June, 2008

Under Pressure

Builders across the country face tough markets, unsold inventory, and fewer buyers. Learn what you can do to help.

By Steve Easley

EDITOR’S NOTE: What might you learn if you could listen to a group of homebuilders from across the country discussing their plans for surviving today’s tough market? At the International Builder’s Show in Orlando in February, a panel of builders was convened to share their real-world strategies for dealing with a lackluster market and growing pressure on the nation’s housing industry. These valuable insights were shared with a kind of plain-talk from builder to builder from which lumber and building material dealers could benefit. This provides a real-world window into how you can better understand the pressures your builders face in 2008, and may offer suggestions as to how you can help your customers survive the slump. This article originally appeared in the March 3 edition of Nation’s Building News, the official online weekly newspaper of NAHB. We felt that it deserved particular attention, given the timeliness of the topic, and reprint the piece here with their permission.

Builders and remodelers who work steadily on readjusting their business practices in response to the current economic downturn stand a good chance of surviving until better times arrive and trouncing the competition during the recovery, according to housing industry veterans who appeared at the International Builders’ Show (IBS) in Orlando. Each has the battle scars to prove they have weathered previous housing slumps. “Today's housing market is obviously not the same housing market that existed a couple of years ago, and that means you can't afford to run your company the same way you did then,” said Michael Sivage of Sivage Community Development in Albuquerque, N.M., who moderated the panel. The industry faces “another challenging year” following a “tough” 2007, he warned, and the burden is on builders to persuade consumers to consider the home-buying opportunities in today’s market despite the daily barrage of negative reports in the news media.

Sivage asked each builder to track where his business has gone since the start of the downturn in 2006 and discuss what they are doing to get through 2008 and prepare for better times ahead.

Among the accounts shared with the convention audience:

ROBERT CAMP of Camp Corp. in Lakewood, Wash., said that his company closed sales on only 35 homes last year, compared to 125 in a good market. The company also saw declining profit margins and ran into cash-flow problems. This year, his objectives are to reduce the inventory and cut interest costs by 50%.

To get out from under the interest burden, Camp is offering his customers the opportunity to rent houses in the existing inventory and then purchase them in two years, with rent set aside to help them qualify for a mortgage. Camp has also resorted to “bare bones pricing” that has cut the selling price an average of $20,000 per unit by trimming construction costs, such as scaling back to a one-car garage.

In a new subdivision going up on developed property owned by the company, on a pre-sale basis only, starter homes are being offered for just under $200,000, compared to $250,000 to $275,000 previously.

Camp is looking for 60 sales this year and has already made it a third of the way to his goal.

“The idea is to do something every day to help your company get through this downturn,” he said. For example, he has stopped accepting bids on projects. “We tell subcontractors what we can afford to pay, making sure they make a profit so we all will be in business in 2009.”

“Don’t crawl into a hole thinking you can avoid all of this. It’s not going to go away,” he said. He also advised builders to take advantage of the resources available at their local homebuilders associations and “find people who can tell you how they got through things.”

KEVIN ESTES of Estes Building in Sequim, Wash., a small rural community with a population of 35,000, has seen his sales cut in half by the downturn and is working toward a goal of 18 to 19 closings in 2008, about the same as last year.

“We’re not in a crisis mode,” Estes said, and the company hasn’t had to make staff cuts and hasn’t encountered major financial problems because “we restrained ourselves to stay out of trouble” by exercising discipline over the amount of inventory and leverage.

The biggest immediate challenge, he said, is to step up sales and marketing and address everything related to costs.

With the objective of bringing his home prices down, Estes has been going through the specs in his standard plans and highlighting every item not related to codes and questioning whether they have been providing value.

Everyone on the Estes staff has been receiving retraining in sales and marketing, including administrative staff members and workers in the field, because “each prospective customer is golden right now.” The company is doubling its media placements this year and has established a goal of releasing 12 press releases. Sales efforts are being reexamined from top to bottom. The front desk at Estes receives a Top 10 list of prospective buyers, and they are instructed to interrupt meetings when one of them calls so that they can talk to a salesperson immediately.

In dealing with the current market slowdown, “most of the competition will mostly whine and cut prices,” Estes said. “That will be the extent of their plan. Keep looking at your plan and working on it,” he said, as an opportunity to increase market share.

JOHN YOUNG of Young Homes in Rancho Cucamonga, Calif., reported that the housing market in Southern California is “under a lot of strain.” His company sold 150 entry-level homes last year in the $400,000 to $500,000 range for a sales volume of about $70 million, down from $200 million in 2006.

Non-residential has held up as the best part of the construction market, which enabled Young Homes to sell off 250 acres
of its land for commercial use and receive a good price, he said. With a 50% cancellation rate among first-time buyers who haven’t been able to figure out how to qualify following the mortgage market meltdown of late last summer, building cash reserves have become a priority, he said. “We are paranoid about our cash.” Maintaining relationships with bankers has been important. “We make sure they know what we’re doing so they’ll continue to work with us.”

The company has had to take a hard look at its expenses, including sales and marketing, and tighter budgets have brought third and fourth rounds of staff reductions. However, in preparation for the next business cycle, Young said he has been careful to keep “key people,” even if it means carrying them. “We will be up, will be back, it’s just a matter of time,” he said.

Young Homes now has its eye on building smaller, more affordable homes at higher densities and has been working to convince local jurisdictions of the need for greater diversification in the housing supply.

In the meantime, good architectural open-floor plans are enabling the builder to “strip down” his product.

The high-priced Southern California housing market may have started to see “some light at the end of the tunnel,” Young said, with recent legislation to increase the flow of credit in the jumbo mortgage market and newspaper and magazine articles turning “a little more positive.

On the marketing side, with a 20-year presence in its local market and 3,500 previous customers, Young continues to look for referrals, which have accounted for 20% of its business. Young recommended joining Builder 20 clubs, where builders can exchange experiences on a non-competitive basis, and attending economic summits to gather information on significant underlying factors in the market outlook.

“I’m in a risk business,” he said, “but what can I do in best practices to mitigate that risk?” Young Homes is doing whatever it can to make the best of a difficult market in preparation for better times ahead. Until then, however, “We have to hunker down and get through 2008,” he said.

ROBERT HANBURY of House of Hanbury Builders in Newington, Conn., said that “2006 to 2007 was a cakewalk from a remodeler’s point of view,” but the remodeling industry is affected by the same issues as homebuilding, and it became clear in December that there is a significant reduction in demand for higher-end improvements and additions related to a decline in homeowner equity.

In drawing up its business plan for the year, and taking a closer look each quarter at what is occurring in the marketplace,
House of Hanbury saw that it would have to start looking for smaller jobs, at a higher volume, to make up for the shortfall of the high-cost projects that had been driving the market during more prosperous times.

This has entailed recasting the company’s image as “a full-service remodeler here to service all of your needs” and assessing the company’s capabilities.

“Is your infrastructure built to handle 100 jobs a year instead of 45?” he asked.

Hanbury said that he is looking for referrals and is stressing his company’s longevity, reputation and trustworthiness to see his business through what is expected to be a relatively short cyclical downturn.

STEVE LAWSON of The Lawson Companies, in Virginia Beach, Va., said that the current housing slump is the first he has experienced first-hand. But when he joined his father's company in 1993—a diversified business engaged in single-family,
multifamily, apartment management and affordable housing—he had to deal with “the ugly aftermath” of the downturn
that had only recently ended. “The balance sheet looked like downtown Baghdad,” he said, “and it took years to dig out of it.

“I inherited a building business,” Lawson said, “but I did not inherit profits as a birthright. It has been tough.” He reported that the management side of his business “has been a steady cash generator,” but even in a market that has not experienced a high level of housing price declines, Lawson Companies' inventories in the fourth quarter of 2007, while by no means excessive, were higher than he wanted them to be. He has been “chipping away” at them, with six signed contracts between Christmas and the time of the IBS.

A movement toward higher densities is helping to answer some of the affordability issues in the marketplace, he said, and local planning departments have been embracing this trend.

Doom-and-gloom news coverage about the state of housing has made it paramount to do a lot of talking with bankers,
Lawson said. “Let them know you have a plan and this is how you will carry your business through the downturn; otherwise, they will make assumptions.”

Lawson also recommended talking with real estate agents to find out what they are hearing from their prospects and
getting back to selling, building efficiently, knowing margins, maintaining cash flow and other basics of running a successful business.

THOMAS WOODS of T.E. Woods Homes, in Independence, Mo., said that his company in its best years was building 125 first move-up single-family homes annually at an average price of $260,000.

With a 50% slide in sales since 2005, “You have to apply yourselves and get back to knowing your market,” he said.

Woods said that the impression that large price declines have been registered in his market has required him to explain to bankers that this has largely occurred because the market has shifted to smaller, less expensive homes, reducing the area’s median home price at the same time as the average price has continued to rise.

With his local banks and S&Ls “bought up by the big guys” and the mid-management he’s talking to answering to somebody else, he said that T.E. Woods Homes has been dealing with investors who understand the market and the need to start planning to put new finished lots on the ground, a process that can drag on for 18 months to two years.

During difficult times for the industry, “You have to just become really good builders,” Woods said. “Get up every day
and go to the building business” and interface with knowledgeable, experienced people who can provide diverse views of what’s happening in the market.

“The guys telling you how bad it is” and saying they’re not going to the subdivision because there’s no traffic are setting
themselves up for going out of business, he said. “Most of the competition is going to go here,” he said, which will enable those who don’t to pick up sales.

Woods said that he has seen one “bright spot” in his market: a 100% increase in buyer traffic since the start of the
year. This is an indication, he said, that, “there are people out there who want and are looking for houses.”

Reprinted with permission from the March 3 edition of Nation’s Building News, the official online weekly newspaper of NAHB. To subscribe, visit: www.nahb.org/nbn.