Dan Ryan started Frederick, Md.–based Dan Ryan Builders in 1990, so the recent downturn in the housing market was his first. During the boom that preceded it, Ryan says his company, like many others, “threw our mission statement to create the best value for buyers out the window and priced [our homes] to our competitors, which [were] much higher than we anticipated.” He also chose to ignore warnings of an inevitable softening in buyer demand from his father, Jim, who founded Ryland Homes. “He'd remind me every chance he got that a downturn was imminent,” recalls Ryan. “He was absolutely right; it's just that he'd been saying it for eight years.”
Now that builders are settling in for what could be a prolonged slowdown in their sales and construction activities, they are assessing how their companies got swept up, sometimes uncontrollably so, by a palpable buyer frenzy. “I'd meet people in different places, and when they found out what I did they'd ask me ‘where should I buy?'” recalls Bert Selva, CEO of Walnut, Calif.–based Shea Homes. At the peak of the boom, salespeople for Daytona Beach, Fla.–based ICI Homes would strut into weekly sales meetings, holding 50 signed contracts. “We're only built for 1,500 homes a year—that's stretching it—and we were headed towards 2,000,” recalls Mori Hosseini, ICI's CEO.
The stark realization that the downturn would be more than a temporary pause in the action was like a cold shower for many builders, and debunked some myths that the boom had spawned: that housing wasn't as cyclical as it once was; that investors could be controlled as buyers; and that unbridled price hikes and spec building were compatible. “If I hear ‘soft landing' one more time, I'm going to beat somebody,” says Todd Stevens, president of Scottsdale, Ariz.–based Hacienda Builders, whose closings last year fell by 27 percent to 627 units and which pulled back its average home selling price 20 percent to around $350,000. He and other builders now say they should have responded sooner to signs of the decline that, in some markets, were evident in mid-2005, and rescaled their operations quicker. “In good times, you can hide all your organization's warts that come to the surface during bad times,” says Doug Smith, co-owner of McLean, Va.–based Miller and Smith.
UP AND DOWN: Though public builders saw the total number of homes they closed in 2006 decrease to 366,205 from 367,600 in 2005, the same builders actually saw their average closings increase due to fewer companies being classified as public. Private companies saw both their total number of homes closed and average closings per builder decrease in a slowing market in 2006. Both publics and privates saw revenue growth in 2006.
That doesn't mean some of the excesses that builders lapsed into during the boom have disappeared or that builders have stopped dreaming about growth (see “Another Day,” page 147). But reality and perspective—rather than a hope and a prayer—do seem to be informing builders' business plans again. “You mean you can't have cake every day and not get fat?” asks Dean Ammon, vice president with Bensalem, Pa.–based Orleans Homebuilders, in a sardonic tone most builders would relate to. Ammon speaks from experience, as Orleans' cancellation rate stood at 90 percent for months in some Florida markets last year. “Now everyone in the industry is on grapefruit,” he quips.WHAT GOES UP ...
During boom times, more than a few builders began to accept the proposition that the industry was no longer cyclical, or at least wasn't as subject to seasonal spikes as in the past. Several builders interviewed for this article now contend that public builders concocted this storyline to convince Wall Street to see their jobsites more as factories and to adjust their expectations accordingly. Wall Street, for the most part, wasn't buying, but the notion stuck as conventional wisdom in many quarters.
In retrospect, one wonders why. Ryan thinks the idea that the housing industry had shaken off its cyclical shackles was typical of builders' “notoriously short memories,” and “wishful thinking.” Anyone questioning cyclicality needed to look no further than Denver, where home buying has been soft since the first quarter of 2001. “It's very much a ‘manage your business week to week' kind of thing here,” says Cheryl Schuette, president and COO of Englewood, Colo.–based Village Homes, whose closings were flat in 2006. “You can't make assumptions that next month is going to be better.”
“It's still a cyclical business; we just got lulled into a false sense of security for 10 years,” says David Weekley, chairman of Houston-based David Weekley Homes, who still cringes at the thought of how his headquarters' market collapsed in 1985, when starts fell 80 percent during a six-month period. That experience taught him the value of geographic diversification—Weekley moved into three markets last year: Phoenix, Tallahassee, Fla., and Bluffton-Hilton Head, S.C.—and when buyer demand slackened this time, his company laid off only 4 percent of its workforce, because it could offer employees relocation opportunities to less-volatile markets.
Geographic diversity wasn't always a protective shield, as several giant builders with national profiles reported significant erosion in their profitability last year. But it did cushion the blows from the downturn for some companies. Chicago-based MCZ Development saw sales in its headquarters market's six counties fall to 300 units from 700 in 2005, according to Crain's Chicago Business. Yet MCZ, which builds in six states and the District of Columbia, more than tripled its closings last year, according to its CEO Michael Lerner. Austin, Texas–based Main Street Homes was mired in a slump from 2001 through 2004, but its fate changed once it expanded to sizzling San Antonio. Last year, Main Street's total closings in three Texas markets more than doubled to 1,031 units, primarily because its communities in San Antonio grew to 11, from one in 2005. “The industry is cyclical, but we're on a different cycle,” says David LeBoeuf, Main Street's CEO and co-owner.