New home slowdown is building economic pain

Despite the lowest mortgage rates in a generation, a raft of lucrative incentives for home buyers and the promise of a reinvigorated economic stimulus package, new home construction activity in the Twin Cities metro area dropped last month to its lowest point in nearly a decade, the Builders Association of the Twin Cities said Tuesday.

The organization's monthly report confirms what economists and anyone who works in the construction industry already knew: The slowdown in new home sales is cutting deep into the broader economy as prospective new home buyers take a wait-and-see approach because of worries about their jobs and family finances. That's leaving subcontractors, suppliers and anyone else connected to the construction industry struggling to find work, and it's putting a dent in the building association's biggest annual marketing campaign, which is set to begin in just a couple weeks.

Twin Cities-area home builders obtained 127 permits in January to build 340 housing units in the 13-county metro area.

While dismal compared with January 2008, those figures represent a slight uptick in construction activity over December. But the increase was driven largely by the rental market. More than 60 percent of the planned units last month were multi-family units, including a senior housing project in Inver Grove Heights and an assisted-living community in Glencoe. Less than a third of the planned units last month were single-family houses.

Even the rental market, which has propped up residential construction over the year, is now showing signs of weakness. During the last quarter of the year, vacancy rates in the metro area jumped to 4.9 percent from 4.2 percent during the third quarter as renters began doubling up to save money, according to a report released Tuesday by GVA Marquette Advisors.

That report said that many of the multi-family projects that had been planned for the coming year will not get built as access to financing evaporates. While 1,200 units got built in 2008, GVA predicts that only 500 market-rate apartments will come online this year.

Money is exiting economy

Already, the downturn has been severe and steep. Just four years ago home builders were issued 613 permits to build 1,000 new units -- the bulk of which were houses and condos -- with a value of more than $200 million. Last month's construction activity is expected to be worth only about $57 million, a reduction of 71.5 percent.

The decline in construction spending has been accelerating over the past several months, a sign of just how much money is being sucked from the local economy. It affects everyone from the crews who dig foundations to the corner-store retailer that sells grass seed.

In fact, during December the number of residential construction jobs in Minnesota fell almost 16 percent over the past 12 months, while the number of jobs in the broader construction sector was down 10 percent, according to the latest data from the Minnesota Department of Employment and Economic Development (DEED). While those construction jobs represent only 0.4 percent of all non-farm jobs, that employment category suffered one of highest numbers of job losses.

That's a dramatic comedown for an industry that helped fuel one of the biggest economic expansions in the state's history earlier this decade. Construction had offered so many jobs with rich overtime budgets that it helped fuel the housing boom itself as an entire generation of working-class home buyers found themselves with enough cash to buy their own piece of the American dream.

All of that is changing. Many of the workers who helped drive building permits to all-time records are now facing the loss of their own homes. That includes Gretchen Hansen, whose husband was a union painter who got laid off shortly after refinancing their mortgage to help fund the renovation of the kitchen in a Victorian-era house they've spent nearly a decade restoring. "Increasingly, it got harder and harder to pay our mortgage," she said.

After struggling unsuccessfully to modify their mortgage, they're now trying to find a buyer as they awaiting a sheriff's foreclosure sale on their St. Paul house.

The pain is likely to spread.

Of the 33 U.S. home builders with more than $10 million in revenues, more than 30 percent are in financial stress and are in danger of going bankrupt, according to the Grant Thornton Corporate Advisory and Restructuring Services. In 2007, 80 home builders nationwide filed for bankruptcy; that number rose to 143 last year. And John Bittner, a Grant Thornton partner, said Tuesday that he expects two of the top 10 builders nationwide to file for bankruptcy in the coming year.

To underscore just how conservative home builders have become in this environment, the Builders Association's Spring Preview -- once the largest in the nation -- has shrunk from 1,249 entries in the spring of 2006 to just 403 this year. That's the lowest number in more than 20 years for the event, which starts Feb. 28.

Woodbury issued the most new building permits last month -- 14 permits to build 14 units -- followed by Maple Grove and Shakopee, each of which issued 10 permits to build 10 new units.

A glut of unsold homes

Mary Bujold, director of research for Maxfield Research Group, said that home builders have been focused on reducing inventories of unsold homes and despite the continuous downturn in construction activity, there's still plenty of new homes available.

"People can still go out there and work a deal with a builder for new housing," Bujold said.

In the last quarter of 2008 the number of unsold new single-family houses in the Twin Cities fell 36 percent to 4,508 from the same period during 2007, according to data from MetroStudy. That's a 8.1-month supply of unsold new homes. The seven-county metro area has more than 34,000 vacant developed lots available -- more than a eight-year supply.

The January report is a critical indicator of what to expect in the coming months and future reports will be watched closely for evidence of a turnaround, which some say is already in the offing based on an uptick in recent sales activity. Art Plante, Minnesota division president of K. Hovnanian Homes, which has continued to break ground in new housing developments around the metro area, says that sales during the beginning of January took a hit because of the dismal weather, but that there was an increase in sales at the end of the month. He said that the company is offering some of its best deals on houses that are already completed. The company, which is celebrating its 50th anniversary, is offering a special incentives on options and buy-downs on interest rates to entice buyers.

Jim Buchta • 612-673-7376