Home Builders Cope With the Slowdown
A newcomer to the recent Pacific Coast Builders Conference might have thought that this year’s meeting of Western builders and other industry representatives was just like those of years past.
There were, after all, the usual exhibitors hawking everything from fake bricks to high-tech spas and the usual panel discussions on topics ranging from affordable housing to the future of the economy. The convention concluded last weekend.
But many of the veteran builders who have attended the show in the past said there was a certain pall over this year’s conventioneers that hasn’t been seen in years.
The reason? After three years of selling homes as fast they could build them, developers are now trying to cope with a sharp drop in demand and the resulting glut of new houses on the market.
“The same spark that we had over the past few years just wasn’t at the meeting this time,” said Bruce Karatz, president of Kaufman & Broad Home Corp. “I think a lot of it has to do with the slowdown. Everyone was a lot more subdued.”
But more than dampening the mood of many convention-goers, the drop-off in sales has forced many builders to re-evaluate their marketing strategies and overhaul their company game plans.
Some are postponing or even canceling planned projects. Others are trimming their staff to lower overhead costs and slashing prices to sell slow-moving homes.
Some builders are even diversifying into other lines of business to offset the cyclic nature of home building.
“No builder has a ‘home-run’ strategy to deal with this kind of market,” said Randall Lewis, executive vice president of Lewis Homes of California. “If you want to win, you have to hit lots of singles and doubles.”
The duration of the current slump and the way that builders cope with it could have a broad impact on the lives of virtually all Californians.
New-home buyers are benefitting from the slowdown because most builders are willing to cut prices, provide special financing, offer free upgrade packages or provide other incentives to sell their slow-moving homes.
But builders caution that if housing starts continue to plummet, the current glut of new homes on the market will eventually be eaten up and prices will start to rise sharply again.
Meanwhile, some experts fear that a prolonged slowdown could lead to massive layoffs in the construction industry, California’s biggest employer. The ripple effect would be felt throughout the state and perhaps even across the country.
The California construction business accounted for about 1.7 million jobs in 1989, according to the nonprofit Construction Industry Research Board.
The group estimates that spending on new projects will drop 7% this year. If that proves correct, about 115,000 Californians will lose their jobs.
“That’s a lot of jobs, and it will affect a lot of things,” said Ben Bartolotto, the research board’s director.
“It will affect the state’s tax revenue, which would then affect the budget, which would then affect everything--from how much is spent on roads to how much is spent on schools.”
The loss of 115,000 jobs “wouldn’t be enough to throw the state into a recession,” Bartolotto said. “But if the aerospace industry and some of the other key employers keep laying off people, we’re going to have a real problem here.”
Many builders at the convention complained that recent moves by the federal government to shore up the ailing savings and loan industry is making it difficult to finance their projects. They’re particularly upset by a new rule that prohibits an S&L; from lending more than 15% of its money to any one borrower.
The limit means that despite previous loan commitments, an S&L; often can lend only a portion of the money a developer needs to build a new housing project--or even finish one that’s already in progress.
“There are an awful lot of builders out there who are stuck midway through a project because their lender just sent them a letter saying, ‘We can’t loan you any more money,’ ” said Martin Perlman, a Texas builder and president of the National Assn. of Home Builders.
“These builders aren’t bad credit risks,” Perlman said. “It’s just that Congress passed this new law, the S&Ls; had to follow it, and the builders got hung out to dry.”
Many large builders, including Watt Industries Inc. and William Lyon Co., said they’re increasingly turning to foreign lenders--especially the Japanese--to finance part or all of their projects.
Many smaller builders don’t have the massive projects needed to attract many foreign banks. With sales slow and money harder to get, a growing number of developers are simply throwing in the towel.
“We’re telling a lot of our clients who don’t have the cash to wait out the slowdown to sell their projects and cut their losses,” said Jack Rodman, a partner with the real estate consulting firm of Kenneth Leventhal & Co.
“We’ve even seen some builders just give up and let the bank foreclose,” he said.
Builders determined to hang in during the slump are keeping a close eye on their overhead costs--especially the price that they’ll pay for land.
“Last year, we made 15 full-price offers on land,” said Dan Rigney, president of Rigney Development Co. “This year, we haven’t made one.”
Kaufman & Broad’s salespeople are brushing up on their sales techniques, and its architects are freshening up their floor plans and designing smaller houses.
“We’ve let our houses grow too big and too expensive over the years, so we’re looking at downsizing some of our homes to keep prices down and appeal to the widest possible audience,” Karatz said.
Developers are also squeezing more homes into their projects. “Builders used to come to us and ask us to design something with nine to 11 units per acre,” said Aram Bassenian of Bassenian/Lagoni Architects. “Now, we get a lot of requests to do 17 to 25 units per acre.”
Many builders said they’re now considering projects that they might not have touched several years ago.
For example, San Diego-based McMillin Communities is planning a new housing tract in the desert town of Needles. “It’s on Indian land, and we’d share the profits with the tribe,” said Bob Jones, senior vice president with McMillin.
“It’s safe to say that it isn’t your typical home-building venture.”
Meantime, Regis Homes--which has primarily built rental apartments over the last several years--now has two condominium projects geared toward first-time buyers.
“The cost of land has risen so much that building apartments just doesn’t make a lot of sense anymore,” said Geoffrey Stack, president of Regis Homes Corp.
“Besides, the first-time buyers market is still pretty strong.”
The slowdown in sales has been a boon for many research and consulting companies that help developers determine where they should build and what type of homes they should construct.
“Our business is up 30% from a year ago,” said Eric Brown of The Meyers Group, an Encino-based firm that provides marketing and research information to builders.
“When the market was so hot a year or two ago, a lot of builders didn’t think they needed our services because everything was selling like hot cakes. Now, things are a lot slower and builders are being a lot more careful before they start a project.”
Just how long the current slowdown will last is anyone’s guess. Although a few builders who attended the show said they think the doldrums will last only another month or two, most weren’t quite as optimistic.
“I can’t tell you when this market is going to pick up again,” said Steven Muller, a top executive with home-building giant Centex Real Estate Corp. “But I’m afraid that things are going to get worse before they get better.”
