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Author: Steven W. Hays, Sr., CPA
As printed in Builder News, July 2007
A publication of the Home Builders Association of St. Louis & Eastern Missouri

THE MARKET

As we enter the second half of 2007, the local home building industry continues to be challenging. While traffic counts have maintained nicely throughout the year, sales have remained consistently inconsistent. Two bad months are often followed by a few good weeks and vice versa. Creative marketing and blitzes seem to attract market share for a short period of time. It is a good sign that spec inventories seem to have dwindled to manageable levels, although the amount of developed lots available continues to be a key management issue.

It is becoming clearer that gas prices have had a huge psychological effect on the home buying market. Beginning in July 2005, as gas prices reached or exceeded $3 a gallon, the psyche of the home buying consumer was and continues to be negatively impacted. Without any sense of urgency, the customer is not comfortable with making a major lifestyle decision.

What to expect for the remainder of 2007? It appears we are in for more of the same. Despite a recent pickup in what has been a troubling resale market and also the continuing historically low long-term mortgage rates; our industry will continue its inconsistent performance. However, it is important to keep our situation in context. The markets in the early 1980s and 1991 were BAD – this market simply requires a lot of hard work. It is now more important than ever for builders, lenders, subcontractors, and suppliers to work together as a team. Stay tuned! 

NEWS FROM WASHINGTON, DC

Having returned from the National Association of Home Builders Spring Board meeting in early June, the mood around the country is one of concern. Housing starts are down nationally 23% through May from a previous time period last year. Although not a huge factor locally, the collapse of the sub prime market will further delay housing’s recovery. There appear to be several markets, especially on the coasts, that will face high foreclosures as a result of these previously accepted lending practices.

While our local market may be down by double digit amounts, this is nothing to what is being experienced in Ohio, Michigan, Las Vegas, and other big cities. However, some markets, including Texas and the Pacific Northwest, remain healthy. NAHB’s now predicting a recovery of some sort starting in 2008. This seems to be consistent with the forecasts of other leading economists around the Country.

• Other notes from around the country
• Litigation from home buyers appears to be a growing issue throughout the industry. In a recent study in Phoenix, nearly 24% of customers have or intended to sue builders, many over frivolous items. Builders in some markets are being trained to avoid these types of customers.
• The costs of raw materials have stabilized and have actually decreased in some key components... for now.
• The shortage of skilled labor is becoming a growing concern in several markets. Any changes in future immigration laws may have a huge impact…  

HOW MUCH “OVERHEAD” IS ENOUGH?

Many builders are struggling with “right sizing” their businesses to the level of activity that supports current sales volume. It is both a difficult financial and emotional situation to “let go” key employees that have been trained and are high performers. It also has been a misguided notion to keep extra overheard in anticipation of waiting for the market to improve.

In today’s market, it is even more important that employees are versatile and able to perform multiple functions. Employees in many businesses, especially those that are struggling, are asked to be even more productive. It also may result in not every function being completed to the past levels of detail. While there is not an exact formula on how many “overhead” employees to maintain, there are several benchmark sources available. The ability to control and manage fixed operating costs is key to surviving these current times.

HAYS’ BITS

• For some timely and relevant information, the NAHB.org website has much to offer…
• Some good news – it appears that the new local projects of 2007 have generally been successful.
• Similar to the trend noted here, cycle time (time from “firm contract” to house “closing”) according to a recent Builder Magazine study increased from 126.8 days to 132.5 days in 2006 – despite the slowdown in the industry.
• Spend the time you have NOW to perfect your systems and processes – while you can…

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