Credit: Oscar Einzig
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.
Contingency Plans
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.”
Blowing Their Own Horns
During that seminar, Woods encouraged his audience to “know your market,” a common theme heard from builders and suppliers during the convention. It would appear this message is sinking in, based on a survey of 304 builders that the NAHB Research Center conducted in January. Two-fifths of those polled see a greater need to place more emphasis on selling, which would include making better use of brokers, conducting more sales events, upgrading their companies’ Web sites, and developing a referral program.
The downturn is forcing builders that otherwise might resist spending money on marketing to get the word out more aggressively about what distinguishes their homes from the rest of the pack. For the first time this year, Estes Builders in Sequim, Wash., will spend 1 percent of its revenue on advertising, says owner Kevin Estes. Both Dublin, Ohio–based Epcon Communities, the industry’s second-largest condo builder, and Tapestry Custom Homes in McKinney, Texas, are attempting to develop a niche using universal design, which Tapestry president Bill Slease is convinced will be the next wave that drives the green building movement.
Credit: Oscar Einzig
Judging by the overflow crowds drawn by any seminar with “green” in its title at IBS, it appears that more builders than ever are looking to market themselves and their products as sustainable and eco-friendlier. At one session called “Green Building 101,” Don Ferrier of the Fort Worth, Texas, design/build firm Ferrier Builders, noted that his company—which at the time of the convention already had secured a dozen contracts from buyers, compared to three in all of 2006 and four in 2007—is striking a chord with baby boomers who see a green home as “the wisest investment they will ever make. They are worried about escalating gas prices, and they want to make sure the house they buy isn’t going to cut into their retirement savings unexpectedly.” Even Magleby, whose company builds homes as large as 15,000 square feet, says all of his houses are Energy Star rated.
But as long as the housing market is limping, “green” could take a back seat to “affordable,” as more builders develop homes they can market to customers looking for “value.” “We’re trying to stay ahead of the curve with leading-edge design that’s also repeatable,” says Thomas Sattler, president of Denver-based custom builder Sattler Homes, which created a division to build and sell semi-custom products. Wilmington, N.C.–based Kent Homes did the same thing when it recently launched its Kent Select portfolio of eight semi-custom home styles. Payne & Payne Builders in the Cleveland market is looking into “sub-branding” for its semi-custom product, says president Dean Tompkins.
On the other end of the price spectrum, Camp Construction recently offered its first house priced under $200,000 and is among the builders developing bare-bones homes they can sell cheaply. Hubble Homes in Des Moines, Iowa, doubled its sales last year, to $32 million, after redesigning its product to reflect what customers could afford. “If the market is going to allow you to sell a home for a certain amount of money, then that’s what the house is worth, and it’s up to the builder to redesign the floor plans … for market rate and still make money,” said Hubble’s CEO Rick Tollakson during IBS. “This is the perfect time to increase market share,” adds Estes.
Senior editors Jenny Sullivan and Ethan Butterfield contributed reporting for this article.