Battening Down the Hatches

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Shrinking Volume

Compared to 2007’s data, one change stood out in 2008: Across the board, companies are smaller. Reflecting a national crash in building activity (starts in October 2008 were down 40 percent from October 2007), the proportion of builders in our survey who reported starting fewer than five homes has swelled from 45 percent to 54 percent. The percentage of builders who started 20 homes or fewer is now at 70 percent, up from 61 percent a year earlier.

Dollar-volume changes mirror the results for home starts: From the largest firms to the smallest, everybody is earning less. Only 8 percent of respondents in 2007 reported less than a half a million dollars in receipts, but by 2008, that proportion had jumped to 13 percent. In 2007, 62 percent of respondents grossed less than $10 million; in 2008, that share had grown to 70 percent.

Cutting Staff

Personnel cuts show a similar pattern of drastic downsizing. In 2007, 44 percent of companies reported laying off staff, while 9 percent had boosted payrolls. This year, job losses are accelerating: 57 percent of companies now say they have laid employees off, while only 3 percent report adding workers. The layoffs are changing the face of the industry: Firms with only a handful of workers now make up a larger segment of the total, while the ranks of companies that employ hundreds are thinning. In 2007, 51 percent of respondents reported having five or fewer full-time employees; in 2008, that proportion was 57 percent. At the other extreme, companies employing more than 50 people made up 22 percent of the firms in 2007; by 2008, their share had shrunk to just 14 percent.

The Outlook

As their firms scale back, builders are taking a gloomier view of the overall economic situation. In the rear-view mirror, 2007’s majority prediction of a rebound in 2008 seems almost naïve. This year, 37 percent of builders think the market will touch bottom in the first half of 2009 and 26 percent in the second half of 2009, but 14 percent expect the slump to continue until 2010.

Beyond the Numbers

In survey comments and phone interviews, Builder readers describe a situation that has grown increasingly difficult. A small upper Midwest builder remarked, “We are currently out of ideas. This area continues to experience huge job losses without anything new to create jobs.” Commented ­another small builder, “I am down to a one-man show with no money.” Another said simply, “Nothing is working.”

Medium-sized builders showed a similar fatalism. One owner of a company in the $20 million range said, “If you were caught with a large inventory of lots, there is not much you can do.” Said another, “We are competitive, but if there are zero buyers, it does not matter.”

In a broad, diverse industry, builders have never been a monolithic opinion group. Now, with markets shrinking, divided attitudes are bubbling to the surface. In a small North Dakota town, where an oil boom supports a hot local housing market, one small builder complains about newcomers flooding in from slower areas: “They come in and take over, pull inventory from out of town, get all the subs tied up, bring in their own subs, and still build homes that are put up so fast—what will happen to them when the contractors decide to hurry up and leave? It’ll be a mess.”

And even medium and large builders have beefs about the biggest publicly traded national heavyweights. One builder grossing almost $30 million dollars said, “We can’t compete with large builders giving $100,000 off.” And a builder/developer with seven active neighborhoods in a major Midwestern city complained, “We are all suffering due to the practices mostly of the large publics.”

Changing Focus

Builders are reassessing their markets and down-sizing their product. Among the typical responses: “Redesign—more efficient and more affordable”; “Building lower-priced, well-equipped homes”; “Smaller but unique floor plans”; or simply, “Designing smaller homes at a lower price.”

The smallest independent builders are discovering another simple strategy: Downsize, stop building, and start remodeling. That’s what husband-and-wife team Mike and Abbie Andersen of Andersen Homes in Gig Harbor, Wash., are doing. Explains Abbie, “Up until the downturn, we would do between five and eight homes a year—probably one-third custom and two-thirds spec. The specs, if they weren’t under contract while they were still under construction, would move within four or eight weeks—they sold really quick.” But in the fall of 2005, the market started to cool, and by late 2007 the Andersens were stuck with two specs they couldn’t move. “Now we’ve leased those,” says Abbie. “And we still have three lots that we’re sitting on, and we had building permits on two of them. But we’re not going to go forward with those.”

Instead, Mike has put the toolbelt back on. The Andersens have laid off all four of their employees, and Mike is doing additions and gut-rehab jobs, working solo with subcontractors. So far, the pair has enough work to stay in business and keep Mike busy. “It’s actually a lot more fun,” says Abbie, “and for sure it’s a lot lower risk. We’re not holding any paper on the project—we’re just getting paid to come in and remodel.”

Just north of Milwaukee, Wisc., Bob Henderson of Henderson Group Homes has turned to high-end whole-house makeovers. At the peak of the boom, Henderson’s design-build outfit had 17 employees and was building 20 houses a year. Now he’s down to five people, and he manages about six jobs a year. “As of June of 2008, we have no new homes under construction,” he says. “Our business is 100 percent remodeling right now.” But like the Andersens, Bob Henderson has four finished lots still on his books—and when the time is right, he says, he’ll go back to building.

But neither Abbie Andersen nor Bob Henderson sees that rebound on the horizon. Henderson reports, “The market’s not giving us any sense of a turnaround. I think 2009 is going to be the critical year for a lot of people. As the volume winds down to nothing, it’s pretty hard to stay in business.” Says Andersen, “In 2009, I think it’s going to be really bad.”

Holding On

Many of the nation’s largest builders are now thinking long term—“hoarding cash to spend as the market turns,” as one public builder executive put it. Another top company official plans to rely on “funds raised through the issuance of debt and the sale of stock to enable us to weather the current storm and capitalize on opportunities that will arise as the market recovers.” Some of these top builders predict that when the turnaround finally arrives, large well-financed firms with deep pockets will be the only companies left to take advantage of the reviving market.

But those big firms may be sharing the field with builders such as the Andersens or Bob Henderson, who can stay in business and even carry a few lots, in spite of a dead flat market. Both small builders have a working plan to get through the recession by relying on custom remodeling. And both say that when home buyers are ready to buy again, they’ll be ready, and willing, to build. The shape of that future market is still an unknown, but it’s likely that when the buyers come back, builders—both large and small—will be there waiting.