Contractor Update

From the Bend Bulletin, "Earlier this year, David Alexander's carpentry crews had to scramble to finish 25 to 30 houses a month.

Now, Alexander said Friday, they're working on seven to 10. His employee count has slipped from 14 to 10. He's searching for more work to keep his remaining employees at Bend-based David Alexander Construction working through the winter, and he's hoping that new-home sales pick up enough to get the construction season off to at least a moderate start next year.

"Down and level," Alexander said. "That's what we're hoping for. Down and level."

Awash in inventory, Central Oregon's largest home builders say they are hitting the brakes now, taking millions of dollars in potential construction money off the table in the process.

Building permits are down 22 percent in Bend so far this year from 2005's record levels, according to Don Patton, owner of Cascade Central Business Consultants, a business that follows industry trends. In Redmond, permit activity is off 28 percent.

So far, the slowdown hasn't left any obvious scars, even on an economy that is unusually dependent on construction and real estate spending.

Total employment in the construction trades in Deschutes County was up 8.3 percent, or 610 jobs, in September 2006 over September 2005, Oregon Employment Department regional economist Steve Williams said. That's a significant increase, but slower than the 11.6 percent job growth recorded in the sector from September 2004 to September 2005.

Local banks have so far shown few signs of slowing.

Bank of the Cascades, the largest player in Deschutes County's lending market, reported profits up 16.8 percent in the third quarter.

At Prineville-based Community First Bank, a smaller but growing bank that deals mostly with small contractors, loan portfolios are up 20 percent since the first of the year, President and CEO Robin Freeman said. The bank is buttressed in part by loans for commercial construction projects - a field undampened by the downturn in residential real estate.

Smaller contractors - particularly ones that specialize in building a handful of higher-end houses every year - have shown a bit of a slowdown, but not much, Freeman said.

The most dramatic downdraft in residential construction is coming from the larger production builders who make their living building entire subdivisions at a time, fueling hundreds of subcontractors and suppliers in the process.

The stakes for the local economy could be high.

Real estate services, residential construction, and commercial and institutional construction accounted for nearly $1.90 of every $10 earned in the local economy in 2003, about twice the statewide average, according to an economic survey commissioned earlier this year by the Central Oregon Builders Association.

The question is whether this summer's pullback in residential construction is enough to seriously dent the local economy, or whether building levels are simply retreating from an overheated state to one that's sustainable.

What the builders say

Bill Duffey, sales manager for Palmer Homes, one of the region's oldest homegrown production builders, says it's the latter.

Palmer pared its construction target this year from 125 homes down to 90 when sales suddenly slowed in the summer, Duffey said.

The company is offering price breaks of as much as $20,000 per home to cut its inventory load before the end of the year, Duffey said, and it's intentionally halting work on some of the homes it already has under construction to give potential buyers the chance to choose custom finishes.

Total sales projections have dipped from as high as $42 million to probably no more than $38 million, Duffey said.

Even so, because the company is building on land that it bought at relatively inexpensive prices three to four years ago, it is having one of its best profit years ever, Duffey said. It tentatively plans to build another 80 homes next year, bringing it back into its traditional range of 65 to 80 homes per year.

"To be able to go back, after all the news that's been in the paper and all the stuff that's been going on in the market, to be able to project doing 80 starts - we have no problem with those numbers," Duffey said. "No problem at all."

Palmer's pullback in production goals has been mirrored by its competitors.

Renaissance Homes, an upscale Portland builder that made its first moves into the Bend market last spring, quickly brought 58 houses out of the ground as the spring sales season got off to a hot start, company President Randy Sebastian said. But investors, speculators and second-home buyers bolted from the market early in the summer, forcing Renaissance to slow up while it reconnoitered the playing field.

The company still has more than 30 homes for sale in its Renaissance Ridge development in southwest Bend, Sebastian said.

Most of Renaissance's 20-or-so sales have gone to local move-up buyers, not to the second-home investors it thought it would be selling to when the year began, Sebastian said. It has cut prices anywhere from $80,000 to $160,000 per home to get things moving again, with some recent successes - six homes have sold in the last two weeks.

Still, the company has cut 70 percent out of its aggressive early year production goal, Sebastian said, leaving somewhere in the range of $45 million to $50 million in potential construction money unspent.

At least, not yet.

Renaissance is planning to stick with the Bend market for the foreseeable future, Sebastian said, even laying plans for a new 80-home subdivision along the Deschutes River to go along with Renaissance Ridge.

"The good news is it'll happen," Sebastian said. "The bad news is, it didn't happen this year."

The same is true at WoodHill Homes. WoodHill plans to break ground on at least two major new Bend subdivisions later this year, President George Hale said, but it has cut this year's building projection from 120 homes to 80, cutting $7 million in spending in the process.

The slowdown may have some silver linings.

With better sales tracking and tighter business management, builders appear to be reacting quickly to the unusually sudden slowdown in sales, apparently avoiding their propensity through past drawdowns to keep building until inventories reached disastrous levels, said Harold Guthrie, an owner of Bend-based electrical contractor THT Electric.

"It doesn't catch people as off-guard as it did in the past," Guthrie said. "There's not quite the cowboy attitude that there used to be."

And going forward, local lower-end buyers may catch a break as builders adjust to a more locally oriented market.

Last year's red-hot sales were fueled by investors and second-home buyers that accounted for as much as 40 percent of a typical builder's sales, Hale said, forcing prices upward and enticing builders to construct more expensive homes to meet the demand.

With the investors greatly reduced or gone, though, Hale and Duffey said their companies are searching for ways to bring lower-cost homes to the market next year, trying to get their price points down to the point where entry-level buyers can have a shot at them again.

There have been some mixed signals lately in the national real estate news. New-home sales rose 5.3 percent in September, but the increase was driven by heavy price cutting. Existing-home sales dropped for the sixth straight month, while mortgage interest rates hovered at a relatively low average of 6.39 percent.

Meanwhile, with uncompleted homes still left to finish this fall and with Central Oregon homes still selling at the relatively strong levels of 2003 and 2004, there have been few signs of out-and-out financial distress so far in the local subcontractor community, Hale said.

But plumbers, framers, drywallers, electricians and finish carpenters are a good deal easier to book this fall than they were in the spring, and, with more than 1,400 homes still for sale on the Bend market, leaner times may still lie ahead for some.

"In these times, the cream rises," Hale said. "The guys who were really good get better, and the guys who were really kind of marginal find other things to do. It's kind of uncomfortable for most people to go through these days, but I don't think it's a bad thing."