Survival Instinct

Chris Coleman doesn't expect his housing market to get well anytime soon. As president of Northfield, Ill.–based The Dearborn-Buckingham Group, he assumes, only half facetiously, that his company “will not sell a single home” in 2008. But don't count Coleman among the industry's doomsayers, because he says Dearborn-Buckingham is positioning itself to get through this year “and be there at daybreak.” Like most builders, he knows the sun will come up again; it just won't be tomorrow.

“I don't think you can time the [housing] market any more than the stock market,” says Alan Lev, president and COO of Belgravia Group, a Chicago developer. All that companies like his can do right now is be smart and conservative and, as he adds, “don't do stupid things,” like overbuild or not pay enough attention to customers during the selling process.

Coleman and Lev were among the dozen executives who participated in three roundtables—with four builders each in Chicago; Costa Mesa, Calif.; and Washington—that BUILDER conducted in late October and early November to hear how builders across the country are responding to the persistent housing downturn. What those discussions revealed were builders who are grasping at straws. They're frustrated with customers who refuse to leap at purchasing opportunities in plain sight (“This is as good a time to buy as any in my career,” asserts John Laing Homes' CEO, Larry Webb); contemptuous of national builders for the calamitous aftermath of their excesses in land buying, construction, and marketing; and stymied by municipalities that block denser developments that could make homes more affordable. They're also flummoxed by the media's relentless hammering on the dismal market conditions that these builders' own plights betray. “We've tried everything, and we're not big enough to turn buyer psychology around, so now we're talking to land owners and banks for patience,” says Bob Mitchell, chairman and CEO of Rockville, Md.–based Mitchell & Best, who was dipping into his own pocket to pay key employees and keep them from walking away.

SCALING DOWN: Washington, D.C., builders are trending toward smaller homes to address affordability and buyer tastes.

What worries builders is that these conditions could worsen. “This doesn't feel like the last dip to me,” says Terry Wardell, president of Wardell Builders, a custom builder in San Diego. In that same market, Hallmark Communities, which focuses on first-time and move-up buyers, stopped building homes two years ago. “We see this as being a five-year problem,” says Hallmark's president, Mike Hall.

John Laing's Webb foresees major fallout among builders from “one of the biggest capital crunches in our history.” Several builders also blame themselves for getting caught in the spokes of an industry that had spun “out of control,” throwing the balance between supply and demand out of whack. “We were a little too loose during the good times,” concedes Jack Zausa, president of Orland Park, Ill.–based Zausa Homes, which focuses on entry-level buyers. “The faucet kept flowing, and we didn't put our hand over it.”

Still, no one is admitting defeat yet. And given that one panelist, Jay Moss, is CEO of Mosaic Homes, which Irvine, Calif.–based giant developer SunCal Cos. launched only last October, it's obvious some companies see growth opportunities ahead. But chastened by the severity of the industry's recession, most of these builders are taking a fresh, and perhaps more realistic, look at what they are building, how it's built, and how it's sold. “It's a good time to go back and re-evaluate everything we're doing,” says Larry Burrows, president of Winchester Homes in Bethesda, Md.

None of these builders envisions a radical departure from how they've operated in the past. But they are making changes out of necessity. With few exceptions, builders have cut their workforces to the bone. South Barrington, Ill.–based Kennedy Group of Cos., for example, is down to 50 employees from a peak of 165, says founder and president Bill Kennedy. He and others are retraining their associates to wear multiple hats, which isn't necessarily a bad thing, says Zausa—whose company cut its staff in half—because “when everyone is cross-trained, they understand where the dollars come and go.”

Builders are taking a more inclusive approach in their house design and construction, as well. “If you want to cut costs, bring your controller in and work with him at the outset to design your homes,” says Kennedy. Winchester Homes is involving its subcontractors sooner and has managed to take a month out of its prestart process, says Burrows. Subs are playing a role in helping builders value engineer their homes for efficiency and cost savings. “We've never built homes faster,” says Steve Alloy, president of Reston, Va.–based Stanley Martin Cos., which is in the midst of a three-year initiative that includes simplifying and standardizing its house plans and retraining its subs. Last year, Stanley Martin lowered its construction time by 17 days, and its goal this year is to take another 30 days out of the process.

During the Washington roundtable, one of the running jokes was how living rooms have become an oxymoron. “Two hundred dollars per square foot for a room no one uses,” says Alloy, who believes that, as houses have gotten larger, design and functionality have been sacrificed. He's not alone. “I don't want to be putting cost into homes that no one appreciates,” says Webb. Hall adds that his company tries to stay away from the “Taj Mahals” that some cities in Southern California push builders into.

Despite what they see as municipal opposition to workforce housing, these builders are attempting to accommodate buyers by offering more economical options. Winchester Homes is building smaller (2,500- to 2,900-square-foot) detached homes. Dearborn-Buckingham recently introduced a series called Americana, whose price tag is less than $360,000, this builder's average. And Mid-Atlantic Builders in Rockville, Md., which specializes in high-end custom homes, this year will diversify into several counties with attached villas that target empty-nesters, as well as its first townhouses, both smaller than its typical homes. “If you can't cut square footage, you can't cut price,” says Roger Lebbin, Mid-Atlantic's president.

Lebbin is one of several panelists who voiced dismay about the decline in their companies' salesmanship over the past several years. “So many salespeople never get to the point where they are asking for the order,” observes Mitchell, who is reinvigorating his sales staff with younger people he can train. Lev points out that just having its own salesforce puts Belgravia Group “miles ahead” of most other Chicago developers that don't. And with so much unsold inventory on the market, builders see selling as the one skill, above all others, they must do well to survive.

“Selling is a verb, so we are emphasizing training and are letting people go who aren't [making sales],” says Coleman. Kennedy adds that he considers every home he builds a spec house until it closes, so his company needs salespeople to stay in contact with buyers “from when it's sold to when it closes.”

Moss of Mosaic Homes empathizes with salespeople who invariably take the rap when business is bad and are disparaged as “order takers” when business is good. He says the best salespeople “can take you out of your problems” and sees a bigger deficiency in the way builders approach buyers. “We've got to change the way we talk to our customers, how we track and sell them.” The rash of incentives and deep discounting that builders have engaged in over the past year hasn't helped matters, say builders, because such tactics disconnect the buyer from the salesperson.

While the effectiveness of incentives to stimulate sales might be waning, builders still believe these are the wrong messages to be sending to reluctant buyers, especially when prices for new homes are sometimes less than those of competing existing houses. “When you put in an ad that offers $75,000 off this weekend, that's a negative,” says Hall, “instead of taking the approach that it's a good time to buy, a positive.”

As they reintroduce salesmanship into their customer relations, builders are also turning to the Internet to reach more buyers. This seems especially true in the D.C. market, where Alloy calls the Internet “the great leveler” and Lebbin adds that “it makes a smaller builder look like a larger builder.” Mitchell says the Internet “is bringing in more people to our sales offices than anything else.”

Most of the builders at the roundtables said that while sales have been sluggish, their customer traffic has been acceptable, which gives them hope that, by late this year, business could return to some semblance of normal.

By then, the industry's power structure could look a lot different. Already, Wardell says his company is “picking through the bones” left by national builders that walked away from land or entire markets. And the general consensus is that the weight of the housing recession will crush a certain number of builders and force others to merge with or sell to competitors. “There are some people in this business who need to be out of this business,” says Coleman. Alloy anticipates some disruption, too. “The industry will become more efficient, but there will be winners and losers.” Stanley Martin is already rebanking land until market conditions improve and is shifting resources to complete in-town infrastructure.

GETTING REACQUAINTED: California builders say the industry must re-establish its relationships with buyers.

Alloy says that surviving any housing downturn hinges on his company's ability to keep its core management team together. “This is when leaders lead, and you have to be confident and tell your people, ‘We have a plan and we need your help.' ” But Kennedy—whose company expects to build 200 homes in 2008, from 800 units in 2006—thinks too many builders come up short because they only look inward for answers. “Don't put your head in the sand. A lot of builders won't admit that they are having problems, but there are people out there who can help you. Plan for the worst.”

Builders and developers with reliable financing sources could be better positioned to take competitive advantage of an industry in flux. Lev of Belgravia Group foresees opportunities in the second half of this year for some, “when the cream rises to the top.” Webb says John Laing Homes, owned by Dubai-based developer Emaar Properties, wants to become the largest private builder in the U.S. and expects to add three or four divisions in 2008, either as start-ups or through acquisition. “There's going to be a vacuum” to be filled, predicts Moss of Mosaic Homes, whose four divisions expect to start building in June. “We're going to be cautious in some markets, more aggressive in others.”