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Cover Story: What's New in the Neighborhood?

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During the past four years, Pennsylvania's Charter Homes has redesigned its product line three times. It's now doing it for a fourth.

Charter CEO Rob Bowman says most of the earlier work was focused on reducing hard costs by shrinking footprints, simplifying plans, and trimming unnecessary architectural and design frills. Now, he says, Charter and other builders may be treading the fine line between more efficient, cost-conscious homes and those that are less desirable.

So Bowman and his team are looking to put some extra polish on the company's product portfolio before the spring selling season officially opens. “We're adding in features and detail that [will make] people say, ‘I like that' and ‘I can imagine myself living here,'” he says. This must be done within a rather narrow price range. Buyers remain focused on value for a per-square-foot cost.

Since the housing downturn began, most other builders have likewise rethought their product lines, cut costs, written down land values, and focused on the first-time home buyer as federal tax credits were rolled out. Thanks to those incentives, that market has been overserved. Now builder focus is returning to more traditional concerns such as quality, amenities, and that old standby, location.

Bowman says it is critical for Charter to have the right parcel of land in the right location available at the right price if the company is going to compete. New communities offer an opportunity to come to market at new price points, he says, while, on the other hand, there's not much a builder can do with legacy communities other than muddle through them. Bowman says by the kickoff to spring selling season, the company will have 18 actively selling communities, including two locations Charter has taken on in the past six months.

In an extremely low-volume home sales market, the quickest way to generate returns on capital is to open new communities on land bought at lower prices and offer new products that buyers can see themselves living in 10 years from now. Post downturn, not all builders are equipped to do this. Some well-capitalized companies may accept that they will bleed cash, to the chagrin of investors and stakeholders. Others will radically alter the shape and structure of their companies such that even stronghold markets may be abandoned. Still others may take an if-you-can't-beat-them-join-them attitude and look for an M&A partner. The buyer pool is smaller, and the builder universe is more competitive.

“The pie is shrinking, so if we want to eat, we have to steal sales,” says Bowman.

BUY, BUY BABY

Builders who begin this spring selling season with successful new communities will likely be those that have done their homework through 2010 to identify, negotiate, and ultimately tie up the right parcels of land.

The pace of acquisition near year-end was more measured than the frenzied land rush that categorized the back half of 2009 into 2010 in a number of major home building markets. With demand evaporating following the expiration of the federal home buyer tax credit last spring, some builders have found themselves with lot pipelines looking a bit longer than they did at a time when demand appeared to be firming up. Even so, parcels are still trading at largely attractive prices, giving well-capitalized builders access to lower-priced lots, which in turn can set the stage for a roll-out of lower-priced product.

The caution and restraint being exerted in the land market by some of the bigger players as they search for smaller parcels, closer-in locations, and more flexible terms, however, is giving local players a strategic opportunity to reload their land portfolios with lower-priced lots, setting themselves up to become steeper competition through the critical second quarter of 2011.