It wasn’t too long ago when only two or three of Challenger Homes’ 10 communities in the Colorado Springs, Colo., market were “carrying” the company, recalls its president Todd Anderson. But in 2011, all but one of those neighborhoods achieved or exceeded their plans. The builder closed 187 homes in 2011, a 153 percent jump over the previous year, and remained this market’s leader.
Challenger sells first-time and move-up homes ranging from $175,000 to $250,000, mostly to military personnel, and has benefited greatly from the Defense Department’s base realignment, particularly in communities around Fort Carson where the company has doubled its market penetration over the past five years. But Anderson attributes his company’s recent successes as well to “a more seasoned sales team. We only added one or two salespeople, but we didn’t have the turnover of the past three or four years,” he explains. Consequently, the builder’s communities are performing better because “our sales team gets what we’re trying to do and is taking the initiative.”
Challenger is among Colorado Springs’ four leading builders that together sold almost half of all the homes closed last year. Conversely, Richmond American Homes went from closing a couple of hundred homes a year in Colorado Springs to 86 homes in 2011.
Such a reversal seems an anomaly, though. Most large public builders continued to sell homes at rates that placed them among the leaders in many of the country’s 50 largest housing markets, based on total closings. D.R. Horton, PulteGroup, Lennar, or NVR sat atop 26 of those markets. And combinations of public companies dominated several markets, including Washington, D.C., and Baltimore; Tampa/St. Petersburg, Fla.; San Antonio and Austin, Texas; Riverside/San Bernardino, Calif.; Raleigh, N.C.; Phoenix/Mesa, Ariz.; and Philadelphia.
“Lot prices are out of control in Dallas/Fort Worth” because “public builders have been taking lot positions, and some big money is going down,” says Keith Hardesty, division president for First Texas Homes, a market leader in Dallas. First Texas, with between 48 and 51 active communities in this metroplex, isn’t competing on price for land against the giants; instead, it’s focused on finding what Hardesty calls “boutique” subdivisions in the middle of a city or town, and “rejuvenating” them. A project with 20 to 30 lots “is perfect for us right now,” says Hardesty, “but tough to find.”
Outpacing Their Markets
Besides the shrinking availability of quality lots, builders complain about appraisal process issues and restrictive mortgage credit preventing them from selling more houses. Still, most leaders say they outpaced their markets’ overall performance last year, and more than a few of these builders saw in 2011 the first positive signs that business conditions were improving in a sustainable way.
“It was basically a comeback year for Atlanta builders,” says Tom Justice, national president of sales and marketing for Atlanta, Ga.–based Peachtree Communities. He’s particularly encouraged by the fact that people continue to move into this market. “We’re in business, we’re advertising and doing things like the good old days.”
In Cincinnati, where residential permits fell by 15 percent last year, The Drees Co.’s closings were about even with 2010 totals. Terry Sievers, Drees’ Midwest regional president, notes that while foot traffic was down, sales in Cincinnati initiated via the Internet rose by 20 percent last year. “Information is so instantaneous,” Sievers says, and can be a good or bad thing “when people are deciding whether to buy a house based on what’s going on in Greece.”
The big change for builders in Southeastern Michigan last year was that their market stabilized to the point where they could realize some home price appreciation. In the case of market leader Lombardo Cos., that meant increases of $4,000 to $5,000 on houses whose average selling prices are around $245,000. Lombardo—which cracked into the Builder 100 this year, ranking 93rd in closings—in late 2010 added a custom home division, Cranbrook Custom Homes, whose average selling price is $650,000. Anthony Lombardo, the company’s CEO, says that he launched this division to fill a price void in the market, and Cranbrook has been generating about three or four sales per month.
Pardee Homes has thrived in the San Diego market, says regional marketing director Matt Sauls, by building to “a very narrow [customer] niche” in Carmel Valley where biomedical, pharmaceutical, and information technology jobs abound and which offers one of the area’s best school districts. Pardee’s homes in the Valley range from $600,000 to $1 million, but two years ago it developed a more affordable (mid-$400s to the low-$500s) townhouse product within the last phase of a large master planned community, which gave more buyers an entry point into this much-sought-after market. And Pardee recently started marketing another new multifamily project in San Diego’s Sorrento Valley neighborhood.
Tailoring their products more specifically to different customer groups has helped builders maintain or expand their hold on certain markets. In Pittsburgh, Epcon Communities has developed homes selling for $275,000 to $300,000 that are appealing to older buyers who are trading down from $1 million houses but are also choosing to hold onto more of their equity, says Nanette Overly, Epcon’s vice president of sales and marketing.
Epcon, a franchisor, works with about 110 builder partners in 90 markets, and that local expertise goes a long way toward Epcon’s understanding what customers want in the houses they purchase, says Overly. In Atlanta, Peachtree is also paying closer attention to its buyers’ lifestyles, says Justice. Last year, it reviewed all of its core house plans, made their kitchens larger, and started using more stone/brick combinations for exteriors (as opposed to all brick).
The Discovery Homes division of A.D. Seeno Construction Co., a leading builder in the San Francisco Bay area, tends to stay ahead of the curve in its home design and construction by “using the latest and greatest products for our homes,” says Albert D. Seeno III, owner of the Concord, Calif.–based builder. “Our customers expect that, and we wouldn’t give them anything less.”
Seeno says Discovery Homes streamlined its marketing last year “and fine-tuned our campaign approach.” Discovery, like most other builders, found that its business improved as consumer confidence strengthened in the latter months of last year. But overcoming the stigma of a bad market remains the biggest challenge to growth for Discovery and others around the country.
Discovery opened three communities within existing markets in 2011, plans to open two more communities this year, and is purchasing land for longer-term development and construction. Other local leaders also took steps to expand their opportunities. Lombardo Homes, for one, entered St. Louis with six models. And Peachtree Communities has aggressively purchased land around Atlanta, even as it has become choosier about the location and cost of what it buys so it can keep the selling prices of its homes within $10,000 to $15,000 of comparable foreclosed homes.
Neighborhoods that Peachtree plans to open this year, in Gwinett and Henry counties, will each have in excess of 120 homesites. The company sold more than 100 houses in the first quarter of 2012, and Justice anticipates between 350 and 375 closings this year. Peachtree also plans to expand into Raleigh, N.C., and Greenville, S.C., which is why Justice believes 2013 “is going to be really exciting for us.”
Other local leaders share that optimism about this year and next, if early returns are any indicator. Challenger Homes, says Anderson, closed 90 homes in the first three months of 2012 and fully expects to overshoot its goal of 240 for the year. “We’re already on pace for between 280 and 300,” he says, even though his company isn’t planning much new geographic expansion. Epcon expects to sign at least six new builder partners in 2012, and through early April had already inked two, in Dallas/Fort Worth and Manning, S.C., a county seat.
That’s not to say these builders think their industry, or the economy in general, is out of the woods yet. The Drees Co.’s Sievers wonders where jobs in Cincinnati will come from, now that one of its biggest employers, Chiquita Banana International, is relocating its headquarters to Charlotte, N.C.; and Delta Air Lines, after merging with Northwest in 2008, has downsized its Cincinnati hub considerably. Lombardo cautions that any projections about growth in his company’s markets demand context. “We’ve gone from 20,000 permits to 3,000 last year and should do 3,500 this year. So it’s all relative.”
But even builders that expect their markets to be flat this year, such as Pardee and First Texas Homes, still believe their companies can increase their market share. “We’re projecting one sale per week per community, and at most [neighborhoods] we’re exceeding that,” says Sauls.
Regardless of their outlook about market conditions, local leaders can’t help but look over their shoulders to see if any competitors are gaining ground. Ryland Homes may have exited the Dallas market last year, but First Texas Homes now hears the footsteps of Plano, Texas–based Megatel Homes, a green builder whose houses range from $189,000 for a 2,184-square-foot model in McKinney to $499,000 for a 4,303-square-foot house in Prosper, according to its website.
“Megatel,” admits Hardesty, “is definitely someone to watch.”
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