As New Canaan, Conn., custom home builder David Prutting prepared for a staff meeting last fall, he pondered the best approach to take with his employees. He had called the meeting to re-emphasize the importance of customer service, especially in a slowing economy. But he didn't want to instill fear—just motivation. “It's not a time for panic,” he says. “I just want to get across the message to try and perform a little better. The last thing I want is for people to walk out the door scared.”
Custom builders all over the country are having the same kinds of thoughts and meetings. They're trying to be realistic about the dismal state of the U.S. and global economies and the high-end housing market, while remaining optimistic about the small businesses many of them have spent their adult lives creating. Some are in a situation similar to Prutting's: They're busy finishing projects started during the housing boom but are worried about the short-term future. “I see a big drop-off for us in early 2009,” he says. Builders are having to let staffers go—or at least caution them about possible layoffs. They're holding equally difficult conversations with subs and suppliers, warning them about dwindling amounts of work in the upcoming months. “We've notified our trades what our volume's going to be,” says Rod Cullum of Cullum Homes in Scottsdale, Ariz., where many of his competitors have gone out of business. “Quite a few trades rely on us for their primary source of income. We've encouraged them to get ahead of the curve.” It's not a happy piece of news to break to anyone, but no one ever said running a custom building business was easy.
That's the thought that keeps longtime custom home builders going. “It's a cyclical business, and it always has been,” says David Creech of Creech Construction Co. in Raleigh, N.C. “You've got to be prepared. I've seen it dead before, during the oil crisis of 1973 to '74, and in 1981, with the 16 percent and 17 percent interest rates.” Those who have gone through other down times knew the housing boom would end, and they know this downturn won't last forever. They may have seemed overly cautious 10 or even five years ago, limiting spending and expansion—but now they seem prescient. Less experienced builders don't have that valuable perspective, and in many markets it's they who have been hit the hardest. “There's no question” that newer builders are hurting more than seasoned ones, according to building industry consultant and CUSTOM HOME columnist Steve Maltzman, CPA. “I'd say 40 percent to 50 percent of the builders I was speaking to [during the boom] had never seen a downturn before. The custom builders got to the point where they said, ‘This is great, why don't I build a spec home?'” Now many of those specs are sitting on the market, costing their builders thousands of dollars in taxes and interest.
Market Conditions Along with a company's longevity and level of investment in spec housing, its chosen market is another major factor affecting its current situation. Custom builders who cater to the richest of the rich report a minor drop in business, despite all the recent financial market turmoil. “The deeper into the ocean you go, the fewer waves there are,” says New York City's Stephen Fanuka of Fanuka Inc., which builds in Manhattan and on Long Island for the very top of the market. “The people who have the old money and the established money are not worried.”
For those working at a slightly lower (and much more populated) price point, whose clients are wealthy but not immune to market risks, the story is very different. The ills that befell the production housing industry starting three years ago have trickled upward, though most custom builders' situations are still better than those of their production counterparts. Even in areas where the job market is strong—Seattle, for example, or North Carolina's Research Triangle—people have been spooked by stock market and house price plunges and are hesitant to buy or start building a home. Those who do want to move forward are having trouble obtaining loans. Some subs have gone out of business, leaving builders scrambling to find replacements. “We now need to verify that the subs have the wherewithal to do the work,” says Seattle's Joe McKinstry of Joseph McKinstry Construction Co. “It places the general contractor in a really, really delicate and difficult position.”
Texas has proved to be a bright spot so far, although many think the slowdown might finally start to affect business there this year. In much of the Southwest, by contrast, almost no one is buying high-end houses. “The market's frozen right now,” Cullum says.
Time Frame Fewer jobs in the pipeline means more time to think, and the main question on nearly every builder's mind is the same one that preoccupies the general public: How long is this going to last? The NAHB predicts that housing starts will bottom out in the first quarter of 2009 and undergo a slow recovery from there. But this forecast encompasses new housing in general, not custom homes specifically. “The demand for new homes is driven by new employment, and households moving to those new jobs,” cautions Steve Melman, NAHB's director of economic services. “The demand for luxury homes isn't necessarily employment-driven.” Kermit Baker, chief economist for The American Institute of Architects, believes the custom home market could be close to reaching bottom, but might stay there for several months. And Celia Chen, director of housing economics at Moody's Economy.com, thinks the bottom of the overall market will be reached sometime in the third quarter of 2009. “Even at the high end there are a lot of risks right now because of the problems in the financial markets,” she says. “Those folks are losing their jobs also, and bonuses are going to be low this year ... the main constraint will still be in terms of the availability of credit to purchase high-end housing. Even though the conforming loan limits have been raised, I don't think that will affect the problems with the mortgage lenders ... the longer the financial crisis continues, the more it will hit the high-end market.”
