During the first weeks of 2008, Buffington Homes, a high-end custom builder in the Charleston, S.C., market, had shortened its construction cycle time to around 13 months from 18 months not too long ago, when subcontractors were a lot busier. “The quality of the work is much better, too,” boasts Dan Buffington, the company’s CEO.
Buffington’s experience is typical of how builders are getting more productivity from hungrier subs. It also illustrates how builders are turning lemons into lemonade at a time when business conditions are less than ideal.
Buffington told his story during a roundtable with other custom builders that Builder conducted at the International Builders’ Show (IBS) in Orlando, Fla., in February. While attendance at the event was off—12 percent, to 92,000, by the NAHB’s reckoning—gloom didn’t pervade the event, even though builders recognize that a quick reversal in housing’s fortunes is, for now, unforeseeable.
By the time the show began, Bank of America had already warned Congress that $739 billion in mortgages could default over the next five years and was urging a bailout for homeowners and lenders. The National Association of Realtors estimated that January resales were off 23.4 percent, to 4.89 million units, compared to the same month a year ago; and unsold inventory jumped 18.4 percent, to 4.19 million, equal to a 10.3-month supply. David Seiders, the NAHB’s chief economist, told conventioneers that housing starts and sales would again fall this year, by 22 percent and 27 percent respectively. And a week after the trade show, Tom Eggleston, CEO of Indianapolis-based CP Morgan Communities, predicted to analysts that the housing market might not get well until 2010.
In the same breath, Eggleston talked about expanding in North Carolina, South Carolina, Virginia, and Tennessee, if market conditions improved. Indeed, everyone is playing a waiting game whose rules include a lot of ifs. “We’ll see a turnaround if we don’t go into a recession, if mortgage markets stabilize, and when prices and inventories come down,” says Derek Thomas, vice chairman with Newland Communities, the industry’s largest private developer, which has 40 residential communities in the works. Newland has been conducting resale classes in the Phoenix market to help prospective customers who are having trouble selling their houses.
The industry is waiting to see what impact the federal stimulus package, which includes a section that lowers borrowing costs for more-expensive homes, will have on demand, especially those builders that are seeing more customers coming to shop their neighborhoods, or at least kick the tires. Tom Woods, who owns T.E. Woods Homes in Independence, Mo., told a large audience at IBS that his company’s customer traffic had doubled, to 440, during the first six weeks of the year, compared to the same period a year ago. Brendan Murphy, who co-owns Chesapeake Development, a custom builder based near Atlanta whose products range from $400,000 to $1 million, said during the convention that while he’s a “pessimist” about market conditions, “our traffic picked up in the last month, and I’m working with 23 ‘A’ prospects.”
Most buyers, though, remain on the sidelines, which puts builders in a holding pattern in search of new currents to remain airborne. Lindon, Utah–based custom builder Magleby Estate Homes, which had its best year in 2007, is taking on more high-end remodeling, says Chad Magleby, the company’s vice president of business development. To bolster its cash flow, The Lawson Cos., a Virginia Beach, Va.–based builder whose sales volume fell 46 percent in 2007, is diversifying into apartment management. “Profit is not a birthright, and don’t take it for granted [because business] can get worse,” cautioned company president Steve Lawson. Camp Construction in Tacoma, Wash., closed 35 homes in 2007 and expects to close 60 this year. To be on the safe side, it recently moved 30 completed homes into its rental portfolio and could end up offering several of its 14 homes under construction as rental properties if buyers don’t materialize. “Look at your plan every day,” owner Bob Camp advised builders he addressed at IBS. “Don’t crawl into a hole.”