National real estate woes have reached the Rio Grande Valley as the region lies on the brink of its worst home building decline in more than a decade.

One of the country’s largest home builders, KB Home, has announced that it will stop building homes in the area, and other builders are reporting a continued decline in the demand for homes

“The market just isn’t where we need it to be to continue selling homes there,” said Cathy Teague, a spokeswoman with the company’s San Antonio office.

KB laid off its salespeople and other employees earlier this month. Teague wouldn’t disclose the number of employees here or the number of homes built.

The company, which has been here since 2002, also plans to shut down its office and showroom near Expressway 83 in South McAllen.

Teague stopped short of saying KB had completely abandoned the market. She said the company is optimistic it could return once market conditions improve.

Construction crews and foremen will remain in the Valley to finish homes currently under construction.

Los Angeles-based KB is the nation’s fifth largest home builder, according to Builder Online Magazine. With the nationwide housing crunch, KB has been hit hard in almost every market. On the company’s third quarter earnings report, it cited a $478.6 million loss and said it would ramp down building in several markets.

KB’s departure marks one of the steepest home building declines in recent history. After the six banner years that started the decade, the number of building permits in Hidalgo County declined roughly 30 percent this year compared to 2006, according to statistics from the Real Estate Center at Texas A&M University.

Hidalgo County hadn’t experienced a significant year-to-year decrease in home construction since 1994.

Builders and real estate experts blame the decline on the nationwide foreclosure crisis sparked by subprime lending. Amid the subprime problems, lenders are tightening mortgage requirements and loans have gotten more expensive, resulting in lower demand for new homes.

“There’s been clear reductions in the number of new housing starts Valley-wide and a reduction in the number of new developments,” said Mike Blum, a broker with McAllen real estate firm NAI Rio Grande Valley. “It’s driven by the marketplace and the credit crunch.”
But while the number of new homes is on the decline, the value of those homes is actually increasing. Blum said that’s because fewer cheaper homes are being built.

The hardest hit segment of the market is homes in the $125,000-and-under range — homes typically purchased by the very people who are now having trouble getting loans, Blum said.
“There’s a lot of people in that price point, and a lot of the building in that price point stopped,” he said.

Prices for existing homes, meanwhile, are holding relatively steady. The average existing home in Hidalgo County sold for $140,050 in November, according to the latest statistics available. That’s a $5,000 increase from November 2006.

Like KB Home, Houston-based Obra Homes has also noticed a marked decrease in new home sales during the last year, said Lyle Jackson, vice president of sales and marketing for the company’s Rio Grande Valley market.

“It’s a market correction and everyone is optimistic,” Jackson said. “But I don’t know if it will end in the first quarter (of 2008) or the end of (that) year or the next year.”
With a tighter market, Jackson said builders, including Obra, are more deliberate about where and how many homes they build.

“You definitely can’t do any spec building, because there is inventory on the ground,” he said, referring to the practice of building homes on a speculative basis, before lining up the buyers.

Tony Domit, president of McAllen-based Domit Construction, was once one of the Valley’s most prolific home developers and builders until he abandoned home building for the more favorable commercial construction market.

“There isn’t as much money (in home building) anymore,” he said.

Worries about housing and credit haven’t been enough to slow down economic growth in the Rio Grande Valley this year.

Cities across the Valley report record economic figures, from job numbers to sales tax revenues.

Economic experts and city development officials are pointing to new companies and commercial growth in cities across Hidalgo County as an offsetting factor for much of the slowdown in the home building and sales sectors.

“You can see the changes that are happening,” said Gökçe Soydemir, associate professor of economics and finance at the University of Texas-Pan American. “Every day you see new buildings that are being constructed.”

However, Soydemir said a weak dollar and worries of inflation may be enough to slow down the Upper Valley’s roaring economy.

As of November, Hidalgo County has added about 7,770 jobs over the past year, according to the Texas WorkForce Commission. The area even recorded a record low 5.3 percent unemployment rate.

Much of the job growth has been driven by retail, which has continued to flourish while some industries slow, Soydemir said. Sales tax revenues for McAllen are projected to grow nearly 7 percent over 2006. Mercedes, which added Rio Grande Valley Premium Outlets, has seen sales tax collections nearly triple.

La Plaza Mall owner Simon Property Group opened a new shopping center on Expressway 83, including several big-box retailers, and created dozens of jobs.

The Rio Grande Valley Partnership, a regional chamber of commerce based in Weslaco, projects a 10 percent increase in bank deposits in Hidalgo and Cameron counties by the end of the year.

The maquiladora sectors in Reynosa and in the Valley slowed slightly during 2007, said Keith Patridge, president and chief executive officer of the McAllen Economic Development Corp. The job-creation group is contracted by the city of McAllen to lure employers to the area and foster growth.

This year the development corporation helped bring 17 new companies to Greater McAllen and Reynosa for a total of about 1,800 jobs, most of which are in Reynosa. However, Patridge said a slumping economy elsewhere is helping to bring companies to cities on both sides of the Texas-Mexico border to take advantage of cheap labor.

“We are seeing a little bit of a mixed bag,” he said. “Some are growing like crazy and are going to be moving operations into the area.”

And on this side of the border, manufacturing employment is leveling out after dropping during the last decade, Soydemir said.

One of the few downsides in the Valley economy this year was a drop in home sales and new home builds, which followed a larger nationwide downturn. Sales of existing homes in the Upper Valley are down nearly 10 percent from last year through November, according to data from the Real Estate Center at Texas A&M University.

It has been worse for new homes. Construction permits for new homes have dropped 27 percent through October compared to last year.

However, with the Federal Reserve lowering interest rates, home sales are likely to pick up next year, said Raymond Jenkins, Frost Bank’s chairman for the Rio Grande Valley sector.

“With the backdrop of the Valley and continued good employment numbers, I say our outlook is very bright,” Jenkins said.

Kyle Arnold covers business, the economy and general assignments for The Monitor.

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