The banner across the top of today’s Arizona Daily Star proclaims,”Home Sells for $3M – Foothills deal is Tucson’s biggest in 3 years.” The accompanying article points to this sale as a sign of a”resurgence of the luxury home market in the Foothills.” The manager of the office that sold this house is quoted as saying “This is a very important sale… I think it’s a sign of increasing movement in the high-end [home market] and I’m expecting more good things to come in 2017.”
Anecdotally, I’ve recently heard several agents in my office tout how busy they are and how active the $750,000+ home market currently is, which supports the article’s conclusion.
This made me wonder if custom builders are seeing this trend and beginning to re-enter the luxury home market by building expensive, custom spec (speculative) homes, a segment of the new home market that accounted for a significant number of my land sales in the market run-up to 2006, which has been virtually non-existent since.
Building a spec home requires the builder to undergo quite a bit of risk by taking out a large, personally guaranteed mortgage with the hope and expectation that a buyer will like the design, finishes, price, and neighborhood of the home and purchase it in a timely fashion.
Time works against the spec builder as carrying and holding costs build up rapidly. Thus the quicker he sells the home, the more success he achieves. This type of project typically takes 9 to 12 months to complete, and the hope is that sometime during the construction process, a buyer will purchase the home, further customize it to his personal taste, and be prepared to close as soon as it is finished.
However, if the home is finished and stays on the market another 9 to 12 months, any potential profit can be lost quickly. To take these type of risks, builders must be feeling very confident that there is not only a significant pool of buyers for their product but also that the overall luxury market is strong and growing stronger still.
In the early to mid-2000’s, I had a list of approximately 100 custom builders that were actively building homes in the Tucson marketplace. At that time, any home priced at $400,000 and above was considered a luxury home and they were being built all over the Tucson Valley. I was sending out a monthly “Builder Newsletter,” describing all the potential vacant lots which were good candidates for a spec home.
The spec home business was booming by all accounts. By mid-2006, the beginning of a pending recession was evident and those builders who were about to start new projects either abruptly stopped or, in some cases, were stopped by their lenders who withdrew funding. By 2007/2008, most if not all of those builders had left the market and the spec home business was gone.
Check back in next week for Part Two of this ongoing exploration of the custom builder’s market!
