Patrick Malloy can feel it.
For the president of Carrollton, Ga.–based Patrick Malloy Communities, which will close over 400 homes in the Atlanta market this year with prices from the low $100,000s to mid-$300,000s, all the signs of a slowdown are there. Traffic has been dwindling. Cancellations have been rising. Large, national production builders in his market have been cutting back on both their land positions and the employees who work in their division offices. And when he talks to his own colleagues around the region, a consensus seems to be shaping up: “My projection for our company on existing communities is that we'll be down about 20 percent,” Malloy says. “I think that's probably consistent with what other builders are doing in Atlanta, too. In fact, some people are forecasting a downturn by as much as 40 percent.”
Instead of simply lamenting the market's turn, though, Malloy has adjusted to it. While he anticipates sales dropping at existing projects, he hopes to maintain a flat revenue line in 2007 by bringing new neighborhoods on line. But rather than just slashing prices and forcing sales, he's ready to do something that makes many builders cringe: build fewer homes. “It has to manifest itself in fewer starts,” says Malloy, who builds both detached and attached single-family homes, and maintains a 60-to-40 percent ratio of spec-to-presold homes in his inventory. “It shouldn't be a real surprise to anybody, but if our existing sales are down 20 percent, I would expect that over the average of the year, we'll start 20 percent fewer homes.”
For Malloy, a third-generation builder who was born and raised in Atlanta, the simplicity of that math is apparent. Unlike big, national production builders who put economists on their payrolls and enlist armies of consultants to tell them how many starts they should be putting on line in a given period, Malloy is part of a different breed of home builders. He's among the thousands of local and regional operators who lie outside of the top 200 companies tracked by BUILDER, who have learned to keep tabs on their local markets, project trends, and respond swiftly to them without the benefit of national forecasters getting in their way. “Getting market information is very different for a small builder versus a big builder,” says Larry Kush, CEO of Montevina Estate Homes in Scottsdale, Ariz., which builds about 40 homes per year. “He's not like that big builder, who can pay for all those consultants. In that regard, the smaller builder has a lot more of a challenge.”
LEADING WITH YOUR GUT Yet despite that challenge, these smaller builders are able to track their local markets, oftentimes with stunning precision. They do it the old-fashioned way, with one ear to the ground and the other pressed into a telephone receiver. They get their information from any number of sources, from their banker to their barber to local real estate agents, with data culled from local and regional agencies. By doing so, they're able to plan their own businesses accordingly to ensure they will still be solvent when the next generation takes the reins.
“For that size builder, it's much more of a gut-check approach,” says John Burns, president of Irvine, Calif.–based John Burns Real Estate Consulting, which tracks local data for production builders on a national level. “Of course, that's the way everybody did it 30 years ago, but the big builders are now a lot more big-picture oriented than the smaller guys, because they can afford to be.” Burns notes that he constantly sees smaller, regional builders searching out information for themselves, and getting it any way they can. “Those are the kinds of guys who show up when I do a presentation at a title company,” Burns says. “That way, they get the information for free.”
AVOID THE PACK Kush, whose Montevina homes range in price from $400,000 to $3 million, is exactly the kind of smaller builder Burns is referring to. Despite the fact that he's been recognized locally as Phoenix's Builder of the Year five times, and holds a lifetime director's seat on the region's builders association, Kush and Montevina aren't exactly household names nationally. In his own market, though, Kush has learned a thing or two over his 30-year career about how to forecast trends in Phoenix. Ironically, one of those lessons has been to stay away from those areas that the big builders, with their armies of consultants, are flocking to.
“You've got to remember how a big builder thinks,” Kush says. “If his corporate office calls him and tells him to get rid of the 225 specs he's got on his books by the end of next quarter, he can do something that most builders can't: He can cut $75,000 off a $300,000 house. Well, if you're building down the street from him and you've got 10 specs, all of a sudden, you're out of business, because you can't match that price.”
For Kush, that meant staying away from outlying areas of Phoenix, where many big builders are now struggling with outsized land positions. “A Realtor told me the other day that one of the strategies has been to drive until you qualify,” Kush says. “Well, during a downturn, the drive just gets shorter.” But keeping an eye on the big builders isn't the only way Kush has been able to stay alive, and prosper, in Phoenix. Another warning sign he looks out for? The condo market. “When condos start to sell, look out,” Kush says. “Condos are the opportunity of last resort in homeownership. People buy them because single-family, detached housing has gotten too expensive. When you start seeing condos selling heavily, you know you've reached the peak in your market.” Indeed, in many markets across the country, including Phoenix, condominium sales heated up to scorching levels in 2005, just as single-family markets hit a zenith.
BE A GOOD NEIGHBOR While keeping an eye on their big-builder brethren is one way local builders gauge their markets, keeping up with one another is an effective strategy as well. Malloy highlighted a recent roundtable discussion he attended with 12 Atlanta-area home builders to gain a feel for current traffic levels and concessions. While large builders are often loathe to even acknowledge the existence of their large-scale counterparts, camaraderie at the local level isn't uncommon.
“Local home builders aren't as competitive with each other as you might think,” says Greg Wessling, CEO of Charlotte, N.C.–based HouseRaising, a custom home building management firm that coordinates projects for smaller builders nationally. “They help each other out, with everything from subs to referrals for work.”