdown claimed many construction careers. Since January 2007 more than 18 area homebuilders have filed for bankruptcy, with a majority citing multiple mortgage payments from unsold speculative homes.

The slowdown also caused many builders to turn in their contractor’s license. According to the State Contractors Licensing Board, there were 3,567 licensed residential contractors in the state in 2006. In 2007 the number of licensed homebuilders decreased 20 percent to 2,864.

Scarlett and many other residential contractors said they are still recuperating from last year’s slowdown but believe a healthy housing market and growing demand for new housing are just around the corner.

Speculative Data

Demand for new homes did not keep up with a continued increase in supply of new homes in 2007, which meant dozens of builders were left picking up the tab.

According to data from the fourth quarter Skyline Report, prepared by the University of Arkansas’ Center for Business and Economic Research, there were 2,210 completed but unoccupied homes on the market.

New home sales data from the Northwest Arkansas MLS indicates there were 322 new homes, valued at $250,000 or more, sold last year, a 13 percent drop from 2006.

On March 17 the Northwest Arkansas multiple listing services showed 326 new homes valued at $250,000 for sale in the two-county area. That equates to more than one year’s worth of completed but unoccupied upscale inventory.

Completed but unsold upscale homes account for about 5 percent of all homes on the Northwest Arkansas MLS.

While new home sales are not an exact representation of the number of speculative homes sold, the data provide an insight on the movement of speculative housing.

Chuck Benningfield, owner of McTab Inc., has been paying for an unsold speculative home in Bentonville’s ritzy Talamore subdivision for almost two years. Benningfield doesn’t enjoy paying the mortgage, but it hasn’t completely soured him on the idea of speculative building.

“You have to know where to build,” he said. “If you are going to build a spec home in this market you have to build it in an established neighborhood. I won’t build one just anywhere.”

Gary Striegler, an upscale custom homebuilder and owner of Striegler & Associates Inc., said he has been part of a handful of speculative home projects. He unloaded his final spec home to a business partner at cost and has no intentions of playing in the speculative market again.

Jim Conner, owner of Conner Custom Homes and vice-president of the Northwest Arkansas Home Builders Association, said he believes positive absorption will help revive the speculative market and as inventory decreases builders will resume speculative building.

Customizing

Upscale custom homebuilders saw the least fallout from last year’s decline.

There’s no way to track the number of custom homes built in the two-county area because homebuilders don’t have to specify between custom and spec projects on the building permit and custom homes aren’t listed on the MLS.

But Steve Spradlin, owner of Capital Structures Inc. and president of the Northwest Arkansas Home Builders Association, said he believes custom homebuilding has increased greatly over the past quarter and expects activity to remain brisk through the remainder of 2008.

Decreased demand has caused building prices and land prices to fall, which has made custom home building more affordable and more appealing than ever, Spradlin said.

Benningfield, who builds $1 million custom homes and has about four projects under construction, said he estimates contractors can build a custom home for about 15 percent less than they could this time last year.

“Sub costs keep decreasing,” Benningfield said. “Suppliers need to keep inventory moving so they have lowered their prices as well. People are starting to realize that these conditions won’t be around forever and many are starting to look into the custom market.”

Jeff Martin, owner of The J. Martin Co. and Martin Custom Homebuilders Inc., said some of his customers have taken advantage of the reduced building costs and added more space or additional amenities to their homes.

Striegler, who builds homes in the $700,000 to $1 million range, said tightened lending standards, which have limited the buying power of many potential homeowners, have not hurt possible custom homebuyers.

“Most of the people building a custom home have assets and great credit,” Striegler said. “Banks aren’t turning these people away, they’re aggressively trying to seek them out because they know they have solid credit. I haven’t had any of my clients walk away because they couldn’t get financing.”

Many custom homebuilders reported multiple projects under construction and additional projects still in the planning stages.

“There is great interest from within the market right now,” Benningfield said. “People who thought they could never build a custom home are starting to look at their options. I think we are going to see a turnaround in the market later this year.”

Scarlett said his success in the custom market and his mishaps in the speculative market have convinced him to stay out of the speculative market and in the custom market, where the sales are guaranteed.