August, 2008

Looking For The Light

Custom Homebuilders Offer a Bright Spot In a Dim Market.

By Staff Report

With the current new housing market bleak, it may serve lumber and building material dealers to start thinking small:

Small as in paying more attention to those custom homebuilders who may build as few as five homes a year, but who appear to be somewhat insulated from the current torrents in the market.

At least that’s what research conducted by the magazine Residential Design and Build found when it conducted its second annual market trends report earlier this year.

Residential Design and Build, based in Chicago, has a circulation of about 50,000 readers, split equally between architects and custom builders/ designers. The magazine focuses its editorial exclusively on the custom home market, and Editor Rob Heselbarth says that the majority of his readers build between five and 15 homes per year.

While any survey necessarily reflects a moment frozen in time, and Heselbarth concedes that the market may have dimmed somewhat since the January 2008 survey date, the results were encouraging, and the trends custom homebuilders’ reported were significant.

The 503 architects and custom builders who responded to the poll said they believed 2008 showed promise, but also revealed concerns and potential problems that LBM dealers should take into account when serving this market.

In general, survey respondents said:

— The custom home market was holding steady; profits, square footage, and number of homes designed/built annually were steady.
— 80% of RDB readers said the 2008 custom market outlook was excellent, good or fair.
— The market slowdown was seen as the top threat to all respondents; material costs, land prices and labor prices followed.
— The majority of custom homebuilders and architects were not lowering their offerings to compete in a down market
— The instability of building material prices worried most custom home architects and builders.
— Builders/architects are pushing green on their clients just as much as clients are pushing it on them.

SURVEY QUESTION: “What is your outlook for the custom housing market in 2008?” Source: Residential Design & Build, 2008
41% Fair
32% Good
21% Poor
6% Excellent

Understanding the Custom Market

Heselbarth says that even with further market deterioration in the first half of 2008, he believes that custom homebuilders still aren’t suffering the housing ravages that have affected other groups, such as production builders. “Overall, I feel confident saying no,” he says. “Custom homebuilders are insulated somewhat; that’s true.”

In the survey, 53% of the respondents identified themselves as homebuilders, and an additional 15% were design/build firms. Architects made up the remaining 32%. Of the homebuilders, 62% employed five or fewer people, while 15% employed more than 21. Of those surveyed, 51% make more than $1 million annually. Employee size and revenue numbers were slightly higher on the design/build side, with 49% employing five or fewer people, and 21% employing more than 21; 57% of this group reported that they make more than $1 million annually. The vast majority of both groups build fewer than 10 homes a year. At the time of the survey, both architects and builders projected that while 2008 might not be a stellar year profit-wise, it looked stable, with builder firms reporting slightly more optimistic
numbers than combined design/build firms.

• 3% more builder firms projected they would make between 6% and 25% gross profit in 2008 than did in 2007
• 2% fewer design/build firms projected they would make between 6% and 25% gross profit in 2008 than did in 2007.

Finding Bright Spots in a Dim Market

Of particular interest to LBM dealers are some of the other findings in the survey.

For instance, respondents noted that a robust 34% of their clients cited energy- efficiency as a particular request of their new homes. Tighter, more wellconstructed homes that can benefit from new products offer a tremendous opportunity for upselling custom homebuilders.

In fact, when asked, “When budgets get tight, which of the following do homeowners compromise on/settle for?,” respondents noted that only 2% of homeowners were willing to compromise on structural materials in their home. (50% said that square footage was the first thing to go.)

Likewise, only 4% would compromise on siding or interior doors and 6% for different roofing. Only 7% were willing to compromise on decking, and only 9% would consider less-expensive windows.

More promising news came in the survey when the question was asked, “Which product categories became more important to your clients in 2007?”

A surprising 56% cited windows, with the same number stating that energy-efficient products were more important. In addition, 36% said insulation had become a more important category; 27% said doors; 15% said roofing; 9% said housewrap, and 7% said decks.

And these responses reflect even more of an upsell potential, since 82% of the survey respondents said they trust their lumber and building material dealer for product information.

Another opportunity may be reflected in the question, “Which trades are the most scarce?” Respondents noted that electronics integration, finish carpentry, framing, foundation and concrete, and plumbing trades, in that order, were difficult to find. (Opportunities for installed sales may offer one possible avenue for future revenues.)

And in the fast-growing world of green building, 27% of the architects and builders noted that they were driving interest in the category with their clients, but a strong 23% said the interest was arising from the client. (The numbers were split almost evenly—51% no to 49% yes—when the question was asked, “Is it difficult to find subcontractors to work on green projects or use green products?”

Challenges in the Market

One of the biggest sources of concern to this group is material price stability, with 74% reporting that they were concerned about prices over the next year to two years. Copper, concrete, wood, drywall, roofing, sheet metal, siding, and insulation were the categories cited as a price concern. And yet 72% of respondents said that they haven’t downgraded any of their offerings based on the down market.

As a whole, the survey points out that custom homebuilders, while not immune to market forces troubling the industry, may offer one brighter spot that LBM dealers should focus on.