Barry Katz works in Westport, Conn., a town whose ties to a booming financial industry have made it a custom builder’s dream market. But the subprime mortgage meltdown has both roots and effects in this Wall Street bedroom community. “It’s putting the brakes on things a little bit,” says Katz. “My homes are $3 million-plus, and ordinarily those customers are not much affected by little blips in the economy. In a sharper downturn like we have now, though, some of them have to sell a home,” and may be having trouble doing so.
Katz can identify. “I actually do more spec than custom,” says Katz, who has a house on the market at $3.7 million. “That, in a stronger market, would have sold already,” he says. “Prices do not seem to be coming down, but houses are taking longer to sell, and ultimately that translates into smaller profits for spec builders.” In response, he says, “I’m not starting another spec right now. I’m going to wait and see what happens.”
Katz has been in business for some 20 years—“long enough to have seen a couple of cycles like this”—but he finds this one somewhat baffiing. “I think it’s a little different. The last really bad one was in 1987, which was precipitated by the stock market.” At the moment, however, “There’s nothing fundamentally wrong. Mortgage rates are low, and there’s very strong demand for housing. I think that some of this downturn is media-generated. It’s self-fulfilling to a certain extent. What perpetuates these things is the perception that if you wait a while prices are going to come down. It’s a matter of when people think the cycle is at the bottom.”
Out in Seattle, custom builder Joe McKinstry is as busy as he has ever been. “I’d have to say I feel really good,” he says, “and I feel really weird about feeling good. It kind of spooks me.” After 9/11, McKinstry experienced a drop-off in business severe enough that in 2002, “we were taking anything we could do.”
Since then, though, his niche has been extremely active. “The pressure is on to continue to build homes—custom homes. I’m kind of waiting for that shoe to drop, and it’s not happening.” McKinstry’s apprehension is born of experience. “I’ve been in business for 30 years,” he says. “I’ve been through several major downturns. I remember the [early 1970s] billboard that said ‘Will the last person leaving Seattle turn out the lights?’” That history made him conservative about expanding his business during the most recent boom. “I know a couple of outfits that have gone from 35 to 150 employees,” he says. “We’ve gone from 17 to 20 employees in the same period.”
That caution now seems well founded. “I didn’t expect [the housing market] to come unglued like this—who did?—but I knew it couldn’t keep going the way it was,” says McKinstry, who likens the mortgage meltdown to the collapse of the 1990s dot-com bubble. He expects his high-end niche to remain strong, but down-market trouble is already driving new competitors in his direction.
“There’s market pressure from other people. On Tuesday they’re a spec builder, and Thursday they’re advertising as a custom builder. We lost one project to one of the biggest commercial construction companies in the city.” To keep his employees busy, the owner of that company bid the project essentially at cost. “The money will always be there,” McKinstry says of his well-heeled clientele, “but how will it be distributed? There are times when you just have to be careful.” This seems to be one of them.
