The past year has been a nightmare for the housing industry. The subprime mortgage crisis triggered a chain reaction of trouble across the country. Sales and prices are down; profits are in the tank; and spec and production builders are in a protective crouch, waiting for the falling market to bottom out. For custom builders, though, the picture has been far less bleak. And for many, especially those at the highest end of the market, times have never been better. Still, when a piano falls from the sky and flattens the next guy, one might well feel a bit jittery. To gain a little perspective, we sought out custom builders who have been in the business long enough to have weathered hard times before and asked if current market conditions have any historical € parallels.
“I started about 1957, I believe,” says Gale Fraser, who builds in the finest residential neighborhoods in Chicago. Despite the carnage elsewhere in the industry, Fraser reports, his market remains robust. “In fact, we’re probably busier now than we’ve ever been.” And it’s not just Fraser’s company that has found safety in the high-end custom niche. “We’ve got kind of a select group in the subcontractors that we work with, and they’re just as fortunate as we are.” Fraser has to look back decades to recall a time when the market turned on him in a bad way. “Back in the late ’50s, we had a slowdown,” he says. “We all felt it. I had a model home or two at the time. The only other time was when Jimmy Carter was in the presidency, and we had speculated on some townhomes, which was unfortunate timing. The prime rate went up to 21 or 23 percent—holy cow, that knocked the buyers for a loop—so we held them for a while.” Those experiences, in part, convinced Fraser to abandon speculative work. That move now looks prescient, because as bad as that market was in the late ’70s, the current scene looks worse in some respects. “I can’t recall repossessions like you have now, people defaulting to the degree that they have. I’m sure there are a lot of builders out there hurting badly. Suppliers, too … they’re all hurting.”
Boston-area custom builder and remodeler Bob Ernst measures any downturn in the construction business against the recession of the late 1980s, which kind of crept up on him. “I did really well for a while,” Ernst says. “And then, when things caught up, they really caught up, and I almost lost my business.” The experience remains painfully fresh in Ernst’s memory, keeping him alert to any hint of a repeat scenario, so the frantic pace of recent years had an ominous undertone. “The period of 1986 to 1988 was similar to what we were going through before this last crash,” Ernst says. While the ax fell on many New England builders in 1989, “I was still really busy a year into that.” But, so far, history has not repeated itself. He and his partner, John DeShazo, began 2007 with less work booked than they would have liked. “I was nervous,” Ernst says, “but we ended up having our best year ever, by a margin of 40 percent or so.”
That may be due to the fact that Ernst is running a smarter company. Twenty years ago, he says, “with my level of business acumen, I was not in a good position to weather the storm.” Since then, Ernst and DeShazo have targeted clients who are “focused on value rather than price,” those least reactive to ups and downs in the economy. They have also diversified, with new divisions in landscape installation and mid-market remodeling that contributed more than a third of their volume last year.
But Ernst also points to a characteristic of the market itself to explain his company’s continued success: Wealthy clients are simply spending more. In 2007, his average job size jumped from $600,000 to $1 million. On one project with a $1 million budget, he says, “There were $3.5 million worth of change orders.” Still, Ernst has a long memory, and he is prepared for a reprise of 1989, however unlikely that may be. “We are building our company to be more scalable and flexible when these downturns occur.”
