Homebuilders say it is smart choices that will get them through a tough housing market

Christine Laue, Omaha World-Herald, Neb.

Mar. 16--Omaha homebuilders reminisce about the housing boom with tales of buyers so eager to build that they lined up at models and followed diggers to find available land.

But today, homebuilders face a tougher market -- one with hesitant buyers, excess inventory and increased scrutiny from bankers.

In the past two years, one major homebuilder and a medium-size builder filed for bankruptcy, and others have abandoned the profession.

But many more have weathered the storm, and some have even grown. It's just harder now. A few who survived this far worry that if things don't turn around soon, they face further cost-cutting measures, including laying off more workers.

"All the builders are pressed -- it's not like '02 and '03, where we'd frame something and it would sell," said John Barrett, owner of Barr Homes and ProLine Homes. "The builders that will make it now are the builders that will keep the costs down and will figure out the future and adjust accordingly."

Barrett adjusted quickly to the changing climate, ending 2007 with lower profit margins but higher sales volumes.

"We went from doing 20 to 24 houses in a six-month period down to eight in a six-month period," he said of his $250,000 to $500,000 Barr Homes. "We had to make a decision in October of last year when we saw things really falling off."

He discounted his Barr homes $10,000 and sold "spec homes" below cost. Spec homes -- homes without a particular buyer, built on speculation that they will sell -- and models can cost $2,000 to $2,500 apiece a month to carry, he said. And because home trends change so quickly, he said, specs only two years old sometimes look dated, with features such as laminate countertops that cause them to sit even longer.

"If you have a problem, you should get rid of them -- don't prolong your agony," Barrett said.

Before the slowdown started, Barrett had identified an underserved niche in a price range lower than his Barr Homes. The plans sat in the wings, however, because labor and material costs were too high to keep the homes in the right price range.

When Barr Homes' $250,000 to $500,000 market became saturated and sales slowed, labor and material costs had dropped enough so he could start building his ProLine Homes to sell for $190,000 to $230,000.

"Maybe God saved me," he said with a laugh, "but our ProLine kicked in to fill in the gap."

Barrett built five ProLine homes that first year, 2006, and 33 in 2007. Meanwhile, he slashed the number of Barr Homes from 48 in 2006 to 26 in 2007.

While ProLine sales are promising so far this year, Barrett still is being conservative for 2008. He originally planned a total of 80 to 90 ProLine and Barr Homes, but just cut that number to 60. He has not reduced his work force but said he might if he doesn't sell enough homes by July to meet his overhead.

"I know a lot of people that had 12 or 15 people that are down to one or two right now," he said. "We're very concerned."

Steve Faller, president of Landmark Enterprises, a custom builder of homes starting at $400,000, reduced his employees from 16 to 10 in 2005 and 2006 and doesn't anticipate more cuts.

"In a lot of ways, we haven't cut back because we know it is cyclical and it is going to be good again," the builder of 22 years said. "We want to keep our subcontractors and suppliers and employees that are good, even through the rough time."

He described his strategy now as "cautiously moving forward." He is not making new land purchases, for example, but still is buying advertising to keep his name out there.

He plans to build about 12 homes in 2008 -- down from 31 in 2004, but up from 10 in 2006.

The key difference this year for Faller and some others is that they are building fewer spec homes, either by their own choice or the bank's -- or a combination of both.

"It happens in every business," Faller said. "They somewhat overbuild or build for the future -- until they get their hands slapped and pull back in a little bit."

Builders don't necessarily want to scale back specs or models, because buyers want to touch and see what they are purchasing, builders say.

Barrett said two of his six banks quit spec lending to him, and he expects his total spec loans to shrink from 30 in 2007 to 12 to 15 by fall 2008.

"It does hurt," he said. "That's how we survive." Barrett said that his spec sales are "60 to 70 percent of our total volume."

Sid Dinsdale, chairman of Pinnacle Bank Nebraska, said banks traditionally have financed builders in the residential sector to build on a spec basis or a pre-sold basis.

"We, like most banks, have slowed down on the number of specs we do, but normally the builders slow down when things are not humming," he said.

Dinsdale also said the definition of "pre-sold" can be foggy, because in good times, that could mean only a $1,000 down payment by the buyer, for example.

Barrett said a few banks tightened that definition of "pre-sold." In the boom, one or two of his banks would grant a loan to start construction if the home sale was conditioned upon the buyer selling his or her existing home. Today, those banks are accepting only "clean contracts," or contracts with no contingencies, he said.

Some banks also are more stringent with construction-site inspections, which are meant to ensure that money advances are going toward the specific home they are drawn against.

Jim Landen, president of Security National Bank, said that not all banks have had to change their lending policies.

"We feel pretty good about what is going on in the Omaha marketplace. We don't see builders that we're working with in crisis," Landen said. "We're not having to tell them they shouldn't be putting speculative homes up. They're deciding that themselves."

Bankers and builders said that there are some price ranges in which spec homes still sell.

And several builders said Omaha has been helped by a strong relocation market. Offutt Air Force Base and employers such as ConAgra provide a steady flow of new-construction buyers who keep the spec home inventory in check, they said.

Despite reports of record-low builder confidence nationally, Omaha builders such as Faller are more optimistic now than a year ago, saying that the downturn here was not as severe as in other markets and that it is part of a necessary correction.

Faller said the downturn has forced him to be more competitive and refocus on what his company does well.

Marc Stodola, president of Charleston Homes, said the Gateway Homes bankruptcy filing in January overshadows the fact that some companies are not just surviving but thriving.

"We're a growing company. We project that we will close 50 homes in 2008," he said. "I just think (Gateway) is forcing every homebuilder to make good financial decisions, and part of that is decreasing velocity."

Ted Ramm, vice president of Ramm Construction Inc., an Omaha builder of $250,000 to $700,000 homes, said that although he built fewer homes in 2007 than in the two previous years, his average sale was up $30,000 to $40,000 per unit, making 2007 a profitable year.

He avoided layoffs by hiring fewer subcontractors such as framers and having his own employees do that work.

The toughest part, he and other builders said, was the reality of more homes and fewer buyers. While they try repeatedly to send the message that it's a great time to build because of low interest rates and home prices, they struggle to change the public's perception that the economy is too unstable to buy a home.

"They're up against both reality and perception," said Ken Simonson, chief economist for the Associated General Contractors of America, a trade group.

His projection for builders: "a lot more pain."

"I think it will be several more months before housing sales bottom out, and it will be several months after that before homebuilders pick up their tools again," he said.

Walt Slobotski, president of the Metro Omaha Builders Association, said an informal survey of 32 builders attending the group's January meeting showed that half thought homebuilding would pick up in late 2008 and half thought 2009.

Ramm said he is planning for a year similar to 2007. He's optimistic -- yet cautious.

"It's a time to be careful," Ramm said. "It's like any business: Take one step at a time."

To see more of the Omaha World-Herald, or to subscribe to the newspaper, go to http://www.omaha.com. Copyright (c) 2008, Omaha World-Herald, Neb. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.