Ever the optimists, a clear majority—55 percent—of the 744 home builders who responded to our "State of the Industry" survey say 2008 is the year the downturn hits bottom and the industry begins to recover.
That may be wishful thinking, but there also are some real pessimists in the group: 14 percent say the housing market won’t hit bottom until 2009, and another 3 percent believe it will take until 2010 before the market sorts itself out.
At this point, though, it doesn’t matter as much when the downturn ends—what matters most in the coming year is how your company responds. The days of boasting 50 to 100 buyers on a waiting list for every available lot are long gone, replaced by value-engineering of projects, sales training classes, and strategic outsourcing. "We used to have 35 employees; now, we’re down to five," says Jim Brewer, vice president of construction at Spiegel Development in Sherman Oaks, Calif.
Brewer says Spiegel’s business in its Los Angeles market has been cut in half this year. The company closed 42 homes in 2006, and as of late last year, Brewer says Spiegel was struggling to close 20 homes. Plus, the average sales price of one of its homes dropped from $550,000 to $450,000 for a 2,000-square-foot house. The builder’s survival strategy is to eliminate overhead at every turn and outsource everything.
"Instead of hiring a one-stop service bureau or an architectural firm, I deal with 10 vendors to get the best prices," Brewer explains.
That means using a two-person sales shop instead of a Coldwell Banker or RE/MAX. A civil engineer does the survey work and develops drawings, while expediters run documents to the various government agencies. Brewer says he even has a person who does nothing but pull permits. The company used to carry three or four supers and some laborers; no longer. All the construction work is farmed out.
"The fact that I was a contractor and had to carry general liability insurance was very expensive," says Brewer. "Now, we’re more of a management company. I’ve become more like the orchestra leader."
Builders Respond
Along with everyone else, Builder’s editors recognize that a great deal of the reporting on the home building industry this past year has been negative. Just about every day, there’s a story about a home builder that’s either laid off a large number of employees or shut down a project or been sued by nervous creditors or, worse, declared bankruptcy. We felt that market conditions had turned so unfavorable and that the news was so skewed that it was time to conduct a survey and hear how builders themselves view the downturn and which of their survival strategies are really working. Based on the responses we received, here’s a quick overview of the ways that builders tell us they’re responding to the slowdown:
Sales training. Looking to do business in the toughest building market in a generation, 41 percent of those surveyed say they’ve increased their company’s focus on sales training, while 55 percent told us their focus on sales training remains the same as in past years. Only 4 percent have decreased their company’s emphasis in this area.
Design strategies. Seventy percent of the group say they’ve responded to the downturn by doing something different with design. Forty percent say they’re using value engineering to get more bang for the buck, while 31 percent say they’re designing for a different buyer segment or price point. Another 29 percent say they’re building smaller, more affordable homes.
Prices. The vast majority of respondents—66 percent—are cutting prices at least somewhat. Thirty percent of the group have cut prices more than 10 percent, while another 17 percent have lowered prices between 6 percent and 10 percent.
Layoffs. Forty-four percent of builders say they’ve laid off staff, and only 9 percent have increased staff. The average layoff is about 25 percent of total staff, with 72 percent of the group having let go of more than 10 percent of their staff. Builders tend to lay off supers and laborers and keep sales, marketing, and IT staff on the payroll.
Targeted incentives. Nearly 70 percent of builders say they’re using incentives, but they’re being very strategic. Fifty-one percent offer free or discounted upgrades, while 42 percent will assist home buyers with financing. Only 32 percent offer cash discounts. Another 20 percent say they’ll help buyers sell their old homes, a strategy that might expand as more foreclosed homes hit the market and builders have trouble moving inventory.
Land opportunities. Thirty-nine percent say land prices in their trade area have decreased, and another 42 percent say the advent of other builders selling off land has presented opportunities for them to buy. Among the 24 percent of builders who say they’re selling off land, 31 percent of the parcels are going to small residential builders.
Internet marketing. Twenty-six percent of the group say the Internet is their company’s most effective marketing medium today. Eighteen percent use the newspaper real estate section; 10 percent opt for the local home-finder magazine, and only 6 percent like direct mail.
Focus on Sales
It’s no surprise sales training ranked high in our survey responses. Nothing happens unless salespeople are moving product, which is why the vast majority of survey respondents who offered comments talked about the need for increased sales training. "Marketing and sales training have become much more important," writes one builder. "We are more diligent with determining what our competitors are offering and what our target market is expecting." Brendan Murphy, president of Atlanta-based Chesapeake Development, put some money behind that sentiment. He budgeted about $15,000 to $20,000 this year for sales training. The company built 20 homes in 2007, and even with the down market, Murphy hopes to build and sell 30 homes this year. He says salespeople have to do the hard research work and develop product knowledge to sell homes, but they also have to be properly trained.
"I’m not going to sit back and wait and blame the down market on someone else," Murphy says. "We’ve had a lot of years in this industry where people made a good living just taking orders," he muses, adding that "now, we need real salespeople who are trained, not just someone waiting for buyers to walk in the door."
Unlike Brewer, Murphy says he plans to move forward with in-house salespeople. His hope is for the sales staff to be taught the correct way to gather information to register prospects, do effective follow-up, and manage the leads that come in from the company’s Web site. He prefers to hire people with sales experience in outside industries. The last person he hired was a manager from a local Circuit City store.
"We don’t want anyone with home building experience—we don’t want them to have bad habits," Murphy says, adding that hiring someone with technology experience was a plus, since Chesapeake Development plans to focus more on offering buyers home technology and home automation.
"Some home theaters can run $100,000 or more, and our customers demand them," Murphy says. "[Our new hire is] used to selling home theaters and electronics, so … we’ll hire a new-home specialist to teach him about home building."
Designing Smarter and Smaller
On the design front, builders are using value-engineering and targeting new market niches, and many are simply building smaller houses.
Phoenix-based Courtland Homes, which built 500 to 600 homes at the peak of the boom, started value-engineering its homes in 2005. The company slid to about 280 closings in 2007, but Jack Magura, Courtland’s director of sales and marketing, says that while competitors were rebidding entire projects as the downturn deepened, Courtland had already streamlined its construction processes.
"Our team sat down with all our framers and drywallers a few years ago and took a look at all the plans," Magura says. "We did things like look to see if corners could come out of rooms, took a look at all the windows to see if we were offering too many, and asked ourselves if we really needed high-pitched roofs."
Magura says the result is that Courtland’s prices are as competitive as those of any builder in the Phoenix area, and this year the builder plans to cut 5 percent to 10 percent of the square footage out of its homes. Magura says the reduced square footage will bring the company’s price down on a 1,100-square-foot home to about $200,000.
"When times were good, we all looked to sell as much square footage as possible," he says. "Now, we’re looking to take out some of the square footage but still have a livable home."
Building Higher-end Homes
Another strategy builders are using, our survey found, is to build fewer houses but change their focus and market higher-end homes. This approach is working for PSC Homes in Lexington, Ky., which built about 40 to 45 homes at the peak of the market but last year closed only about 20 homes. Today, the company builds homes ranging from $250,000 to $350,000, as opposed to $200,000. These homes feature granite countertops, pewter finishes, upgraded crown moldings, and low-E windows. The builder is also marketing home technology more aggressively.
To highlight all these added amenities, PSC converted about 1,600 square feet of existing office space into a design center. The builder put in an entire kitchen and a huge bathroom and got its lighting vendor to supply all the recessed lights and track lighting. The design center cost more than $31,000, of which PSC put up $12,000. Its vendors paid the rest.
"We felt we could use the design center during the ‘dance’ stage with a home buyer when we’re all negotiating," says Pete Soteropoulos, the builder’s president. "Our region has a few large builders, like Beazer, Dominion, and Ball Homes, and those companies have design centers from which their people sell," he says. "I just saw the design center as another way to compete that makes us feel like a professional company. Buyers can come into a real nice space and spend up to four hours with a decorator to make their selections."
Listen to Your Customers
For Todd Garner, director of production for Cooper Homes in Rogers, Ark., the bottom line for builders is that they have to listen to their customers and build homes people want.
"I like the production-building model. It’s very efficient to say, ‘These are our 20 plans and 75 options, and these are our 10 color boards,’" Garner says. However, "today the buyer can go down the street and one of our competitors will build them whatever they want and throw in a new car to close the deal."
Cooper, which built about 300 homes at the height of the market in 2005 and barely finished 50 last year, is adjusting by offer-ing more custom plans. Instead of having its in-house estimators and draftsman develop standard plans, the builder has them draw up custom plans for home buyers. "We’re trying to adjust and do whatever it takes to make a sale," Garner says.
Expect a lot more of that in 2008. And a word to small builders: Expect big builders to continue slashing prices by $100,000 or more in your local markets, putting even more pressure on prices.
"Today, prices have been reduced so much that we ask ourselves if it’s the floor plan or the price that sells the house," says Courtland’s Magura. "Generally, it’s the price," he says, which is why Courtland is also making more of an investment this year in sales training.
The message for builders heading into 2008 is that no one strategy will help your company make it through the year. Training salespeople and better managing Internet sales leads is a good start, but it will take so much more to survive. Increased sales training has to be combined with strategic marketing, value-engineering, focused customer service, and more effective use of your remaining staff.
"The market won’t improve until this summer," says Brewer of Spiegel Development in the Los Angeles market. "I think we have to allow the entire year to absorb all the inventory and foreclosures," he continues. "Fortunately, we have a large enough job base in Los Angeles; many of the buyers simply need a place to live."
And that’s what you should keep top of mind as you decide the direction your company should take this year.
Learn more about markets featured in this article: Atlanta, GA, Phoenix, AZ, Los Angeles, CA.
