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How speculative building wore out its welcome

New residential construction was once a hallmark of progress in Mecklenburg County. Not only were big builders like Pulte, Ryan and Eastwood homes succeeding in the speculative sales market here, but smaller homebuilders were also riding the train, littering the interior neighborhoods from Eastover to Plaza Midwood with speculative sites.

Fueled by investment-hungry banks, these “cowboy” builders rode this city like a bucking bronco. With sky-high lot-to-package ratios, they plundered every square inch of buildable land from Highway 51 to uptown.

That was 2006, when speculative building — where a home is constructed on the speculation that it will sell — was a fairly standard business model.

Now, with demand much lower, homebuilders like Westwood Custom Homes, Kelly McArdle Construction and Dubose Custom Homes have survived by building only custom — where a home is built for a specific customer — as opposed to doing specs anymore.

The main culprits that have eliminated speculative building from the residential markets are lack of financing and demand. Even the hottest deal on the market now has to adjust to the fact that new-home prices are settling in closer to those in 2003-05.

Those builders who have disregarded this grim reality have been shot down in a blaze of their own greedy glory. Buckeroos Scott Sadler and Bruce Bleiman’s Mediterra on Carmel Road demonstrate this, as they tried to ride out the speculative building trend without looking at the big picture.

Medittera was supposed to convert 4.6 acres of measly land on a busy street into 12 “authentic country villas” starting at $1.3 million. A stretch, to say the least, even in boom-time development.

In fact, how these “country villas” even obtained city approval or financing is a mystery. Even with guest houses, three-car garages, cabanas and pools, these homes were a far cry from Tuscany or anything like it, packing in their future residents like affluent rats while maximizing every dollar for the developers.

Across the street, speculative cowboys were constructing the Village at Totenham. It had the same model: Exploit every inch of land, offer a McMansion in south Charlotte on a major road and watch the dollars roll in. Perhaps they collaborated on how best to ruin the graceful entrances to existing wooded home sites on Carmel Road.

Whatever the case may have been, these builders and their products were exposed for what they really were when the bottom fell out and outlandish speculative building was forever outlawed by the new economy.

Mediterra was bought by CommunityOne Bank in January for $1.8 million. The model house, which remains unfinished, is listed for around $550,000. Sadler’s comments on the stunning loss were very astute in stating that the development would have succeeded if he and Bleiman had started two years earlier in 2005.

That’s true, cowboy, but sadly you rode this one trick pony on her last leg, and with a terrible ride at that.

One nice aspect of the economic downturn is the purging of ridiculous products like these from the residential marketplace. Successful speculative building now is an entirely different game, one builders and banks can’t afford to lose.

Those builders who are left playing are smart and savvy. Their goal is no longer to maximize a piece of land and milk it for all it’s worth until all that’s left is a bloated product with no market.

The challenge now is to build the consumer a new home for the same price as an existing one, a pretty tricky task thanks to short sales and foreclosures.

The key is lot price. Banks are now willing to let lots go at a price that gives builders an opportunity to match the market and make speculative sales a reality once again.

James Custom Homes, based in Matthews, has started construction in Ashton, a former subdivision of Simonini Builders. Simonini had once planned to build three- and four-bedroom homes ranging from 2,480 square feet to 3,410 square feet with prices from $629,000 to $720,000. Jim Roese — with his partner, Jim Barnaba — is building bigger houses at a lower price, from $300,000 to the mid-$400,000s.  They are able to do this because lot prices fell to $100,000, a 55 percent drop from two years ago.

Another interesting development in the new wave of speculative building is the extinction of the developer. Builders are buying directly from the banks, taking out the developer and their fees.

Fortunately, the builders who are still in business are strong and healthy (they’ve had to be to survive) and able to handle lot acquisition and development on their own. By eliminating fees and the old model of greed that marked the early 2000s, the products coming on the market are going to be aggressive in price and value; i.e., look for more curb appeal and conformity and less … crazy.

There are still 15,000 developed pads around Mecklenburg County clogging new construction and market growth. The bright side of this is that if banks and sellers can get their prices right, new home construction can happen once again. And when it does, you know it’s going to be good.

In this market, there is no alternative.

Joanna Reule is a Realtor and broker at Cottingham Chalk Hayes. She can be reached at jreule@cchrealtors.com or cchrealtors.com.

One comment

  1. Ms. Reule identifies symptoms rather than causes. A foundational economic axiom is that people respond to incentives. What she calls “greed” was the logical reaction of investors to the Federal Reserve’s persistent policy of sub-market interest rates after 9/11. The boom-bust was the result of investors being lured into expectations of long-term demand — and thus overbuilding — coupled with rising consumer borrowing and falling savings in response to cheap credit. Until the market-distorting problems of central banking are confronted we will continue to blame phantoms like “greed” while moving on to the next speculative bubble.

    That said, her conclusions about the “new economy” are sound — proof that the market ultimately wins out over the machinations of policy-makers.

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