Builders Weather Economic
Downturn
Offcuts
Recall
As the boom goes bust, savvy business owners focus on
profitable niches and diversification
True believers in the irrational exuberance that's been fueling
the housing industry got a painful smack upside the head this
fall. According to the latest figures from the U.S. Department
of Commerce, the rate of single-family housing starts for
October fell 15.9 percent from September's rate, and a whopping
31.8 percent below that of October 2005.
Furthermore, in a development many view as symptomatic of the
malaise plaguing the industry as a whole, luxury home builder
Toll Brothers announced in December that its fourth-quarter
profits were 44 per cent lower than those of the same period
last year. Chairman Robert I. Toll blamed the dismal results on
"our higher-than-normal 585 cancellations."
Although not as hard hit as new construction, remodeling
activity is slowing down as well. Numbers from Harvard
University's Joint Center for Housing Studies show that
residential remodeling expenditures over the past four quarters
rose an anemic 1.6 percent. Previously, double-digit increases
were common.
Clearly, home builders and remodelers need to adapt to a
changing business climate.
Branching out. For some companies,
diversification has been the silver bullet. Gary Sackett is
project manager for Abrahamse & Co. Builders in
Charlottesville, Va., a 30-year-old firm that has long taken on
institutional (schools and churches) and commercial jobs, as
well as high-end custom homes. Sackett concedes that the "surge
of new prospects" for residential work has lessened in recent
months, but says that the commercial sector remains strong. In
past years when work has slacked off, he says, "we beat the
bushes — lobbying local architects and accepting small
remodeling jobs that we'd ordinarily turn down — to
generate new contracts." This time around, he says, will be no
different.
Mark Parlee, a veteran builder in Urbandale, Iowa, says he
started preparing for the slowdown years ago. "I was thinking
that this building boom couldn't go on much longer, so I got
more into renovation and repairs," he says. A former framing
and siding contractor — and an early convert to
Hardiplank — Parlee made himself an authority on the
correct installation of cement-board siding, boning up on
crucial details that many siding installers in his area
ignored. Although he continues to build houses (mainly with
subcontractors), he and his four-man crew are extremely busy
these days correcting poorly built exterior details, replacing
siding, and otherwise fixing other people's mistakes. "I'm
going into winter with four houses to redo," he says, "and
another client who's ready to commit."
Rob Corbo, a remodeler in Elizabeth, N.J., also became
convinced a couple of years ago that his phone would eventually
stop ringing off the hook. Even during the good times, work
would occasionally stall because projects didn't start on time
or subcontractors fell behind schedule; to fill in the
downtime, he started doing modest kitchen installations for a
big-box home center. "It only amounts to about 10 percent to 15
percent of our business," he says, "but that's what's been
keeping us busy for the last month and a half, and probably
will for the next month, too."
Corbo's referral network has benefited from this arrangement
because the home center he deals with allows him to contract
directly with the homeowners if they're interested in having
more work done. "They [the home center] want to sell kitchen
cabinets and installations, but they're not interested in major
gut jobs or additions," he says.
Beware the pitfalls. Diversification, done
deliberately and carefully, can be a sound strategy. But
struggling home builders should be wary about diving headfirst
into the remodeling field. "When new houses get cut back, we
see a lot of guys in a truck coming around thinking they can do
remodeling," says Danny Feig-Sandoval, owner of Small
Carpenters At Large (SCAL), a 28-year-old remodeling firm in
Atlanta. "They don't know how to price jobs and they're not
aware of the customer service that's required for remodeling
work." Not long ago, in fact, SCAL was hired to complete a job
that another contractor had severely lowballed and then
abandoned when he ran out of money.
Despite increased competition, SCAL and other high-end
remodelers are better insulated than most builders from the ups
and downs of the housing market. "Our clients are more focused
on quality of life than on resale value," says Michael Anschel
of Otogawa-Anschel Design-Build in Minneapolis. "It's not about
curb appeal or keeping up with the Joneses. These people are
deeply committed to their homes and to making their homes work
better for them, and they need to know that their contractor
feels the same way.
"At the same time," he adds, "we have to convey, to even the
wealthiest clients, that we are conscious of the budgetary
constraints."
With more builders chasing fewer dollars, nobody is just an
order-taker anymore. "In today's atmosphere, there's not tons
and tons of work waiting at your door, so you have to be more
proactive, and you have to follow up with people," Anschel
says.
Market smarts. Jim Ronda, a remodeler in Medford,
Ore., agrees. "We're having to do more work up front to get the
job," he says. Although he's relied on word-of-mouth referrals
during most of his 25 years in business, Ronda is now trying to
drum up business by placing more ads in local fundraising
publications and by experimenting for the first time with radio
spots.
Similarly, Feig-Sandoval of SCAL — despite being, by his
own account, computer-illiterate — has poured his modest
advertising budget into a new professionally designed Web site,
which he says is rapidly becoming his company's most effective
marketing tool.
Like most of the other builders mentioned here, Kevin Barr, a
veteran home builder and remodeler from Twain Harte, Calif.,
has been through hard times before, and suggests that builders
who expected smooth sailing forever were either naive or
inexperienced. "There are a lot of builders who've been in
business for less than 10 years and have never seen a slow
cycle," he says. What's happening now "is part of the market,"
he notes, "and they need to be ready for it."
F.H. Perry Builder, a custom building and remodeling firm based
in Hopkinton, Mass., has plotted a steady course of growth for
30 years through numerous fluctuations in the volatile Boston
area real estate market. "We're a ridiculously cautious
company," says Allison Iantosca, vice president of sales and
marketing. "Every time we move forward, it's always a slow,
strategic step."
That conservative approach has paid off as the company heads
into 2007 with a generous backlog of upcoming projects; but the
firm has never been afraid of slowdowns, either. Says founder
Finley Perry, "A recession — for lack of a better word
— is a positive thing because it gets you to question who
your staff is, how you're positioned in the market, how you're
doing business, and how you're going to beat it next time."
— Tom O'Brien
Offcuts
• In December, Connecticut insurance commissioner Susan
Cogswell reversed an earlier ruling that would have allowed
insurance companies to require shoreline homeowners to install
storm shutters or face cancellation of their policies. Under
the new regulations, owners of property located within one-half
mile of the coast are permitted to use plywood,
impact-resistant glass, or other approved measures to prevent
storm damage. Insurers will also be allowed to apply a
hurricane deductible. Two days after the ruling, Allstate
announced it would no longer write homeowner insurance policies
for new customers in Connecticut. The company denied that the
storm-shutter ruling was responsible for the shift.
• Either Bill Gates and billionaire investor Carl Icahn
haven't been paying much attention to the home-building market,
or they're smarter than the rest of us. Recently, both men have
been loading up on stock in large home-building firms, even as
the business outlook continues to worsen. According to Reuters,
Icahn owns a large share in WCI Communities, which builds
luxury homes in Florida, while the Bill & Melinda Gates
Foundation has almost 2 million shares of Pulte Homes, as well
as large holdings in Centex, KB Home, Ryland, Beazer Homes,
Lennar, and WCI.
• Calling FEMA's application process "Kafkaesque," a
federal judge has ordered the agency to resume housing payments
to tens of thousands of displaced victims of Hurricanes Katrina
and Rita. The case was brought on behalf of at least 11,000
families who, as early as February of last year, found
themselves suddenly ineligible for the rental assistance
program known as Section 403. According to the Washington Post,
FEMA phased out this program, which made payments directly to
landlords, in favor of a larger program, Section 408, which
gives the money to the victims. Those affected were required to
reapply for the 408 program, but the information they were
given was so cryptic and contradictory, many did not know they
were eligible for further assistance.
• The U.S. Supreme Court heard arguments in November that
timber giant Weyerhaeuser violated federal antitrust laws by
overpaying for alder saw logs and buying more logs than it
needed, thereby driving up the prices competitors had to pay
for their lumber. The suit was brought by a small timber mill,
Ross-Simmons Hardwood Lumber Co. of Longview, Wash., which
claimed it was driven out of business by predatory tactics. In
2003, the U.S. District Court in Portland ruled against
Weyerhaeuser, ordering the company to pay $79 million in
damages; in 2005, that ruling was affirmed by the 9th U.S.
Circuit Court of Appeals. The Supreme Court's decision is
expected in June.
RECALL
DeWalt is recalling about 137,000 circular saws because the
blade guards can fail to close completely. The recall affects
DeWalt DW378G and DW378GT framing saws with date codes
200301-49 through 200637-49; these tools were sold from January
2003 through August 2006. Also affected are DC300 cordless
circular saws, with date codes 200601-49 through 200637-49,
sold from May through September of 2006. For more information
or to arrange for a free repair, contact DeWalt (866/854-5214,
www.dewalt.com).
DeWalt
DW378G
DeWalt
DC300