Homebuilders’ Tales From the Bottom
About 10,000 builders, architects and related professionals from the western United States opened their annual convention here recently under stormy skies--and not all of those dark clouds were Mother Nature’s.
Builders were told that only 130,000 new homes will be built in California this year, down 21% from last year’s depressed levels and the lowest amount of new activity since the 1981-82 recession.
The downbeat assessment didn’t surprise most of the developers attending the 33rd annual Pacific Coast Builders Conference here at the Moscone Convention Center.
Builders from virtually every part of the state--especially those doing business in the hard-hit Southland--said that the sharp slowdown in sales over the past 18 months has already forced them to lay off workers and postpone new projects.
“Things are bad, and they’re not going to get better anytime soon,” said Ken Willis, the executive director of the Building Industry Assn. of Southern California. “It’s tough out there.”
Builders had hoped that the sudden burst of sales activity that occurred shortly after the “shooting war” erupted in the Persian Gulf was a sign that consumers had gotten their confidence back and that the housing slump had finally bottomed.
But after posting relatively good sales figures in the spring, developers have once again found themselves with too many empty houses and not enough eager buyers.
With no big upturn in sales predicted for the second half of the year, builders are being forced to tighten their belts even further. And from the sprawling convention hall to hotel bars, they swapped tales that illustrate how the slowdown is affecting almost everyone’s life.
* Willis’ group--the largest and perhaps most influential regional builders trade association in the West--has experienced a sharp drop in membership brought on by the downturn.
Annual dues are partially based on each company’s revenue, and many Southland builders are balking at paying the hundreds or even thousands of dollars it can cost to belong.
As a result, Willis said, the organization has been forced to cut its staff back to a four-day workweek--effectively slashing employees’ paychecks by 20%.
* Attendance at this year’s convention was down more than 30% from last year’s, largely because many developers have trimmed their travel budgets and cut back on nonessential expenditures.
Many of the lavish cocktail receptions that lenders, architects and other firms have traditionally sponsored in an effort to build goodwill with builders were also eliminated.
Even the parties that were held were scaled back from previous years: Cheese and crackers replaced fancy carving tables of roast beef and ham, while inexpensive wines replaced fully stocked bars.
* In the San Diego area, several local Little League teams are wearing last year’s uniforms because new-home sales are sluggish.
“When things get really tough, one of the first things that have to get cut are your charitable donations,” said Bill Davidson of San Diego-based Davidson Communities.
“We’ve always tried to sponsor a Little League team in every community we build in, but the slowdown has made that a luxury that we can’t really afford.”
* Many builders say that some cities are becoming more amenable to new projects because cash-strapped municipalities need all the revenue they can get.
“When you’re dealing with a city that welcomes your business, you can build a lot faster,” said Ira Norris, president of INCO Homes.
Norris should know. In May of last year, the pro-growth city of Adelanto provided his company with a vital zoning change needed to build American Traditions, a 305-unit community of single-family homes in San Bernardino County.
City leaders kept the red tape to a minimum throughout the development process, and in a scant 10 months the first families were moving into their new homes.
“It could have taken us two or three years to build this development in another part of Southern California,” Norris said. “The help we got from Adelanto let us keep our prices between $79,000 and $99,000--not much, for a good single-family home in California.”
* Many builders said the sales slowdown has given them some time to strengthen their ties with lenders, architects and other professionals in the business--relationships that can bear financial fruit.
Randall Lewis at Lewis Homes, for example, said he was recently talking to one of his lenders and learned that one of the bank’s other builder clients was suffering some cash-flow problems.
The three parties worked out a deal that allowed Lewis to buy 76 of the other company’s finished lots at a 10% to 15% discount.
“The discount will let us cut maybe $5,000 off the price of each home without lowering our own profit,” Lewis said.
* Judging from developers’ balance sheets, profit margins seem to be falling across the board.
Many builders at the convention said they’re settling for a 5% to 10% profit on each house they build, down from the traditional 12% to 15% range and drastically lower than the margins of 20% or even 30% that some builders enjoyed in the boom years of 1988 and ’89.
* To soften the blow to their bottom lines, many builders are squeezing their subcontractors and suppliers to reduce their charges for labor and material.
“With housing starts down, these guys are hungry for work and they’re more willing to make concessions,” said Bruce Karatz, president of Kaufman & Broad Home Corp. “So, we’re just asking them to share some of the pain.”
* As usual, developers at the convention blasted government regulators, slow-growth advocates and environmentalists for causing costly delays that jack up the cost of building a new tract--costs that they say are ultimately borne by home buyers.
One of this year’s favorite targets of builders’ wrath was the northern spotted owl, an endangered species that lives in the forests of Washington, Oregon and Northern California.
About six weeks ago, a federal judge issued a ruling that blocked most U.S. Forest Service timber sales in the Northwest to protect the owl’s habitat. Builders say that the ruling has caused a lumber shortage and sent the price of wood up by one-third.
“It’s fine to try and save a little bird, but this judge’s ruling has added $3,000 to the cost of building a $150,000 home,” said Mark Ellis Tipton, president of the National Assn. of Home Builders.
“The spotted owl isn’t the endangered species here,” Ellis said, his voice rising for dramatic purposes. “The real endangered species on the West Coast is the first-time home buyer.”
* As if the sales slowdown wasn’t bad enough, California builders are also facing some tough battles with state legislators.
Perhaps their biggest worry is a bill authored by Assemblyman Mike Gotch (D-San Diego) that they say could virtually eliminate caps on the fees that many cities can levy on developers to build new schools.
Currently, cities can charge builders a maximum fee of $1.58 per square foot of new construction to raise money for educational facilities. So a builder can expect to pay a maximum of $2,370 in school fees for each 1,500-square-foot home he builds.
Gotch’s bill, which has already won approval in the state Assembly and is now working its way through the Senate, would allow cities to flatly deny projects if there aren’t enough schools in the community.
Builders worry that passage of the measure would encourage cities to withhold approval of new projects unless the developer agreed to forget about the $1.58-per-square-foot limit and instead pay a much higher levy.
“If builders have to pay even more money for school fees, it’s just going to drive up the cost of buying a new house,” said Robert Rivinius, chief executive officer of the California Building Industry Assn.
“The last thing builders need right now is higher development fees. It would only make an already bad situation even worse.”
