Housing Crunch: Population growth fuels construction needs

A shortage of builders in Columbus and population and job growth in the city are contributing to the area’s tight housing market.

Increased demand for new housing has builders focusing more time on custom-built homes for individual clients.

That’s in contrast to years past, when the volume of spec homes — those built on speculation without a particular buyer in mind — was much higher as builders looked for ways to keep crews busy during slow buying periods such as winter.

Recent high demand is keeping Bob Phillips’ crews busy year-round, however. In fact, some of his spec homes sell before crews have hammered the final nails, positioned the last shingles or installed the last windows.

“Our inventory’s been hard to keep up,” Phillips said last week as he stood in a recently finished 2,100-square-foot spec home in Wildflower Estates, a subdivision on County Road 200S, east of Interstate 65. The $319,000 home has a basement of another 2,100 square feet, a three-car garage, a large yard and upscale touches such as a walk-in shower, high ceilings and granite counter tops.

Phillips, who has built 93 homes in Columbus since 2006, has seven spec homes under construction.

“Just been playing catch-up,” Phillips said.

Other home-builders such as Breeden Construction have gotten out of the spec-home business entirely.

Tim Pratt, construction manager for Breeden, said his company primarily built spec homes before the recession. Today, Breeden builds exclusively custom homes, those that have a buyer before construction begins.

Local and state real estate and building experts said the number of builders fell significantly during the recession. Now that the economy is improving, especially in Columbus, those experts indicate that the remaining builders are struggling to keep up with the higher demand.

Such demand is being fueled in part by the city’s population and job growth. According to the Indiana Department of Workforce Development, employers in Bartholomew County this July had 2,000 more workers than a year ago.

Mark DeBusk, assistant chief code enforcement offer in Bartholomew County, said the number of local builders dropped during the recession.

Builders have to register with the county. Although county officials do not track how many homes each of them builds, DeBusk sees them because he reviews all the permits.

“There are a few (builders) that I haven’t seen recently,” DeBusk said.

Smaller home-building businesses were especially dragged into the mortgage maelstrom by lack of demand and stingier financing.

As the recession hit, some builders depended on income from homes they had just finished to generate enough money to build the next one, said Karen Dugan, a real estate agent with Century 21 Breeden Realtors.

When those homes did not sell, the builders had to continue to make loan payments, including interest. If that went on for too long, the builders’ profit margin shrank and eventually disappeared, sometimes leading to lenders taking possession of the home — and not extending additional credit to the builder for new home-building projects.

That scenario played out across the state during the recession, said Rick Wajda, chief executive officer of the Indiana Builders Association, a group of builders and suppliers.

“No access to capital makes it pretty tough to run a business,” Wajda said.

Some of the local builders who left the business did not have a building background but had gotten into the sector while the housing market was booming. Before the recession, Columbus had homebuilders who previously worked as an engineer, teacher and preacher, Dugan said.

During the recession, the number of permits for single-family home construction in Indiana fell from nearly 35,000 a year to fewer than 10,000, Wajda said.

Reflecting that decline was a drop in the association’s membership from about 7,000 in 2007 to about 3,000 today, he said.

Even builders who survived the recession changed their business strategy.

Jeff Fetterer, vice president of mortgage lending at MainSource Bank, said lenders are paying more attention to home specifications and building materials to decrease the chance that the loan exceeds the home’s value — just in case they have to take possession of the home by foreclosure and sell it.

Fetterer said lenders today may require borrowers to have a higher credit score. Additionally, federal loan underwriters are requiring more detailed income data. Whereas one pay stub and the latest tax return got people a loan a few years ago, today they typically have to present two years’ worth of tax returns and two paychecks.

Brad Davis, chief sales and marketing officer at Centra Credit Union, said the recession forced “everybody involved in the process to re-evaluate the appropriate level of scrutiny.”

Lenders, for example, want to make sure a builder constructs a home of high quality and marketability in a reasonable time frame at a price that the market will bear and that if a builder puts up a spec home, he has the financial means to service the debt if the home does not sell quickly.

“It all comes down to creditworthiness,” Davis said. “Construction is a tough business.”

Phillips, on the other hand, thrived even during the recession, selling more homes each year than the previous year.

He believes he was able to ride out the recession in part because of his high sales volume, firm relationship with MainSource and diversification: He typically builds spec homes at several price points in various subdivisions.

Lenders, builders, real estate agents and government officials agree that the housing market is improving.

“We have sensed that we’ve bottomed out and are turning a corner,” Wajda said.

With interest rates staying low, he predicted that more builders would return to the business statewide.

“We sense that there’s some pent-up demand ... but we haven’t seen huge increases,” he said.

Wajda said that from June 2011 to June 2012 permits for single-family homes in Indiana increased 19 percent — from a very low base.

DeBusk said, “Some of the subdivisions that were idle (in Bartholomew County) have picked up again.”

Lenders, too, who guarded their loans fiercely during the recession are easing up a little as the economy improves and demand for homes is increasing, Fetterer said.

Davis agreed and believes that either local builders will find ways to increase production or out-of-town builders will come into the Columbus market.

“At the end of the day, demand will create supply,” he said.

Still, some builders are remaining a little gun-shy about building spec homes, said Jan Hexamer-Gardner, co-owner of Century 21 Breeden Realtors.

That’s because spec homes require more financial risk because builders have to wait for a buyer, and they have to guess which features prospective buyers will want, Hexamer-Gardner said.

The Columbus market’s shortage of spec homes nevertheless surprises her because of the increase in potential spec-home buyers coming to the area after landing a new job. For them, it means the transition period is going to take longer than they might have expected, with the tight housing market requiring buyers to wait several months before they can move into a new home.

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