John Wieland, the owner of Atlanta-based John Wieland Homes & Neighborhoods, recently completed a “tour” of 46 of his company’s inventory houses. After an overnight stay at each house, Wieland said he was able to figure out why all but five of the homes weren’t selling.
“We weren’t looking at them in context,” he told an audience of builders and suppliers at last week’s BUILDER 100 conference in Chicago. “The vacant lots nearby, the views out of the [home’s] windows, the neon lights from a nearby cafe.”
“Context” is a big deal right now for Wieland and two other production builders—Tom Lewis of T.W. Lewis in Arizona, and Bob Schottenstein of M/I Homes in Ohio—whose companies are struggling to come out of the housing recession in one piece. As panelists during the conference, they agreed that business conditions are improving somewhat, that what customers want keeps shifting, and that operational change has been and will continue to be the inevitable result of the downturn.
All three builders said their companies are still in survival mode, and are doing what’s necessary to stay afloat. “At least for the rest of the year, it will be just hard defense,” said Lewis, whose company has generated half of its business over the past six months by purchasing existing homes from its buyers. “We kind of feel like a car dealer,” said Lewis. The company also has put up 100 of its spec homes for rent until it can find buyers. “This puts good inventory on the shelf and we don’t have to give it away.”
M/I Homes has been looking beyond its traditional customer base to sell houses. Schottenstein said his company’s marketing is now more focused on targeting younger Generation Y prospects. M/I also recently introduced a new line of entry-level homes, called its Eco Series, that range in size from 1,200 to 1,800 square feet.
All of the homes that M/I is building now are Energy Star-certified. And the panelists see buyer demand for more-efficient homes as a trend that’s here to stay. “It’s another bullet in our sales arsenal,” said Schottenstein. How large that demand will become, though, is hard to gauge right now when “price has become everything in our market,” said Wieland, “particularly when foreclosures down the street are selling for $200,000 less.”
The foreclosure dilemma is also why Lewis thinks the kinds of homes his company has built in the past—they averaged 3,500 square feet, with a base price of $850,000 and another $200,000 in options—aren’t tenable, at least for the immediate future, because “the mortgage financing that had been prevalent isn’t there anymore.”
When asked what the housing recession has taught them, Wieland heard knowing laughter from the audience when he stated “don’t buy overpriced land, don’t hire an assistant for everyone who wants one, and don’t build a luxurious [headquarters] office.” Like most builders, the panelists conceded they bought too much land at too high a price. Surprisingly, however, Schottenstein added M/I hasn’t lost its taste for developing land on which to build. “At peak, we were developing 90% of the land we built homes on. We won’t go back to that, but we will continue to develop.” M/I currently has 120 active communities, and Schottenstein said that the “most successful” among these are those that M/I controlled and developed.
He added, as well, that in some of the markets where his company builds, “there aren’t any developers.”
Wieland said his company wouldn’t stop developing, either. But its subdivisions will be smaller going forward. “Two hundred [units] would be really nice. And no more golf courses.” He observed optimistically that, coming out of the recession, a lot of land is going to be owned “by people who don’t know how to build houses,” which will leave the door open for companies like his to build out communities for fees, which it is already doing for some banks.
Lewis agreed, and thought it was only a matter of time before landowners start calling builders to monetize their real estate. “I think builders will be kings again, but the margins are going to be lower, so that won’t justify a lot of equity” coming into the market.
But after such a severe downturn, which has decimated so many companies, the panelists see an industry that’s in need of fundamental changes, not the least of which involves the better care and feeding of employees and contractors. “I’ve never communicated as often or in as much detail with our employees as I do now,” said Schottenstein. Lewis added that employees “are willing to make sacrifices," and some "are more enthusiastic today than they were three years ago, because we’ve gotten rid of some bad apples.” However, he advised other builders, those associates who remain “want to know what your five-year plan is right now.”
John Caulfield is senior editor at BUILDER magazine.