BUILDERS GO BACK TO BASICS : Housing: The developers who have been able to constrain themselves when they saw the market slowing are the ones who will survive the current slump, some of the experts say.

Builder James M. Peters said in late 1988 that the luxury homes his company built would always be an important part of the Orange County housing market. Other builders listened to him closely--perhaps too closely.

Because by mid-1989, with dozens of other builders jumping on the big-house bandwagon, prospective buyers looked at a market saturated with homes carrying hefty price tags of $400,000 and more, and put their checkbooks away.

The sales stopped, the real estate market went into a swoon and today builders are scrambling to downsize their products and prices. And some companies are desperately struggling to survive.

Consider Peters’ own company, the J.M. Peters Co., based here. Despite its reputation for high quality and value, the firm is in the midst of a financial crisis and is unlikely to survive the current real-estate crunch in any recognizable form, real estate experts say.

There are dozens of other area builders in distress--abandoned by their lenders, strapped for cash, starving for buyers and facing insolvency in the Southland building bust. But there are also dozens of others doing fairly well and poised to emerge from the recession in pretty good shape. They range from established regional giants like the Fieldstone Co. in Newport Beach and Standard Pacific L.P. in Costa Mesa to tiny San Juan Group in Rancho Santa Margarita, a new firm that has just begun selling its first homes.

What is the difference between the survivors and those certain to sink into oblivion?

As always, luck and timing play a part. Companies that bought land at the top of the boom in 1988 and early 1989 paid premium prices and now are staggering under huge debt burdens. But builders who bought earlier continue selling homes and making profits because their prices weren’t swollen to pay for the expensive land.

But there is a lot more to it than luck. It takes a special set of attributes for a residential builder to emerge relatively whole from the current slump and proceed into what will be a strange new world, industry insiders say.

And many builders have been unable--or unwilling--to make the fundamental changes necessary.

An oft-repeated criticism of builders is that many consider their principal line of business to be home construction and not marketing. They continue building as long as construction funds are available--whether there is a market for their product or not.

It is the builders who were able to constrain themselves when they saw the market slowing who will survive the current slump, said Richard B. Peiser, director of USC’s Lusk Center for Real Estate Development.

Companies lacking that discipline are the ones facing disaster, said Kidder, Peabody & Co. housing analyst Barbara Allen.

“A good, disciplined builder cuts production as soon as sales slow down,” Allen said. “But Peters and a lot of other builders kept building” through 1989, adding to a growing inventory of homes that weren’t selling.

Survival in a slumping market also “takes the ability to focus on surviving . . . to be able to do a thorough self-appraisal . . . and to see that this is not just another cyclical downturn but a fundamental change in the financial structure of the business,” said industry analyst Sanford Goodkin, head of KPMG Peat Marwick’s Goodkin Group consulting unit in La Jolla.

Real estate economist Al Gobar, president of Alfred Gobar Associates in Brea, sees one other characteristic as crucial to surviving both the current climate and the future: “The survivors are the contrarians, the ones who didn’t stop building everything but $400,000 homes just because Jim Peters was doing well at the high end,” he noted.

One mind-set characteristic of many builders, Gobar said, is that they believe that if they build a high-quality product, people will buy it. “They forget that what people want to buy is one thing and what they are able to buy is another,” he said.

Companies that will last in the new era of home building are those run by people “who know that the herd sinks itself every eight years or so, and so they don’t follow the herd,” Gobar said. “They think that maybe the emperor really doesn’t have any clothes, and they build for the $250,000 market and the $200,000 market instead.”

J.M. Peters gets discussed a lot these days because of its high visibility and because many in the industry were shocked when it became apparent in mid-1990 that the 15-year-old firm was experiencing financial difficulties after years of huge successes.

There are other companies in even worse shape than Peters, local bankruptcy attorneys say. But as one of a handful of publicly traded residential builders in the nation, Peters must report its financial condition for everyone to see.

And the problems that have been revealed in those reports can provide valuable learning lessons for others in the industry.

The company’s major problem is that San Jacinto Savings & Loan, the Houston thrift that owns 87% of Peters’ stock and was its major construction lender as well, was seized by the government late last year. While most builders aren’t owned by an S&L;, the collapse of the thrift industry and the wholesale closure of S&Ls; has had the same impact on many who saw longstanding lenders disappear overnight.

In Peters’ case, regulators immediately cut off the flow of funds to the company, robbing it of a sizable credit line and the equity funds needed to attract other lenders. That forced the company to stop building, lay off almost 150 employees--including 30 about 10 days ago--and to begin liquidating its inventory of almost 400 homes and several hundred undeveloped lots.

Christopher Gibbs, the company’s executive vice president, said last week that the inventory is down to 170 homes. But those sales have been costly for Peters, which has offered huge price reductions to move many of its homes.

In the company’s most recent financial report, for its fiscal 1991 third quarter ended Nov. 30, Peters reported a nine-month loss of $6 million compared to a $14.2-million profit a year earlier. Revenue for the period was just under $40 million, down from $72.4 million for the first nine months of the company’s 1990 fiscal year.

And in a letter to shareholders mailed last week, James Peters said the collapse of San Jacinto and resulting financial crunch “precludes the company from obtaining any financing or joint-venture partners to do any new development. We are basically liquidating our inventory . . . (and) because we are selling into a depressed market, most of these transactions will generate losses.”

Had San Jacinto Savings not been taken over by regulators late last year, J.M. Peters would be in much better shape to weather the building crunch, analysts say. But they also say that the company’s management made mistakes that would have hurt it in any event.

Peters bet wrongly that the soaring demand in the late 1980s for homes in the $400,000-and-up price range would continue unabated into the ‘90s. And it didn’t foresee that literally dozens of other builders would jump into the high-end market, creating hordes of competition just as that market began drying up.

By concentrating almost everything in that one segment of the market, said Allen of Kidder Peabody, Peters and others found themselves exposed when the market slowed and the federal crackdown on the thrift industry wiped out a major source of financing almost overnight.

In direct contrast to Peters’ concentration on the upper end, Fieldstone founder and chairman Peter Ochs has dedicated that company to the singular goal of providing homes, principally for first- and second-time move-up buyers, that offer more features for the dollar than competing products at affordable prices.

That the strategy works is evident in the numbers--Fieldstone sold almost as many homes in 1990 as in its record year of 1989. And while many other builders are slashing prices, Fieldstone is hosting camp-outs for people willing to wait in line for days to be sure that they get the home of their choice.

To offer homes with what Fieldstone and other builders call a value-oriented price tag, the company keeps a tight rein on operating costs, doesn’t make broad changes to its basic designs from project to project, involves its subcontractors in planning to minimize extra costs and scours the Southland for land at bargain prices.

Ochs is also fanatical about managing from the bottom up rather than from the top down and has instituted what he calls a team-management concept that involves all employees in problem-solving and goal-setting.

The emphasis on management has created a smoothly operating company in which people spend their time working to maintain the corporate goals. Ochs refuses to lay off employees, preferring instead to redesign his products and reduce prices in order to keep building and selling homes in a slumping market.

“Ochs is someone who could run any Fortune 500 company well,” Goodkin said. “He just chose to be a home builder.”

Fieldstone’s quality control and planning enabled the company to cope with the current crunch, in part, because many of the company’s floor plans were designed to be downsized in the event of a market slowdown. That enabled Fieldstone in late 1989 to quickly shift to the slightly smaller and cheaper products, and keep building and selling at a profit.

So in the midst of the biggest housing crunch in a decade, Fieldstone built 1,354 homes last year and sold all but 67 by year’s end. In 1989, the company built 1,373 homes and ended the year with 33 unsold units in inventory. Sales of $357.4 million last year were up 4% from $343.7 million in 1989.

Like Fieldstone, Standard Pacific L.P., a publicly held limited partnership, continued to sell homes last year despite the crunch.

The company, which builds in California and Texas, entered into escrows on 1,063 of its homes last year and ended the year with 256 unsold homes in its inventory. In 1989, Standard Pacific delivered 1,443 homes and had 154 units unsold at the end of the year.

The company reported a 1990 profit of $48.4 million on $381.3 million in revenue, down from a profit of $106.3 million on $486.4 million in revenue in 1989. Profits fell with soaring marketing and development costs, a category that includes the cost to the company of incentives and price reductions.

Analysts describe the company’s chairman, Arthur Svendsen, and its president, Ronald Foell, as conservative managers who believe in tight financial control and a minimum of debt. The company builds homes in a wide range of prices but concentrates on the lower end of the market.

“Foell proves how important financial discipline is,” Goodkin noted. “Absolutely nothing could stampede him into going into the upper-price brackets just because he could make more money per product. When just about everyone else was doing it, he kept as much of the company’s product as possible in the affordable price ranges. And it paid off in sales and profits.”

That is not to say that the Costa Mesa home builder doesn’t play in the high end of the market. Standard Pacific is building a semi-custom development in the Turtle Rock area of Irvine. Most of the 100 homes will sell for $1 million and up, Foell said.

But the homes will be built a few at a time to ensure that the supply doesn’t outstrip the demand. And Standard Pacific is pretty sure that there is a demand--the company recently sent out a mailer to prospective customers asking for expressions of interest in the homes and got back 150 requests to be placed on a waiting list.

The base of Standard Pacific’s strength is its firm policy of building in areas where demand is already proven. The company’s homes are in Irvine, Thousand Oaks, San Jose, Dana Point, Rancho Santa Margarita and Rancho Cucamonga.

“But we stay close in,” Foell said. “You won’t find us in Moreno Valley or Palmdale. We go where there already is a city and where it wants development.”

The typical Standard Pacific project is financed with a 40% cash investment from the partnership and 60% borrowed money. That compares to a typical 85% to 90% debt load in today’s tight credit market. Two years ago, when many builders were getting 100% financing from then free-spending banks and thrifts, Standard Pacific still insisted on investing its own cash.

The policy has stood the company in exceptionally good stead in the current credit crunch and Foell says that Standard Pacific has no problem borrowing to acquire land or begin new developments.

And that is critical, USC’s Peiser believes. “The ability to make it over the hump now depends almost entirely on a builder’s ability to attract equity and construction funding in an era when the traditional sources of funding are all but gone and what lenders there are have raised their equity requirements substantially.”

San Juan Group president and founder Dennis Bean has found another way to succeed in a tight market. A former executive with the Santa Margarita Co., Bean last year put together a business plan and persuaded the company to sell him a parcel of land on its new golf course in the Rancho Santa Margarita planned community.

The deal gave Bean’s company the financial backing of the county’s second largest landowner and master developer--the kind of relationship, analysts say, that will become more prevalent as banks and S&Ls; continue shying away from real estate development lending.

Bean’s company, with eight employees, started in the midst of the market slump and he was able to plan from the start for operating in a recession--a luxury most builders haven’t had.

He determined that the strongest market in Orange County is and likely will be for some time the market for homes priced under $200,000, and he says he doesn’t intend to stray out of that market.

The San Juan Group’s first project is a 343-unit condominium complex, aimed at first-time buyers, that Bean figures will be built out and sold out by the middle of next year, about six months ahead of schedule.

The development features four plans ranging from a 668-square-foot, one-bedroom, one-bath unit to an 1,170-square-foot unit with two master bedroom suites. Despite the golf course location and amenities like ceramic tile counters, oak cabinets and cathedral ceilings in the living rooms and 9-foot ceilings everywhere else, prices range from $104,990 to $139,990.

Sales began in November and by the middle of last week, escrows had been opened on 85 units, although only 81 had been built.

If a newcomer like Bean can make it, why are so many established firms having trouble?

The tightening of credit in the wake of the S&L; crisis brought with it a requirement that developers be highly capable and competent business executives first and builders second, Goodkin said.

“A builder who is interested primarily in building is a just a contractor,” he said. “But contractors will survive only by accident or because the market happens to be doing very well, as was the case in 1987 and 1988, when a lot of people in the business profited just because they were there and not because they had smarts.”

The survivors who prosper in coming years will be companies with a variety of skills, broad understanding of the market and the courage of their convictions.

“They will be able to control at all times their overhead, their selection of product, the timing and cost of land purchases, the range of product, even tiny things like the quality of the brochures they print to market their houses,” said Ken Agid, an Irvine real estate marketing specialist.

“This is no longer the time for the amateur builder and the opportunist who jumps in and out of the market, hoping to get lucky.”

* SIGN OF THE TIMES: The recession leaves its mark in Laguna Niguel. E1.

ORANGE COUNTY’S TOP 10 HOME-BUILDERS

Most of Orange County’s 10 largest builders are projecting significantly lower sales volume for 1991. Builders are listed on the basis of 1990 sales figures for projects in Southern California only.

1989 1990 1991 1989 1990 Company Volume Volume Projection Units* Units* Lyon (William) Co. $638.2 $624.4 $540.0 3,594 2,969 Fieldstone Co. 343.7 357.4 325.0 1,373 1,354 Woodcrest Development 275.4 312.0 242.0 1,232 1,572 Warmington Homes 338.0 226.0 198.0 1,523 852 Meeker Development 105.0 159.0 75.0 341 627 Bramalea California 201.1 132.8 82.0 768 492 Lusk Co. 232.9 116.6 141.5 1,234 509 Barratt American 249.0 114.2 170.5 998 607 A-M Homes 82.1 112.0 70.0 245 168 Western National Properties 59.0 90.0 78.0 638 886

* Includes single-family homes, condominiums and apartment units.

Source: Los Angeles Times

MORE HOUSE FOR A LOT MORE MONEY

The average price of a new single-family tract home in Orange County has doubled since 1985, but average sizes have also increased by more than 26%. Meanwhile, average condominium sizes are virtually unchanged. Cost per square foot for both types of housing has increased about 55%. In contrast, the Consumer Price Index rose about 20% during the period.

1985 1990 Single Single Condo Family Condo Family Avg. size (sq. ft.) 1,330 2,084 1,380 2,638 Avg. price $134,409 $202,601 $217,875 $404,035 Median price $123,900 $186,900 $189,900 $375,900 Avg. price (sq. ft.) $102.41 $97.22 $157.88 $153.16 Baths 2.2 2.6 2.3 3.0 Bedrooms 2.3 3.5 2.4 3.7 No. of developments 114 103 75 128 Avg. sales per week 1.2 0.9 1.5 1.2 Unsold inventory 1,331 578 1,587 1,855 Avg. homeowners assn. fee $105 $58 $149 $108

Source: First American Title Insurance Co.

THE DISAPPEARING ENTRY-LEVEL HOME

Orange County saw a steady shift away from lower-cost homes in the 1980s. In 1982, more than 60% of homes sold for less than $170,000, but by 1990 that figure had dropped to just 14%. Today, many builders are looking to the low end of the market to ride out the recession.

Source: Construction Industry Research Board

BUILDERS SCALE BACK

For the first time since the depths of the last recession in 1982, builders scaled back the construction cost of new homes in 1990, as reflected in a 16.8% decline in average permit values.

Source: Construction Industry Board

BUILDERS SCALE BACK