Oftentimes, the worst scenarios bring out the most innovations. That's what happened to Frank Foster, CEO of Fieldstone, in the early '90s.
"We learned some lessons the hard way," he said during "The 400-Lb. Gorilla: Affordability" session at the Big Builder '07 Conference, Wednesday, Nov. 28. "Out of California in the 1990s, we w're looking for a strategy."
Eventually, that strategy positioned Fieldstone as a company that builds a simply designed, affordable home featuring only three types of windows and a few cabinet sizes–without the government subsidies to help. That efficient plan helps the company's subcontractors plan their staffing and material usage accordingly. In turn, that reduces costs for Fieldstone as well. The subcontractors know they'll have a predictable turnaround time of approximately 50 days.
Fieldstone also uses a lot of research to determine what its customers want. It pools every homebuyer closing on a home in its markets. Foster admits that 70% to 80% of the buyers he polls are buying used homes. That's important because, at the lower end of the new-home spectrum, the resale market is Fieldstone's competition. It's also important that builders selling lower priced homes acknowledge the role that Realtors play in the process.
"Most buyers prefer to buy new," Foster said. "Most Realtors won't sell new homes. The Realtor is the 800-pound gorilla in the process right now."
Fieldstone has gained traction as a lower priced home provider in Salt Lake City, San Antonio, and even Southern California. So, if it's so easy for the company to build an affordable product, why isn't everyone doing it? For one thing, it's not easy. "It's hard to do," Foster said. "We count our pennies."
The rapid home price appreciation in 2004 and 2005 also played a role. "When the market is good, you can make more with high priced homes," said Joel Shine, president of CityView and fellow Big Builder '07 panelist.
Now, unfortunately, that rapid price run up led to home prices that have pushed many buyers out of the market. In many places, homes became priced way too far out of the grasp of the people who needed them the most. Exotic loan programs helped bridge the affordability gap, but with last summer's credit meltdown, those avenues for affordability have disappeared.
That has clearly exacerbated the situation. Shine said he had 75 agreements for new homes in New Orleans; only one closed. The problem: When subprime loans dried up, a lot of builders could no longer qualify. "The more affordable product has had the worst issues," Shine said.
And recent problems from Freddie Mac could make things even more difficult. Fieldstone is making a concerted effort to nurse some of its credit-challenged builders through the process. Right now, many people who could otherwise afford a Fieldstone house don't have the $3,000 or $4,000 for a down payment. As a result, Fieldstone has a credit repair group to work with buyers through their down payment issues. "We have a huge backlog of people in that," Foster said.
Other builders are also doing this through their captive insurance companies. "The captive needs to be a touch point with the client," said Sam Hill, managing director of CaLyon Corporate and Investment Bank. "They walk them through the process and make sure that they make the right choice."