Adjusting to a New Normal

Homebuilders Change Strategies to Meet Market Needs

By Jay Gonzales

If there is such a thing as “normal” in the housing market, it has been anything but that over the last two to three years in the Tucson area – and probably everywhere.

The pandemic of 2020 threw everything into disarray. There was an unanticipated rush for housing in the area, both in the new-home and resale markets. Interest rates reached historic lows. Demand exploded. Supply was low. Available labor and the supply chain were causing chaos.

As we reach the summer of 2023, builders say there are signs that normal is on the horizon, although just what will be considered normal going forward probably is nowhere near the pre-pandemic normal. “Normal” depends on the segment of the market you’re talking about. 

“I think now we’re starting to see just a little bit of some normalcy,” said Amy McReynolds, division president for KB Home, one of the national homebuilders active in the new-home building market here. “I’ve been watching the numbers and comparing them to 2018 and 2019, and resale looks very much like 2018 and 2019.

“There was some sticker shock with the interest rates going up and people kind of taking themselves out. I think where the interest rates are is kind of a new norm. We’ve either gotten some people back that wanted to take a little bit of a break, and then we’ve got new people that are wanting to buy a home and are figuring it out.”

It was a wild ride from the summer of 2020, just after the start of the COVID-19 pandemic, until the summer of 2022 when rising interest rates cooled the market down, said Jeff Grobstein, region president for Meritage Homes, another national builder active in the region.

New homes flew off shelves into the hands of buyers who anticipated a long slog through the pandemic. Buyers knew they would be working from home, and they also realized they could work remotely from just about anywhere. Even today, these two factors continue to affect the market more than three years since the start of the pandemic.

Buyers armed with cash from sales of their homes in other markets like California, the Pacific northwest, Chicago and elsewhere were snapping up homes in the Tucson region and paying cash. At the same time, the low interest rates were putting first-time buyers in play, even though demand for homes made prices skyrocket.

As mortgage  interest rates started climbing, builders actually saw it as an opportunity to catch their breath. After a peak of about 5,100 permits issued in 2021, that number dropped to about 3,500 last year and is expected to dip again in 2023. 

“In the real estate market nationally and also in Tucson, everybody got a little bit nervous about the interest rates,” Grobstein said. “They were probably a little bit nervous about the general economy and the state of the nation.

“As we went into the third and fourth quarters (of 2022), we did see a slowdown in sales and most of the builders said, ‘We’re gonna see a slowdown. Let’s right-size the business a little bit going into the new year.’ ”

While some builders are using the slow down to gather themselves, challenges remain, said David Godlewski, president of the Southern Arizona Homebuilders Association.

The supply chain, cost of materials and the availability and cost of labor caused a huge rise in home prices and affected the ability to build and meet demand. Today the prevailing wisdom is that these challenges will be the new normal and conditions may never return to what they were pre-pandemic.

“We had some unprecedented supply chain issues. We had labor challenges. We had material price increases,” Godlewski said.

For a local custom builder like Chris Kemmerly and his company, Miramonte Homes, the challenges, mostly from supply chain issues and labor and material costs, were unprecedented. With most of his product being custom homes, getting the needed supply of electrical components for homes that require unusual items like elevators, speciality garage doors and high-end electrical panels put his company in the most difficult position that he can ever recall.

“Because of supply chain issues, and labor and material cost increases, it’s the hardest period I’ve ever had to endure as a builder, and that includes 2008,” Kemmerly said, referencing that real estate meltdown. “I would rather have 2008 because I knew what the problems were and I could deal with that. Every day there’s a new issue.”

More recently, Kemmerly said, those issues have gotten “a little better, but not normal.”

Randy Agron, VP at local builder A.F. Sterling, said his company, like Miramonte Homes, ran into the same challenges during and post-COVID with high costs of materials – sometimes unexpected – high cost of labor and a difficult supply chain.

The adjustment A.F. Sterling made was to go small, not in the size of the homes they’re building, but in the size of the developments. He said his company set a general minimum of 10 lots for its developments. It has five active projects around town.

“We did well (post-COVID). The market was strong. The demand was strong. Interest rates were low. Affordability was much better than now,” Agron said. “But we still had challenges – all of us builders did.

“That said, I think we’ve survived and done alright because we’ve become somewhat of a niche builder. We try to find unique locations, good locations. We’ve gone away from the real large communities.”

That kind of creativity and adjusting is what Godlewski said the builders have had to do in order to stay competitive and in business.

“I would say the last eight to 10 months have been fairly challenging for the builders,” Godlewski acknowledged. “They’ve had to get creative in terms of bringing in buyers and trying to create incentives to still maintain the level of interest.”

Godlewski said builders still have inventory because of the build-up prior to the summer of 2022. But what’s missing is a short-term future inventory as permitting has dipped by about 50% from the first quarter of 2022 to the first quarter of 2023. There aren’t nearly as many homes in the pipeline.

“The builders had been trying to keep up with demand so there was a lot of inventory in the ground,” Godlewski said. “There were a lot of homes that were in backlog, so even though the permitting activity isn’t where it’s been, they’re still selling homes.”

Will White, who runs the local office of Land Advisors Organization which brokers land deals for builders, said a percolating issue before the pandemic, and one that remains an issue, is the availability of land for future developments. The master-planned communities that were in place in the summer of 2021 are the same ones still being built out in the summer of 2023. A few scattered subdivisions have opened and filled, but there aren’t any new larger communities in the works, and he estimates the current inventory of new homes will run out in mid-2025.

Tucson is surrounded by Arizona state land that is not being put to auction at any kind of pace that White thinks will meet the coming demand for homes as Tucson grows and jobs come to the region. Add to that the amount of time it now takes to get homes built from the time land is purchased − about a 24-month process − and White suggests a shortage of housing is on the way.

“There are all kinds of things putting pressure on our supply storyline,” White said. “But I don’t want to say everything is difficult. I think it’s good that in this cycle we didn’t over build.

“My best guess scenario is they won’t get new lots and new communities open till later in 2025. There could be a four- to six-month gap that we call a ‘gap out’ where they won’t have anything open for sale. And that’s not good.”

While that sounds ominous, builders and sellers remain bullish on the Tucson market for both new homes and resales. There have been some economic development victories with expansions and new companies coming to the region. Those moving here for employment have to have places to live and the builders know it.

And while interest rates are up, builders are trying to keep their business booming by, among other incentives, buying down interest rates, particularly for first-timers who remain interested and available to buy. 

Those selling existing homes should probably be doing the same thing, said Judy Lowe, CEO at Tucson Association of REALTORS®.

“We also have to create a housing supply for the resale buyer,” Lowe said. “Our new-home construction is offering incentives, offering a buy-down of the interest rate for the buyer. We need to start looking at ways to enhance the buyer’s opportunity in buying resale.”

That can come from both sides of a sale, Lowe said. A seller can offer to buy down the interest rate and a buyer can also request that from a seller.

“We have to think about emulating what is already happening that’s causing our market to feel better, maybe not good but better,” she said.

So what’s in front of us in the market in and around Tucson?

“We’re relatively optimistic about the coming year,” said Jeremy Sharpe, president of Sharpe & Associates and the developer at Rancho Sahuarita, the 3,000-acre development south of Tucson that has been going for 20 years. “I’m cautiously optimistic that the market will continue to strengthen in home sales, which then leads for us as a developer to future land sales.”

Sharpe said the lag from purchase to when you can “flush a toilet” at a new home is 18 months to two years. That means that developers like him, and the builders who buy land from him, have to project what might be happening in the market 18 to 24 months from now. With all the data and market information available, it’s still a tough thing to do, he said.  

“We have the tough job with our homebuilder asking what’s the market gonna be like in 18 months to two years, and so we’re planning well ahead of that,” Sharpe said. “But overall, what we’re seeing is the demand hasn’t died down at all. There’s tremendous demand for new homes and resales and the issue is the supply.”

One of the biggest questions is in what direction is development headed? Infill opportunities are few and much of the available infill land is being taken up by vertical projects that have become popular and plentiful in recent years, particularly downtown and around the University of Arizona.

Existing projects and master-planned communities have been going in all directions from the metropolitan area, northwest along Interstate 10 in Marana where Gladden Farms has been developing 112 acres, east of Tucson at Rocking K Ranch where Diamond Ventures still has much of its 2,000 acres available for new communities, at La Estancia along I-10 south of Davis-Monthan Air Force Base, south at Rancho Sahuarita, and west along Ajo Way at Star Valley.

Dove Mountain, which is also in the Marana Town limits, and Rancho Vistoso in Oro Valley are the only other active master-planned communities.

With the constraints of state land that is not up for auction nor will be anytime soon, White, the land broker for developers, said the existing master-planned communities are where new home buyers are going to have to go.

Gladden Farms in Marana opened five new communities since last June and are building a much-needed Fry’s Food and Drug in the development. KB Home, Mattamy Homes, Meritage and Richmond American Homes all have communities there. With homes starting in the high $200,000s, first-time buyers have a chance there.

Sharpe said there are about 1,000 lots, some in escrow, that are coming up to be available at Rancho Sahuarita.

But White continues to caution that builders and developers who have paused on new land purchases until they can sell and build out existing inventory might be creating a future shortage of new housing.

For now, buyers are getting used to the new normal with interest rates essentially double what they were at this time last year while prices have not returned to pre-pandemic levels.

“What we’ve seen in the first quarter of this year is what I call a normalizing or a moderation from the perspective that people are starting to get a little bit used to the interest rates,” said Grobstein, of Meritage Homes. “I think the consumer got really conditioned over the last two or 2½ years that 3% or 4% (interest rate) was kind of the norm, and it really wasn’t. It was just a flash in the pan that created really good payments for people. What we’ve seen happen since is a nice resurgence into the marketplace.”