Local Leaders: Winning At All Costs

SACRAMENTO, CALIF.

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Big builders in Sacramento, Calif., tried everything to move inventory last year. The jury's still out on how successful they were.

The Sacramento region (No. 28) was California's most affordable in 2006. The National Association of Realtors estimates that in the fourth quarter of last year, 41 percent of Sacramento households could afford to buy an entry-level home. Maybe that's because Sacramento has been ground zero for incentives marketing by builders scrambling to get rid of unsold inventory in an overbuilt market that had seen an influx of builders—including Lennar, Shea Homes, and MBKHomes—in recent years.

“Builders entered Sacramento thinking they all could build 1,000 homes a year, when the market could absorb only 500,” says Doug Bauer, president and COO of William Lyon Homes, whose annual sales in Sacramento have hovered between 130 and 170 units over the past five years, according to The Gregory Group, which tracks the local housing market.

Outside of Beazer Homes—which dropped to 18th in sales in 2006 from the top three in previous years because of delivery problems it encountered—Sacramento's top builders gained market share in sales, according to The Gregory Group estimates. But as our Local Leaders chart reveals, many of these same companies don't fare nearly as well when their closings are the barometer, to the point where three new builders—Meritage Homes, Pacific West Cos., and Kimball Hill Homes—snuck into Sacramento's top 10 in closings in 2006. (Coincidentally, at least 10 builders brought in new leadership last year, according to the Sacramento Business Journal.) Virtually every builder here played the incentives game, and most finally resorted to lower prices because jaded buyers “were walking out of sales offices without engaging the salesperson,” says Greg Paquin, president of The Gregory Group.

Centex and D.R. Horton, in particular, were “relentless” in their price discounting, says Kevin Carson, John Laing Homes' Sacramento division president. (Neither Centex's nor Horton's divisional offices returned phone calls requesting comment.) “We didn't realize how much the publics could impact our world,” adds Sid Dunmore, CEO of Sacramento-based Dunmore Homes, whose closings last year fell 38 percent to 225 units. “They were willing to lose massive amounts of money just to keep volume up.”

PICKING UP STEAM: A broad swath of the top 75 Local Leaders markets reveals just how fast attached housing is growing as a percentage of total new-home sales. In Phoenix, the No. 3 Local Leaders market, attached has grown from 10% of all new-home sales in 2005 to 23% in 2006. In urban markets such as Washington (No. 10) and Seattle (No. 12), attached has always made up a sizable chunk of all new-home sales, and still Seattle saw its attached housing grow to 46% of all new-home sales from 31% in 2005.

Price cutting and incentives, though, were only fitfully effective, as sales in Sacramento's six counties fell 32 percent to 9,588 units, by The Gregory Group estimates. In a teleconference with analysts in March, KB Home's executive vice president and CFO Dom Cecere said Sacramento “continues to be difficult.” Brendan O'Neill, Beazer's Sacramento division president and general manager, told the Business Journal in February that the market was “bouncing along the bottom.” Aggressive discounting spilled over into early 2007: Carson says JTS Communities in January flew a plane over the market with a banner advertising $100,000 off the price of its homes, and that Morrison Homes was offering $75,000 discounts on its homes.

Curiously, none of the sources contacted for this article expect land to get much cheaper in the foreseeable future. Most agree that big landowners such as Reynen & Bardis Communities and AKT Development Corp. have made so much money over the past several years that they can wait out the downturn. “We're still bullish,” says Mark Enes, AKT's executive vice president. “Sacramento is a beautiful place to live and is relatively cheap by California standards. I receive multiple calls from builders every week; these guys are like factories, and they need lots.”

Hanley Wood Market Intelligence, owned by Hanley Wood, LLC, publisher of BUILDER, is one of the home building industry's largest providers of information on new-home projects, land development, and real estate consulting services. The following methodology was used in compiling the 2006 Local Leaders:

• The top 75 markets were determined based on 12 months of total permits issued during 2006 using Federal Office of Management and Budget geographic boundaries as a foundation. Metropolitan Statistical Areas (MSAs) are the primary form of organization, with some exceptions. Large MSAs are often split up into separate Metropolitan Divisions, and these Metropolitan Divisions are normally used if it is not inappropriate for that market area. In our top 75 list of markets, 13 are Metropolitan Divisions. Meanwhile, there are three markets in which it was more appropriate to use the entire MSA instead of separate divisions (Seattle/Tacoma/Bellevue, Wash.; Washington/Arlington/Alexandria, Va./Md./W.Va.; and Detroit/Warren/Livonia, Mich.). Further, some market areas are a combination of more than one MSA or Division, but only if it is specifically appropriate for that geographic market area. In our top 75 list of markets, three areas are combinations of more than one MSA or Division (Chicago, Salt Lake City, and Greenville/Spartanburg, S.C.).
• Builders were asked to provide 2006 closings.
• If a company was acquired or merged with another during 2006, figures include the results for both companies during the entire year.
• The country's largest home builders were contacted via fax and phone for their 2006 figures. For more information on Local Leaders, contact Hanley Wood Market Intelligence at 800-639-3777 or e-mail Jodi Bice at jbice@hanleywood.com.