The Local Forecast

Patrick Malloy can feel it.

For the president of Carrollton, Ga.–based Patrick Malloy Communities, which will close over 400 homes in the Atlanta market this year with prices from the low $100,000s to mid-$300,000s, all the signs of a slowdown are there. Traffic has been dwindling. Cancellations have been rising. Large, national production builders in his market have been cutting back on both their land positions and the employees who work in their division offices. And when he talks to his own colleagues around the region, a consensus seems to be shaping up: “My projection for our company on existing communities is that we'll be down about 20 percent,” Malloy says. “I think that's probably consistent with what other builders are doing in Atlanta, too. In fact, some people are forecasting a downturn by as much as 40 percent.”

Instead of simply lamenting the market's turn, though, Malloy has adjusted to it. While he anticipates sales dropping at existing projects, he hopes to maintain a flat revenue line in 2007 by bringing new neighborhoods on line. But rather than just slashing prices and forcing sales, he's ready to do something that makes many builders cringe: build fewer homes. “It has to manifest itself in fewer starts,” says Malloy, who builds both detached and attached single-family homes, and maintains a 60-to-40 percent ratio of spec-to-presold homes in his inventory. “It shouldn't be a real surprise to anybody, but if our existing sales are down 20 percent, I would expect that over the average of the year, we'll start 20 percent fewer homes.”

For Malloy, a third-generation builder who was born and raised in Atlanta, the simplicity of that math is apparent. Unlike big, national production builders who put economists on their payrolls and enlist armies of consultants to tell them how many starts they should be putting on line in a given period, Malloy is part of a different breed of home builders. He's among the thousands of local and regional operators who lie outside of the top 200 companies tracked by BUILDER, who have learned to keep tabs on their local markets, project trends, and respond swiftly to them without the benefit of national forecasters getting in their way. “Getting market information is very different for a small builder versus a big builder,” says Larry Kush, CEO of Montevina Estate Homes in Scottsdale, Ariz., which builds about 40 homes per year. “He's not like that big builder, who can pay for all those consultants. In that regard, the smaller builder has a lot more of a challenge.”

Yet despite that challenge, these smaller builders are able to track their local markets, oftentimes with stunning precision. They do it the old-fashioned way, with one ear to the ground and the other pressed into a telephone receiver. They get their information from any number of sources, from their banker to their barber to local real estate agents, with data culled from local and regional agencies. By doing so, they're able to plan their own businesses accordingly to ensure they will still be solvent when the next generation takes the reins.

LOCAL LOOKER: A third-generation builder who was born and raised in Atlanta, Patrick Malloy, president of Patrick Malloy Communities, keeps in constant touch with local colleagues, Realtors, and suppliers to gauge what's happening in his market, and then reacts accordingly.

“For that size builder, it's much more of a gut-check approach,” says John Burns, president of Irvine, Calif.–based John Burns Real Estate Consulting, which tracks local data for production builders on a national level. “Of course, that's the way everybody did it 30 years ago, but the big builders are now a lot more big-picture oriented than the smaller guys, because they can afford to be.” Burns notes that he constantly sees smaller, regional builders searching out information for themselves, and getting it any way they can. “Those are the kinds of guys who show up when I do a presentation at a title company,” Burns says. “That way, they get the information for free.”

Kush, whose Montevina homes range in price from $400,000 to $3 million, is exactly the kind of smaller builder Burns is referring to. Despite the fact that he's been recognized locally as Phoenix's Builder of the Year five times, and holds a lifetime director's seat on the region's builders association, Kush and Montevina aren't exactly household names nationally. In his own market, though, Kush has learned a thing or two over his 30-year career about how to forecast trends in Phoenix. Ironically, one of those lessons has been to stay away from those areas that the big builders, with their armies of consultants, are flocking to.

“You've got to remember how a big builder thinks,” Kush says. “If his corporate office calls him and tells him to get rid of the 225 specs he's got on his books by the end of next quarter, he can do something that most builders can't: He can cut $75,000 off a $300,000 house. Well, if you're building down the street from him and you've got 10 specs, all of a sudden, you're out of business, because you can't match that price.”

For Kush, that meant staying away from outlying areas of Phoenix, where many big builders are now struggling with outsized land positions. “A Realtor told me the other day that one of the strategies has been to drive until you qualify,” Kush says. “Well, during a downturn, the drive just gets shorter.” But keeping an eye on the big builders isn't the only way Kush has been able to stay alive, and prosper, in Phoenix. Another warning sign he looks out for? The condo market. “When condos start to sell, look out,” Kush says. “Condos are the opportunity of last resort in homeownership. People buy them because single-family, detached housing has gotten too expensive. When you start seeing condos selling heavily, you know you've reached the peak in your market.” Indeed, in many markets across the country, including Phoenix, condominium sales heated up to scorching levels in 2005, just as single-family markets hit a zenith.

While keeping an eye on their big-builder brethren is one way local builders gauge their markets, keeping up with one another is an effective strategy as well. Malloy highlighted a recent roundtable discussion he attended with 12 Atlanta-area home builders to gain a feel for current traffic levels and concessions. While large builders are often loathe to even acknowledge the existence of their large-scale counterparts, camaraderie at the local level isn't uncommon.

“Local home builders aren't as competitive with each other as you might think,” says Greg Wessling, CEO of Charlotte, N.C.–based HouseRaising, a custom home building management firm that coordinates projects for smaller builders nationally. “They help each other out, with everything from subs to referrals for work.”

For that reason, maintaining an active profile in your local building association can give a smaller builder a big leg up in staying on top of the market, particularly on the local level. At Sharp Residential in Alpharetta, Ga., for instance, Tim McReynolds, director of sales and marketing at the firm, which averages about 300 homes per year, says one of his biggest sources of information is simply getting on the phone with his counterparts across town. “When you start talking to sales managers and vice presidents of sales at other companies, it's a pretty small group of people. It's not hard to stay in touch with those guys,” McReynolds says. “Then, when you start reviewing what you hear with your own lot availability and home availability, you start getting a pretty good idea of what's going on in the marketplace.”

Many builders say they cull similar information by talking to their bankers, subs, and especially, suppliers, to get a general feel for the level of activity in their markets. Local universities, chambers of commerce, and regional economic development authorities are good sources as well. And then there's the public in general, the people they run into on a daily basis in their community. “They'll focus first on what's going on around them, and that can be anything from the clerk at the grocery store to the guy sitting next to them at the barbershop, to their bank, to the local car dealership,” says Wessling. “They'll look anywhere the economy is being stimulated.”

Given their smaller size, local and regional builders can often react more quickly to the information they gather than the national giants. “The nationals are like big battleships: It takes two hours for them to slow down and another hour to turn,” says Kush. “But we're more like PT boats. We turn on a dime. That's one of the nice things about being a smaller builder. You can take that information and react much faster.” As Burns puts it: “The small guys can make a decision in the morning and implement it in the afternoon.”

For all their nimbleness, though, smaller builders often lack the sheer mass they need to compete with the big builders they're up against. The smaller builder's business model often evolves from the other end of the home building spectrum in comparison to national builder strategies. “A big public company will say ‘We're going to build 60,000 units next year,' and then back their way into the equation to figure out how much land they have to buy to make that unit goal,” explains Jonathan Dienhart, director of published research at Hanley Wood Market Intelligence, a home building research firm and sister division of BUILDER. “But the smaller builder comes at it from the complete opposite direction. He's going to say, ‘Where can we find a good deal on land this year?' Then, he'll figure out how many units are going to come off of that property.”

KEEP A WATCHFUL EYE: Larry Kush, CEO of Montevina Estate Homes, has learned a few tricks from building in and around Phoenix over the last 30 years. He stays away from areas where big builders flock to and sees a hot condo market as a sign that single-family sales have reached the top.

Given the struggle many smaller builders have faced for land availability in recent years, local and regional builders can sometimes feel pressure to build, even if they see warning signs of a market slowdown ahead. At L & L of Raleigh, N.C., which builds approximately 60 homes per year in North Carolina's Research Triangle, president Warren Smith says smaller builders may feel obliged to build today to ensure they have the ability to keep building tomorrow. “A lot of times, we don't have the luxury of pulling back that the big national builders do,” he says. “Even when the slow times come, we've got to be on our toes and keep up with our lot takedowns to keep the developers happy. Even if you want to slow down, you might not be able to, because there's this fear of not being invited into the next subdivision.”

Of course, there are worse problems for a builder to have than feeling compelled to build. But even when they do find themselves on the wrong end of a market, smaller builders have a few tricks to deal with that situation, as well. Carl Riden, the now-retired founder of Buford, Ga.–based Harcrest Homes, which survived the housing slumps of the early 1980s and early 1990s, says as president of the company, he constantly stayed in touch with colleagues, while religiously reviewing news and data reports to keep abreast of trends. If he saw rough times ahead, he'd pull back on his starts. But if he found himself in the middle of a build-out when the market turned, he'd actually lengthen his cycle time to help his spec sales.

“You don't want to wake up one day and have 20 houses finished and none sold,” Riden says. “So what we would do is try to stretch it out. We'd keep pick-up trucks in the subdivision so that it looked more active. It looked more successful with the pick-up trucks there, and that would help with sales.”

Of course, the real trick for smaller builders is not to get in that situation in the first place. For many, one of the main places they turn is real estate agents in the community, those men and women who have their finger on how many homes—and what kind of homes—are selling at any time. “We buy statistical reports and things like that, but typically, they don't get real detailed at the local level,” says David Mathews, vice president of marketing and product development at Frisco, Texas–based Darling Homes. “The real insight we get comes from the close relationships we have with the heavy-hitter Realtors in our markets.”

The information he gleans, though, isn't just related to the number of houses that are selling. “Typically, what's really important is getting a feel for how much traffic is walking in their door today, and then trying to break it down into what that traffic looks like,” Mathews says. “They give us an understanding of what types of jobs people are filling in the marketplace, and where those people are coming from. People from different parts of the country are looking for different styles of housing, so it helps us think about that, too.”

Other small builders have a much simpler way of gauging their local markets: They just look in the lawns of existing neighborhoods. “For me, it's really the for-sale signs out in front of the homes that's the biggest indicator of what's going on,” says Tony Morin, a partner at Biltmore Homes in Wake Forest, N.C., which builds approximately 70 homes per year. “The more you see, the more and more buyers you need. So when you see more signs popping up in yards, you know it's going to be harder to sell homes.”

Joe Bousquin is a freelance writer based in Newcastle, Calif.

For would-be buyers firmly in the grip of gloomy projections, sometimes the facts don't matter.

If you just look at the numbers, Atlanta's housing market should still be booming.

After all, the Metro Atlanta Chamber of Commerce is pegging job growth in the region at more than 9 percent for the five-year period from 2005 to 2010. And the area consistently ranks among one of the most affordable major metros in the country. Still, like other areas of the country, a home-buying malaise is creeping across Georgia like unchecked kudzu, and for the positive aspects of Atlanta's outlook, buyers just aren't, well, buying it.

“Frankly, there's so much negative news media that has talked about the housing bubble that even though there's continued good job creation, and even though the affordability index in Atlanta is very, very high, consumer sentiment is down,” says Patrick Malloy, president of Patrick Malloy Communities. “They continue to read all the bad news, and it turns into a self-fulfilling prophesy.”

That sort of sentiment is hanging over many regions nationally, even as job growth and other factors remain stable. “There's a lot of psychology involved from the buyer's standpoint right now,” says Jonathan Dienhart, director of published research at Hanley Wood Market Intelligence. “They're not convinced that prices are going up, so the pressure to buy goes way down. A lot of home buyers can afford to wait on the sidelines for six months.”

For Malloy, that sentiment change has resulted in contingent buyers canceling contracts due to the fact that they couldn't sell their own homes, despite the fact that Malloy doesn't accept contingencies in the first place. “A lot of our buyers had every intent of qualifying for both homes, and if they didn't sell their existing home, to keep it as a rental property,” Malloy says. “But now that a little of the bullishness has been taken out of the market, they're saying now might not be the greatest time to own two homes. Sure, we get to keep their earnest money, but we lose the sale.”

For home builders, that's not a positive trend, regardless of what the numbers say.