Focusing I by Steve Zurier Read the papers and watch the news and all you see is gloom and doom about the housing market and overall economy, but a combination of recent Builder research and interviews with home builders reveals a different picture: Some smaller, custom home builders with defined niches have held their own through the downturn. “The upper end is still continuing to go well ... and custom lots in prime locations have held their value,” says Randy Rollo, president of Austin, Texas–based Randy Rollo Homes, a custom builder who builds about 10 homes a year at an average selling price of $1.6 million. “I’m selling to empty-nester baby boomers who want to be near their kids,” he explains. His clients demand energy-efficient homes and tend to want upscale kitchens and master bath suites, as well as open living areas. “We’re doing a lot of outdoor fireplaces, outdoor plasmas, built-in grills, and also open courtyards,” says Rollo. His buyers come from Northern and Southern California, Florida, and Oklahoma, as well as other major metro areas such as Chicago and Seattle. Business is also holding steady for Matt Hipple, who along with his twin brother Michael, runs Michael J Hipple Builder in Williamsburg, Va. Hipple says one big reason his company is still profitable today is that he and his brother stayed diversified through the boom and didn’t pour all their money into single-family residential construction. “People would ask us during the boom why we didn’t just build new houses,” Hipple says. “But I like to keep my fingers in all of the [market segments].” Hipple builds about six custom homes in any given year, houses ranging from $450,000 to a little over $1 million. The company also does remodeling, with the average job costing about $250,000, and will take on some lightconstruction projects at local attractions such as Busch Gardens and Colonial Williamsburg. “We’ll usually do renovation of existing restrooms and shops, jobs like that,” says Hipple, who explains that he tries to mix and match his crews to the type of work they like to do. “I’ve got guys who do just remodeling and others who just work on new homes,” he says. “We haven’t Weather the Storm How is it that small builders such as Rollo and Hipple are weathering what could arguably be called a housing depression? The answer is that many small builders have done very well for the past several years, so they have cash reserves on hand and don’t have an excess of home or land inventory to sell off. Although a breakdown of housing starts and sales numbers for small builders is not available, an analysis of the small builders who responded to Builder’s “2008 State of the Industry” survey we conducted in October 2007 paints a fairly healthy picture of companies that build fewer than 26 homes annually. The survey is based on responses from 744 builders, 474 of whom are small builders, 151 build 26 to 300 homes, and 119 build 301 or more homes. The survey says only 28 percent of small builders have laid off staff in the past 12 months, which means that the vast majority of small builders, 62 percent, have kept their companies intact. Ten percent said they actually increased staff. The layoff totals are especially dramatic when compared to layoffs at larger builders. Seventy-one percent of respondents that build 26 to 300 homes laid off workers. And for responding companies that build in excess of 300 homes, an even higher number, 76 percent, let workers go. Smaller builders have also held their own when it comes to closings. Sixteen percent reported increased closings, while another 38 percent said their closings remained the same. While 46 percent of small builders report decreased closings, the numbers show that the brunt of the housing downturn hit larger builders. Seventy-four percent of builders in the 26 to 300 range reported decreased closings, along with 71 percent of companies that build in excess of 300 homes. The smaller guys also tend to offer incentives less frequently than larger builders. While 55 percent of small builders do offer incentives to home buyers, 96 percent of builders in the 26 to 300 range offer some form of incentive, and 93 percent of companies that build in excess of 300 homes offer incentives. Another important indicator: 43 percent of the smaller builders who responded to the survey have not cut prices, which means that close to half the group is standing tough. Of those who cut prices, only 22 percent cut prices by 10 percent or more. Conversely, 81 percent of builders that responded in the 26 to 300 home range and 79 percent of companies that build in excess of 300 homes cut prices. Matthew Estes, CEO of Hegseth Homes, a high-end custom home builder in Sacramento, Calif., has refused to lower his prices in one of the most depressed housing markets in the country. As of January, he had five spec homes still on the market and eight lots ready to go at Verdera at Twelve Bridges, an exclusive golf community about 35 miles north of Sacramento. Verdera only has 184 lots, and Estes owns many of the choice lots with views of the golf course. “People who buy our homes have the means and are not impacted by the credit crunch,” says Estes. “Once they realize there is only one of these homes available and they have an emotional connection to the house, they will find a way to buy it.” Estes says his strategy is to hold the line on pricing until this summer, because he thinks once people sense that the market has bottomed out, they won’t want to miss the opportunity to buy in such a choice neighborhood. For now, he’s counting his blessings because most of his fellow small builders in Sacramento are barely holding on. “Nobody who is a custom builder in Sacramento has a lot of work right now,” Estes says. “Most of the guys I know are doing a couple of projects each,” he concludes Troubled Times Along with the builders in Sacramento, small home builders in some of the nation’s other depressed markets are also finding business conditions difficult. Troubled times for the automotive industry in Michigan have reached the Kalamazoo market, which hosts numerous supplier jobs in the eastern portion of the state that service the big three auto makers. Don Watts, CEO of Watts Construction Co. in Kalamazoo, says his company peaked at about 29 homes in 2005, but as of mid-December the company would be lucky to close 10 homes in 2007. “We’re off quite a bit, but we haven’t laid off workers and we’re trying to diversify,” Watts says. Fortunately, like many other small builders, his company does not have an excessive inventory of spec homes and has good credit. The company’s strategy is to mix it up by building starter homes in the $130,000 to $170,000 range and selling higher-end condos at $200,000 to $450,000. Watts also owns a small industrial park in which it builds light-industrial buildings. Although the Kalamazoo builder is selling high-priced condos for his region of the state, Watts says his company is different because it offers customized features in the condos. “We’ll customize to meet the lifestyle wants and needs of the buyer,” says Watts. “We’ll modify the interior design, do custom painting, as well as custom trimming on shelves and niches, cabinetry, and fireplaces,” he adds. Watts says home builders have to be flexible today. For him, if that means waiting 90 days until the customer can access money, then he’ll hold a house at the originally agreed-upon price. Watts Construction will also work out trade-in deals with home buyers who are having problems selling their existing homes. “Our objective is to be flexible,” says Watts. “For every client who’s viable, we’ll be as flexible as we can,” gently pointing out that builders need to work with home buyers, not dictate to them. That may be the most valuable lesson to keep in mind for 2008. Even at the high end where credit-worthiness is less of an issue, buyers have more choices than ever. There’s still a place for smaller builders with experience, but expect more competition as employees who used to work for larger builders form companies. For right now, though, smaller just might be better.