Wells Fargo Home Mortgage Building Times Bulletin

Wells Fargo Home Mortgage National Builder Division
Building TimesSM Bulletin
June 2013

Overcoming housing’s growing pains
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Overcoming housing’s growing pains

An improving economy calls for new strategies as builders bump up production.

The pace of housing recovery is quickening in most markets across the country, helped along by low mortgage interest rates, a tight inventory of homes available for sale, and improvement in the economy as a whole. While the trends are encouraging, they raise new challenges for builders struggling to ramp up after the prolonged dry spell. Companies that slashed overhead are now scrambling to buy land and find qualified staff and subcontractors, many of whom shuttered their businesses during the crash.

Builders are deep into the selling season, adjusting prices, streamlining operations, and creating new trade partnerships. But kicking into higher gear is trickier than in previous economic recoveries. While construction costs are rising and pent-up demand is helping push housing prices higher, restrictive lending and high unemployment prevent builders from passing on all of the increased costs to buyers. Ron Covington Homes, based in Colorado Springs, Colorado, is building more houses in 2013—about 60, compared with 25 last year—but taking less in profits. “We raised sales prices 1 to 2 percent but are taking a 5 percent cut on margins,” says owner Grace Covington. “We’ll be gradually raising prices to catch up with commodities increases.”

Margin management

To stay lean, Ron Covington Homes is capitalizing on the operational and management systems it reinvented during the slow period. Everything from accounting and purchasing to the options process has been fine-tuned, allowing the company to get by with fewer people. It’s also narrowing its offerings to products that are the most popular and efficient to construct. The builder cut two product lines and 35 percent of its floor plans, but it’s launching a new product line that adds 10 percent more floor plans. “If a model is not efficient to build, it’s not worth offering to the one out of 200 buyers who might choose it,” Covington says.

Michigan-based builder Anthony Lombardo also is focused on managing margins. On track to build more than 500 homes this year in Michigan, Missouri, and Indiana, Lombardo Homes is raising prices 5 to 7 percent and will phase out discounting—after a four-year run—by the end of 2013. “We’ve stabilized our growth and want to create as much margin as we can,” Lombardo says, adding that he was aggressive about buying land during the downturn and now has enough inventory to keep him busy for a while.

But Lombardo is considering the costs of long-distance development. “We’re consolidating geographical areas so the field guys don’t have to travel more than 25 minutes,” he says. “When they’re not spending so much time in the car, they can focus on quality and on-time delivery. While we focus on the consolidated areas, the distant sites are appreciating in value.”

Escalating land prices are being felt across the construction landscape. Conner Homes president Charlie Conner, who will sell about 200 homes this year that range in price from $190,000 to $1.7 million, is spending more time scouring his Bellevue, Washington, market for land deals. Not many lots have been created there over the last few years, he says, which means competing with developers who are betting on inflation.

“It boils down to more due diligence, getting an honest price we know we can live with,” Conner says. “A deal came back to me today. Someone else offered too high a price that didn’t work. There are folks who will tie things up, hoping they can renegotiate the deal at the last minute, but it’s easy to get burned.”

Hiring help

The labor shortage also has Conner looking aggressively—and farther afield—for subcontractors. “A lot of folks went off and did something else during the downturn,” he says. “Some are reluctant to gear up too much because it’s hard to unwind things if the recovery stalls.”

To jumpstart the decimated Sarasota, Florida, workforce, Pat Neal, president and CEO of Neal Communities, is providing former trade partners with assistance to get back in business and even grow into new markets. In a two-county area, the trade base has shrunk to 7,000 from 14,000 workers, he says, yet pent-up demand from baby boomers has fueled his company’s sales and profits. It’s planning a 33 percent production increase this year—788 units, up from the 603 it sold in 2012.

Neal is fast-tracking a loyal field base with smart strategies such as in-house training, electronic scheduling, the option of weekly electronic payments, and a culture of respect. He also provides creative financing to set up select subs, such as the flatwork contractor who worked for the company for 20 years before retiring in 2005. “He needs to make a living, so we found him, gave him work, and made financial arrangements to get him back into business,” says Neal, who recently expanded into Fort Myers. “We’ll buy their scaffolding and advance their workers compensation insurance costs to send them into new territory so they can grow with us.” The company deducts a portion of the amortized loan from the sub’s paychecks so that by year’s end, it has recouped its investment and fostered a sense of loyalty.

Neal Communities currently has a dozen unfilled staff positions ranging from draftsman to sales rep and marketing coordinator. And its hiring process is rigorous, requiring four to six interviews, good reading and writing skills, and a Myers Briggs personality test to make sure employees fit in with the company culture. But hiring to meet increased demand is a good problem to have, Neal says. “Our increase in sales is overwhelmingly a positive thing. It brings jobs, creativity, fun, and challenge to our business.”

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