Bust
turns developers' dreams to dust
Housing - Portland-area subdivisions
that once were sure sellers are doomed by tight credit and vanishing investors
Sunday, January 13, 2008
RYAN FRANK and JEFF MANNING
The Oregonian
The housing slowdown has landed with a thud in once popular subdivisions across the region, and it's not likely to let up this year.
Developers carved out thousands of new home lots on the premise that they'd enjoy the same tidy profits produced in recent boom times.
But demand for land and homes has plummeted, particularly in Clark County and Happy Valley, where construction was most intense. As a result, developers are left to pay heavy interest on land sometimes worth less than they owe.
Developers without deep pockets are struggling to stay in business. Others have folded or lost property to foreclosure. In their wake, suppliers, excavators and street pavers try to collect millions in unpaid bills.
"I knew the market was going to correct, but to have it hit this hard, it's a big shock," said Debra Oester, vice president and lead real estate lender at the Bank of Clark County in Vancouver. "To have it come to a standstill like this, I've never seen it before. And I go back to '74."
Realtors promote Portland as one of the top three housing markets in the United States, and the rate of foreclosures remains far below the 1980s recession that rocked Oregon's timber-dependent economy. But there's clear evidence that new subdivisions built at the crest of the boom have suffered a swift and painful fall.
The national mortgage meltdown last summer tightened lending standards, cutting investors and marginal buyers out of the market. That's left thousands of homes available with fewer buyers while developers face mounting bills.
In the Portland area, sales through November were down 12 percent from the year before. The inventory of unsold homes in November was enough to last more than eight months -- up 63 percent from a year before, according to the Regional Multiple Listing Service.
None of the area's major players has been derailed. But many have downsized and slowed operations to weather the storm.
A safe bet goes sour
The Reserve is the kind of subdivision Happy Valley builders drooled over. Perched high above Southeast Sunnyside Road, the Reserve looks onto the snow-crusted Cascade foothills.
Developer Corey Harris said his company, Landmark Development, paid $7.2 million for about 60 acres on the peak in summer 2005. The deal seemed like a safe bet.
Harris would pay excavators to cut through the hillside to make 83 builder-ready lots. Harris said he already had a deal to sell the lots for $18.5 million. To pay his contractors, Harris' company took out a $12.3 million loan with Bay Bank of Longview, Wash., in July 2005.
"We had no idea what was about to come," Harris said.
The project fell behind schedule in the spring of 2006. The housing market sputtered that summer. And by September 2006, his buyer wasn't interested.
Harris had missed the market.
He said his company was stuck with a $140,000 monthly loan payment, and he stopped making the payments last year.
The Reserve's contractors have filed more than $500,000 in liens for unpaid bills.
In November, Bay Bank filed papers to foreclose on the subdivision to get its money back. Ed Cameron, Happy Valley's building official, says it's the first time in his nine years that he's seen an entire subdivision fall into foreclosure.
Happy Valley's protracted land rush pushed the city's population from 4,500 in 2000 to 10,400 in 2007. But the property party has turned into a nasty hangover.
North Clackamas County, including Happy Valley, had 12 months' inventory of unsold homes in November, almost twice the figure from a year earlier.
Thinking back, Harris says: "Happy Valley was hot. Now, it's drowning."
Clark County downturn
Just across the Columbia River, Zephyr Communities found its niche in the booming Clark County market that dwarfs Happy Valley in size.
Tim Gray, 42, former chief financial officer of national builder D.R. Horton's Oregon operation, founded the Camas-based operation in 2004. Within a year, Zephyr enjoyed annual sales of about $30 million. The company built 100 homes and developed 350 lots during its run.
As the long real estate boom continued, Gray was among developers who bid up land prices. "Tim was paying top dollar for the land," said Scott Combs, a Vancouver real estate broker. "But it made sense. Tim was trying to buy land so that someone else wouldn't buy it."
The first sign that the boom was waning came early for Gray: In April 2006, seven of eight scheduled home sales fell through within days. From there, things just got worse as demand fell further and Gray slashed prices.
As Zephyr struggled to pay its bills, its creditors, owed about $45 million, grew restless.
That debt load became crushing. Last June, an unpaid creditor forced Zephyr into bankruptcy.
"It was a fast and steep drop," Gray said. "I didn't pick a good time to go out on my own. It was a very emotionally challenging time. Still is. I made a lot of promises that I wanted to keep, but I couldn't."
On some of his projects, the debt owed by Gray's various companies far exceeded the value of the land.
One of Gray's companies borrowed more than $8 million to develop Regency Estates in Vancouver. After Zephyr's collapse, an appraisal pegged Regency Estate's value at $6.4 million, according to bankruptcy documents.
At Cayman Estates, lenders and investors pledged $2.5 million. A later appraisal valued the 17-lot subdivision between $1.6 million and $1.9 million.
"Once things stopped selling, it just tipped things over," said Charles Carlson, the Vancouver lawyer appointed as trustee in the bankruptcy case.
The Clark County market, like Happy Valley, was made more volatile by investors who bought homes and tried to flip them for a quick profit. Mike Worthy, chief executive at the Bank of Clark County, agreed with other sources that 20 percent or more of the county's recent buyers were investors.
Investors made it appear that demand was so strong that developers kept pushing up supply. But when the market tightened, investors were the first to bail out on sales.
Beyond the suburbs
The housing troubles aren't limited to Portland's suburbs.
St. Helens-based Decal Custom Homes, an active Portland-area builder, is scrambling to remain afloat amid dozens of creditors clamoring for money. Bank of America, for example, sued Decal and its principals in November, seeking repayment of $8.2 million.
Decal has stayed alive only because of financial backing from John Schleining, a successful Ashland developer. Schleining, who declined to comment, took the company reins from co-founder Calvin Baty Jr. in 2007.
The roots of Decal's woes are familiar.
It had developed large subdivisions -- Brush College Heights in Salem and Timberline Estates in Sandy. The company paid millions to install streets and sewer lines.
By early 2007, Decal had completed both Brush College and Timberline and had signed contracts to sell the land to builders for about $25 million, said two lawyers familiar with the case.
But the builders backed out, spooked by the sales slowdown.
That forced Decal to look for other buyers in a market flooded with excess inventory. It now hopes to get about $12 million for the two parcels.
"Now it's a question of whether (Decal) can sell the land for half" its original asking price, said Al Kennedy, a Portland lawyer representing Schleining.
Today, while industry boosters insist that the Northwest real estate market is the strongest in the country, companies such as Decal struggle to hang on and hope for better times to come.
"The multibillion-dollar question is when will the cycle turn," said Worthy, the bank CEO. "I don't know when that will come. I expect to be hunkered down through 2008."
Ryan Frank: 503-221-8519;
ryanfrank@news.oregonian.com; blog.oregonlive.com/frontporch
Jeff Manning:
503-294-7606; jmanning@news.oregonian.com
©2008 The Oregonian