I was recently asked by a “younger” builder who has been in the home building business for about 6 years, “How do I stay alive in this economic downturn?”
My answer, “It’s hard”. Those of us that have been here for a while, know that we will face ups and downs in the market. We knew that in tough times like the late 1970’s to early 1980’s, we had to diversify to survive those economic changes. Those times had different challenges, as lending was available, but at peak rates. We paid 18-21% for construction loans, and 30 year mortgage rates were at 14-16%. We ventured into other types of businesses. We got involved in light commercial work, remodeling, and even into other types of retail sales. We did what we had to do to survive.
As for my friend, he has never seen this part of the business, and this downturn is especially difficult. Although 30 year mortgage rates are at an all time low and construction rates remain low, it is extremely difficult to secure constructions loans for speculative building. Even with the all time low 30 year rates buyers are wary, waiting for the economy to strengthen before they buy.
How does the smaller volume builder continue in the next few months, or through the next couple of years? With the new tax credits coming to an end, will our market shrink even more? Did the tax credits help us anyway? As I see it, yes to both. We may not have sold a house to the first time home buyer, but we did sell the customer who sold their house to the first time buyer. Their sale occurred as result of the $8,000.00 new home buyer credit. So yes the credits spurred sales.
With the tax credits drying up, how do we now attract buyers in this lean market? It seems the larger volume builders have a greater advantage, as they can cut their margins, allowing them to out sell the smaller volume builder. They offer “buy down” rates offering 30 year mortgages at below market. They attract the buyer and secure more sales. How do we compete with that?
The smaller volume builder can do the same. Many banking institutions are willing to help with programs like the ones I’ve mentioned, if the end result is them closing an open construction loan and possibly allowing you to start a new project. This helps with cash flow, and relieves your equity in the house. Margins become a bit smaller, but in the long run, it’s a win win win. The builder sells, the buyer gets the “deal of a lifetime”, and the bank continues loaning; therefore continuing to profit.
I told my friend to “work hard and keep the faith”. As I’ve said before, “these times too shall pass”.
