By Alison Rice. Nationally, the housing market is as hot as ever. Climbing prices are fueling speculation about a housing bubble. New-home sales are hitting the one-million mark. And in some communities, buyers are camping out for new releases like college students looking to score concert tickets.
But the national story doesn't always reflect local reality, as builders, so conscious of their own markets, know. While public companies report record orders, many hometown builders have a different experience to report--weakening demand, ruthless price concessions, and a shifting market. Yet, they're making it, thanks to slowdown planning, niche building, and business diversification, all smart strategies for builders facing economically uncertain times.
The techwreck hit Village Homes hard and fast. "On July 1, , the numbers just fell off the table," recalls Donn Eley, president of the private Littleton, Colo.-based builder, which sold only 15 homes, net after cancellations, that July. "August was a little better, and we thought, 'Surely it will come back in September.'"
If only. Pummeled by Denver's battered tech sector, a shaky national economy, and the aftermath of Sept. 11, Village sold just 110 homes in the last six months of 2001, finishing the year with 541 closings, a 33 percent drop from 2000.
And it all happened during a record-breaking year for housing.
Today, Village is back on the upswing, with 344 net sales and 237 closings in the first six months of 2002, but its experience illustrates one of the most frequently repeated beliefs in the industry: Home building is a local business.
In central south Texas, for example, layoffs in the petrochemical, chemical, and oil industries have dramatically affected segments of the housing market. "The entry-level and the high-end custom remains pretty good, but the middle has just gone away," says Victoria, Texas-based builder Steve Klein, who spans the spectrum from entry-level production homes to million-dollar custom projects.
But builders can surmount such economic shifts. Despite the weaknesses in his area, Klein has managed to grow his business, albeit slowly, maintaining gross profits and increasing revenues by 8 percent. His strategy: a combination of defensive planning and forward-thinking initiatives. "We felt like sooner or later [the boom] had to stop," Klein says. "We had to plan for it."
When a market becomes turbulent, a niche can provide protection from competition and price wars. "There are still great pockets of demand for the right product in the right place with the right design," says Eley.
He offers the example of Five Parks, a Village development in Arvada, a Denver suburb. With its extensive parkland, family-friendly neighborhoods, and a diverse product mix, the 964-unit Five Parks has captured buyers' attention: They've been camping out to place contracts on new releases at the community, which has represented 25 percent of Village's sales this year.
In Austin, Texas, Main Street Homes also has maintained a singular focus in the face of negative job growth and a drop of more than one-third in building permits for the Austin/San Marcos area. Since 1992, the builder has concentrated its efforts on the price-conscious buyer, and it continues to do so, closing 1,080 homes last year.
"It's such a huge market," says Main Street co-founder Steve Bartholomew. "There are so many people out there who really need an affordable home."
Main Street doesn't compete on price alone. Bartholomew and partner David LeBoeuf founded the company based on a farmer's home loan program that offered 100 percent mortgage financing for affordable homes in more rural areas. Main Street still works with partners to provide down payment assistance, financing, homeowner's insurance, and other services to its customers who are typically blue-collar workers with limited financial options.
"We target people who don't know they're home buyers," says Bartholomew. They are after visiting Main Street; 30 percent of its buyers have not shopped other builders.
But Main Street's dedication to its affordable niche hasn't prevented it from adjusting its formula. After national builders began entering Main Street's market, the builder redesigned its product to create an even less costly line of homes: the Fifth Avenue series, which begins at an incredible $69,990 for a single-family detached house.
Builders facing challenging times elsewhere have also turned to product revisions to safeguard margins and develop new revenue. Klein, the diversified Texas builder, reevaluated his floor plans, keeping only the most efficient and profitable designs.
"In a good solid economy, if you've got a house that costs 2 percent to 3 percent more to build, [that's not a big deal]," he says. "When you get down to where every percentage point counts, you can't afford to do that."
Others have expanded their offerings. After years of building just two floor plans, the Murray, Utah-based Hamlet Cos. now gives its Salt Lake City area buyers much more choice--three different townhouse product lines and more than two dozen single-family detached floor plans. "To compete and grow, we had to diversify," says Michael Brodsky, owner of Hamlet, which has been named among the fastest-growing companies in Utah for three years running.
In Greensboro, N.C., which has lost thousands of jobs as textile and furniture manufacturing moves overseas, one builder is also defending its business through innovation and diversification.
This year, Wolfe Homes, whose custom houses usually sell for between $600,000 and $1.2 million, is building a 50-unit complex of luxury townhouses priced in the $300s.
"It isn't as big a product departure as it looks," says David Schenck, Wolfe's vice president, but the townhomes do reflect what the company sees as both a market and demographic shift in Greensboro, with fewer custom buyers and more move-down boomers.
As a result, Wolfe decided it had to broaden its offerings to grow the business by the company's 10 percent target. "If we want to continue to do $20 million worth of construction in this market, it has to come from more than one spot," says Schenck.
Those spots include home renovation, which generates between $5 million and $7 million annually for Wolfe, and a plumbing company that does $600,000 of work a year, providing the builder with extra revenue and, if necessary, the flexibility to trim margins to make a bid more competitive.
Of course, not every preparation for a flattening market has to be that involved. Other builders simply rely on home building business basics that reduce their risk and the potential impact on their profits. "We cut down the number of specs," says Allan Brandt, president of Forest Glen, a custom builder in Englewood, Colo. The company also watches its overhead costs in good times and bad. At Forest Glen, employees receive a salary and a bonus per house, which keeps payroll costs manageable if volume falls.
In California, Crosswinds Communities avoids the price spikes of a hot market, choosing small, steady price increases instead, which leave the builder as the "value" choice when the market drops. "You won't have to get into offering incentives later," says Dave Hahn, California division manager for the Novi, Mich.-based builder.
Obviously, builders can draw on a host of strategies to hold their position and even gain ground, both literally and figuratively. "When the market's off 20 percent, lots of people cut their business plans by 20 percent," Schenck says. "There's opportunity in that."
That's particularly true for those elusive land bargains. "In a boom economy, everyone was holding out for the best price," says Klein. "Now, with the economy slow, you feel like you can approach the [land seller] and say, 'It's now or never.'"
But such breaks require that builders remember the potential upside of an economic downtime and take advantage of it. "When you're blowing and going in a boom economy, you don't have time for the details," reminds Klein, who's taken advantage of the slowdown to upgrade computer hardware, improve his purchasing and estimating systems, and pursue those well-priced land deals.
"You need to get all your housekeeping down so that when the market does turn around, you are the first company to capitalize on it."
Hometown builders watch more than the national housing numbers.
When it comes to housing statistics, the U.S. Census has the national indicators covered. But national stats won't necessarily tell builders if their own market is going south. "They're a guide, but this is a local business," says Allan Brandt, president of Forest Glen, an Englewood, Colo.-based custom builder. Here's what he and other builders watch:
Local building permits: an indicator of housing activity.
Dow Jones Industrial Average: Big drops may affect buyers' perception of their wealth.
Stock prices for local companies: Their valuations could influence their locally based employees' decision to buy.
Commercial office space vacancies: Fewer people in office buildings suggests fewer people are gainfully employed and able to buy homes.
Relocation traffic: a "barometer of the housing market," according to Brandt.