Residential construction is a cyclical business. Easy to say when you’re riding on top of that big wheel. When the wheel is rolling over you, all you want to know is when this phase of the bleeping cycle will be over. Queried in a recent poll on our website, our readers confirm that there is indeed trouble in the business.
More than 80 percent of the 206 respondents say they are seeing the effects of the current slump in their sales numbers. Asked whether the next six months would see conditions improve or deteriorate further, though, they split almost evenly down the middle: 51 percent expect an upturn; 49 percent believe that the downturn has not bottomed out yet. We followed up the survey with interviews of respondents and other custom builders, who filled in the picture with details of their local markets and ways in which they are coping with an economy in flux. What we found was a broader range of market conditions—and of builders’ responses to local conditions—than we have seen in a very long time.
Southwest Michigan custom builder John Zito is an optimist by nature, but he still expects his market to get worse before it gets better. With job losses and a sluggish rust belt economy that long predates the mortgage crisis, “We’ve been down longer than most,” Zito says. “We finished one [custom home] in the beginning of 2006, and then nothing really happened.” The drought of business forced Zito to lay off his three-man field crew. “Now I sub everything out,” he says. “It’s just me and a site supervisor and office staff.” Zito’s company specializes in design/build projects in the $500,000 to $800,000 range, which typically do not hinge on clients’ ability to secure financing, but a weak stock market and unease about the economy have choked off demand. The phone is still ringing, Zito reports, but prospects are tentative. “A few years ago, it was, ‘When can you start?’ Now it’s, ‘I’ll get back to you in the spring, I’ll get back to you next year.'”
Looking on the bright side, Zito says that southwestern Michigan has recently attracted some new jobs to partially offset losses in the auto industry, and he is building relationships with subcontractors capable of performing up to his standards. “We’ve been green building for years, and it’s a huge [learning] curve,” he says. Perhaps the best news, though, is that when the market first slowed, he resisted the temptation to keep his crew busy building spec houses. Others were not so cautious, and the resulting orphan homes are much in evidence, he reports. “I’ve seen a lot of them that are on their second birthday.” In this kind of environment, where just staying in business is a victory, “I am considered busy because I have one house going.”
But what high gas prices take from Detroit, they give to Houston. Ask Stephen Hann, whose work has been buoyed by a local economy awash in oil profits. “I’m blessed to be in this part of the States,” Hann says. While home prices have retreated nationwide, in Houston, “There’s been no big correction.” With five projects currently under construction and three more awaiting financing, Hann’s company has what looks to be a record year on its hands. On average, he says, “We end up doing 12 to 15 jobs a year. And this year we’re going to hit the 15 to 17 mark, but some of those could be $2-plus million projects. So volume is up.”
Hann hit his own hard times several years ago, a consequence of overextending himself in the spec market. “I got out there and got really leveraged before the market made a turn,” he says, “and I’ve been fighting to get my chips back in.” That has meant tightening up on cash management, trimming overhead, and generally doing more with less—good things in any market. “My machine is very lean and mean.” Hann says. “All of us wear more hats to get the job done. I’d rather us all work a little harder and have something to show at the end of the year than have one more salary to pay.” By the time the mortgage crisis shook the industry, he says, “Our belt was already tight, and we’re not loosening it up, even though we probably could.” And he regards the speculative market with a caution borne of experience. “The only thing I’ve got going spec is a joint venture.”
Santa Barbara custom builder Bruce Giffin has his own joint-venture spec house on the market, his first, at a price of $33 million. Read that again if you need to; there are eight figures in that number. And despite all the bad news on the business pages since Giffin broke ground, he is not losing sleep over selling the house. “Our market is still holding up,” he says. “Things for us here in Santa Barbara are better than for most parts of the country.” In his mainstay custom home business, Giffin says, “We may have our biggest year ever this year,” and the outlook is bright going into 2009. Giffin runs a tight ship, but he knows too many good builders who are suffering through lean times to take full credit for his company’s continued success. “We’re members in the LGC: the Lucky Geography Club,” he says. Memories of hard times in the early 1990s keep Giffen from becoming complacent. “It was a depression; it wasn’t a recession,” he says. “It really taught me the value of cash and cash flow, of having cash on hand.” Giffin also works at maintaining good relationships with his bankers, and with his well-heeled clientele. If business slowed significantly, he says, “I don’t know if I’d hunker down. I might just go to the people with money and tell them, ‘Now is a good time to buy.'”
In the Columbus, Ohio, market, custom builder Mark Braunsdorf sees both challenges and opportunities. “Being in Columbus—being in the Midwest, period—we’re probably doing better than the coasts,” Braunsdorf says. “We didn’t see the same run-up in prices.” By the same token, he adds, “In the past 12 months we’ve had two or three national builders pull out.” As for his own business, he says, “Our margin’s getting beat up a little bit. We’ve had more people come in this year saying, ‘I’m looking for a deal’ than we ever did before.” But Braunsdorf sees plenty daylight amid the clouds. When the market was hot, land was tight. With the bigger players on the sidelines, “Now that constraint is removed.”
Working at the upper end of the market lends stability as well. Compared with the area in general, Braunsdorf says, “High-end neighborhoods are in far, far better shape, in fact quite healthy.” A new hospital has brought new professional jobs to nearby Dublin, Ohio. “And there are a lot of places like that. As a smaller builder, that’s been a big help to me. I’ll go sell where they’re buying.” As a result, Braunsdorf says, he’s having a solid year. “We’re extremely positive,” he says. “It’s not a home run, but we’re getting hits.” As for when a real recovery might arrive, though, he is not holding his breath. “I think the next six months will be okay. I don’t think they’re going to be spectacular. I don’t think they’re going to be any worse.”
For much of the past decade the residential construction market was flooded with business, a condition that obscured underlying regional variations. Now the waters have receded, leaving some builders comfortably afloat, others hard aground, and many more navigating perilously shallow waters. Custom builders as a group seem to be faring better than the industry as a whole. But most are having to work harder and more creatively than in recent years. The companies that come through the current slump intact may well be better for it. Which, of course, makes no one less eager to see the business cycle start on its next turn.
CUSTOM HOME Survey Results: The Housing Slump
This article was originally posted on Aug. 20, 2008, as a first follow-up to our Housing Slump survey.
Earlier this month, we asked CUSTOM HOME readers whether they were feeling the effects of the housing slump and about their plans for getting through the tough times.
Nearly 81 percent responded that they are feeling the effects of the current slump in their companies’ sales numbers. When asked whether they expect business in the next six months to improve or worsen, readers were nearly evenly split: 50.9 percent expect business to get better in the next six months, while 49.1 percent believe it will get worse.
Luckily, most respondents have prepared their companies for tough times. Diversifying and expanding their range of work is the most popular strategy to get through the housing slump and make a living despite low demand for new builds. Many readers said that they are increasing their activity in home remodeling and condo renovations, taking on replacement-type work or homeowner services such as building decks and pools, and even expanding into excavation, light commercial, recreational, and government work. Other common solutions include:
Taking smaller jobs
Taking jobs outside of local/home area
- Reducing overhead
- Cutting staff
Increasing marketing efforts One enterprising reader has switched gears completely and is now consulting for the local superior court on plentiful construction defect cases. Unfortunately, many of the survey respondents are having to rely on past savings to get through these hard times. One even plans to retire.
–Stephani L. Miller
