Reality Check

This year, Winmark expects to close about 500 units, or nearly 20 percent fewer than in 2005. It went through two rounds of layoffs—in October and January—that reduced its workforce by one-fifth. Still, 2006 was this company's most profitable, and Jenkins says the downturn “was not necessarily a bad thing,” because it forced Winmark to make improvements in production and warranties.

Myriad builders that loosened their disciplines during boom times see a silver lining in the downturn: more time to strengthen their operations again. ICI initiated an “action plan” last summer that Hosseini describes as “a huge re-engineering of our company,” in terms of costing, pricing, and construction. He didn't provide many details, but Hosseini says the goal “is to get our pencil really sharp because we started to lose what we were good at: offering a home that was a good value.”

What “value” means to buyers now, though, has mutated—irreversibly so, in some builders' minds—due to the rash of incentives and price discounts that raised uncomfortable questions in buyers' minds about what a house is actually worth. Incentives “turned this industry into used car salesmen, eroded our credibility, and insulted buyers' intelligence,” fumes Stevens of Hacienda Builders. “It was like every buyer got the same e-mail at the same time that told them not to buy a house because it would be cheaper in 12 months,” says Dunmore, who claims the main instigators in Sacramento were national builders such as Centex, which “was offering incentives of $75,000 to $150,000 on a house where its profit margin was probably around $40,000.”

LOOKING AHEAD: When asked to think about how important these 10 factors would be in improving the competitive position of the BUILDER 100 over the next 10 years, getting houses built quickly moved to the top of the list, the second straight year it made the top spot. Cycle time grew in 2006, from an average of 126.8 days in 2005 to 132.5 days, underscoring the need to cut it back. Builders also seem focused on the positive economic factors, such as population growth and tracking demographic shifts.

As incentives and lower prices prevailed, some buyers gave a second look to builders with reputations for selling entry-level and first-time move-up houses. “That pushed a lot of buyers toward our product,” says Michael Monahan, a spokesperson for Tampa, Fla.–based Jim Walter Homes, the on-your-lot builder whose average sales price actually rose last year by 22 percent to $90,000.

It remains to be seen, though, whether builders will return to an affordable sector that many abandoned when prices were soaring. But there's no question that they're rethinking how they've been selling their products. “There's a critical need for everyone in the organization to concentrate on the customer's experience,” says Schuette of Village Homes, the implication being that hasn't been the case recently. William Lyon Homes is implementing a comprehensive sales training program to re-educate sellers who had become, says Bauer, “order takers who acted like bouncers; we rated buyers A through D, and bounced the ones who weren't A's. Now it's back to basics because the days when builders could sell any product on a piece of land are over. Now you have to know who your customers are and design for that consumer.”

A soft market hasn't kept builders from exploring expansion options, albeit more cautiously.

Las Vegas–based Pageantry Homes began 2007 actively looking to buy a competitor in either Phoenix or the Pacific Northwest to expand its presence in one of those areas. Walnut, Calif.–based Shea Homes has been searching for land to start up its first division in Florida. Uncertain buyer demand notwithstanding, builders need to scratch their itch to grow, and some think a soft market might be easier to probe for expansion. “We're always looking for growth opportunities in a down market,” says Miller & Smith's co-owner Doug Smith, who lately has seen evidence of large builders offering land in Virginia at lower costs.

Since last fall, many builders have stopped purchasing land and started winnowing real estate portfolios that no longer matched their conservative construction goals. In its 10(k) annual report, for example, Standard Pacific Homes disclosed that in the fourth quarter of 2006 it had reduced its lot position by 20 percent and would focus on “strengthening our balance sheet and improving our liquidity.” Hacienda Builders recently paid $27,000 per acre to pick up 120 finished lots from Standard Pacific at Johnson Ranch in Pinal County, Ariz. Hacienda's president Todd Stevens estimates that StanPac bought that land raw for $70,000 per acre and spent another $30,000 per acre on improvements.

AFFORDABLE OPTIONS: Dunmore Homes countered rampant incentives marketing in the Sacramento, Calif., area with more affordable products, such as those in The Villas at Monterey Village, with six house plans priced from $200,000 to the mid-$300,000s. The Sacramento BIA named The Villas Community of the Year in its price category.

Large builders and landowners have been selling dirt even in robust markets such as Charlotte, N.C., where Eastwood Homes—whose closings in 2006 jumped 45 percent to 1,275 units and are expected to hit 1,350 this year—has added land acquisition personnel. Eastwood also launched a coastal division encompassing Myrtle Beach, S.C., and Wilmington, S.C., that will start selling homes next January.

But, chastened by the recent downturn, builders are modulating growth plans. “We coach our franchises to keep their overhead under control and not to staff up like they're running three communities at once,” says Tom Rothrauff, president of franchising for Dublin, Ohio–based Epcon Communities. Grover Shugart isn't projecting major increases in closings for his company, Winston-Salem, N.C.–based Shugart Enterprises, even as North Carolina's Triad area flourishes economically. “The more focused we are, the better.”

Expansion-minded builders just aren't jumping into land with a blind eye to price, as they once did. “It got to the point where people acted like they were doing you a favor selling land,” says Mori Hosseini of ICI Homes in Florida. Last year ICI avoided land priced above $50,000 per acre. “We passed on deals that a lot of big builders picked up and are now trying to get rid of. So we're back buying again.”