Stanley Martin Communities began preparing for what it saw as the inevitable housing downturn in a 1998 planning retreat. Nine years later, with its strategy accomplished, the company is standing strong, despite having to lay off a number of employees.

Building only estate homes up to that point, the Reston, Va.–based builder made the decision to broaden its customer base by adding a new, smaller product line to the 4,500- to 6,000-square-foot homes that were becoming unaffordable for most buyers, says Steven Alloy, the company's president and CEO. The company began planning and then building smaller homes, between 2,550 and 3,400 square feet, but with all the quality and amenities of a larger luxury home, Alloy says.

“We thought, ‘We'll never be able to grow the company, and the company will have tremendous risk, as long as we are exclusively an expensive builder,' ” Alloy says. “Because of the hyperinflation of home prices, we thought that fewer and fewer people would be able to afford new houses.”

In the past few years, Stanley Martin has further expanded its plan to target more potential customers, phasing out its estate product by 2005 and adding a line of even-less-expensive smaller homes to its product portfolio.

Randy Lyhus

The move to reach a wider customer base has paid dividends, as the company will see the number of homes it's contracted to build increase for 2007, despite a likely decrease in revenue, Alloy says. And revamping its product line is just one of many adjustments Stanley Martin made to remain strong and competitive.

But not all builders had the foresight to plan ahead for the downturn like Stanley Martin did. And strength in this market is relative. While Stanley Martin is in better shape than many, it still had to cut its workforce from 159 employees at its peak to 103 as of October.

With conditions varying by region and submarket, a builder's health is measured by many factors. From the quality and stability of its market to the strength of its balance sheet to the depth, experience, and smarts of its employees and leadership, there is no magical recipe for success.

SURVIVAL MODE Taylor-Morley Homes, of Chesterfield, Mo., is a home building and land development company just trying to keep its head above water. In late October, Southwest Bank of St. Louis filed a lawsuit against the home builder, alleging it was in default of two loans with outstanding balances of $16.56 million, acknowledges Bill Taylor, company chairman and CEO. The lawsuit alleges Taylor-Morley hadn't made its monthly payments to the bank since February and seeks receivership for five of the company's developments, which the bank claims are partially constructed.

Taylor concedes that the company has financial problems and that he knew a lawsuit was likely but says he had been hoping to avoid it and had worked out forbearance agreements with the bank. Taylor-Morley faces a similar situation with Bank of America, with which the company has forbearance agreements on five developments. Taylor says he is working with a group of investors to buy back the company's land and homes.

“We will for sure end up with at least three to five developments and could wind up with as many as 10 to 15, depending on our ability, with our restructuring group, to repurchase those assets from these two banks,” Taylor said in early November. “That will probably be determined over the next 30 days, if not sooner.”