Undeniable Optimism

To interpret the results of Residential Design & Build magazine’s 2010 Market Trends report is to understand that 2010 will be better — not worse — than 2009. More than 75 percent of the 624 designers and builders of custom homes who completed our survey expect their revenue to increase or stay flat in 2010, and 70 percent say the 2010 housing market will be the same or better than it was in 2009. In addition, 93 percent say they’ll maintain their staff level or hire more people, while only 7 percent anticipate staff layoffs.

Supporting the positive outlook for the 2010 housing market is Kermit Baker, chief economist for the American Institute of Architects, who says the rest of 2010 should show improvement compared to 2009. “For a lot of these firms it’s hard to project out more than a few months, but in general the numbers are showing that things are looking better in 2010. I have a hunch that at the end of the year we’ll see more positive numbers than today’s numbers indicate,” he says.

Inventory Drops

“The market is improving slowly, and I actually think demand is strong out there. But we still have a huge inventory overhang compounded by an increase in foreclosures. It’ll take time to work off that inventory and generate more construction activity,” Baker adds.

Good news from our survey is half of all respondents indicate they observed a reduction of inventory as a result of the first-time home-buyer tax credit, while 85 percent tell us their own inventory levels either decreased or remained flat. Government statistics show housing starts have remained at a relatively constant level, which as Baker points out can be misinterpreted.

“The numbers of starts and sales look worse than the market really is,” he says. “When you look at the sales of existing homes the numbers are strong. Again, we’re working off that inventory. The housing market seems strong at the bottom, which is good because this will be a bottom-led recovery. Entry-level buyer activity looks healthy fueled by tax credits and low interest rates, and prices certainly are attractive. First-time buyers who take advantage of the favorable conditions are sparking activity in the trade-up market. Numbers-wise, we have a good head of steam behind us.”

David Crowe, chief economist for the National Association of Home Builders, thinks the 75 percent of survey respondents who believe revenue will be flat or will increase are a bit optimistic, but agrees with AIA’s Baker that 2010 will be a modest growth year for housing in general. Crowe also is encouraged by the positive results of the first-time home-buyer tax credit. “We’re seeing a slightly larger impact from it than your survey results, but it’s clear the tax credit will make a difference,” Crowe says.

Commenting on the 18 percent of respondents who say they anticipate an inventory shortfall when the housing recovery kicks in, Crowe is “concerned that only 18 percent think this might happen. I think the chances of an inventory shortfall are greater than that.”

Baker also urges caution when discussing inventory levels. “There are some looming issues out there. We’ve had a soft market for so many years during which time manufacturers have cut back production and dealers have shuttered operations. What if we get a healthy recovery here? The consensus is it will be a slow, drawn-out recovery because of financing difficulties and lingering unemployment problems. But the unknown remains what will happen to an industry that has been weak for so long that it may not have the capacity out there to deal with it,” Baker asks.

When asked if they are concerned about the supply of building materials when the housing market recovers, 77 percent of respondents said no. The NAHB’s Crowe agrees that material availability will not be as much of a challenge as the price of those materials. “I think they’ll be able to get it, but prices will rise as building returns. Capacity will come back online when it’s clear that activity levels are sustainable and manufacturers can make enough money to ramp up production.”

Financing Troubles Continue

Another challenge is the banking industry which continues to follow tight lending practices. On the list of threats to business in 2009, the response, “Banks won’t lend to clients or us” ranks second behind “The economy in general.”

“The banks won’t lend, and there’s only a very dim light shining through the darkness particularly for builders trying to get credit. We’ve seen the biggest fall-off there,” Crowe says. “This doesn’t apply as significantly if building to order off a customer’s credit rating, but lending remains a significant problem and we’re still sorting out what may be a protectionist approach out there.” When asked, “In 2009, did at least one of your clients have trouble securing financing,” 70 percent of respondents said yes.

Trouble with financing for new homes has turned some builder eyes to the remodeling market. More than 55 percent of those surveyed say they will be doing more remodeling in 2010 than in 2009, with an additional estimated 25 percent saying they don’t know. Remodeling hasn’t slowed down as much as new construction, Baker says, which has many architects looking in that direction.

“A lot of them never knew how to get into that market, but they’re taking time to figure out how to do it. And it’s trickier now, too, with not as many upper-end kitchen and bath remodels and room additions out there where an architect’s value is clear. Architects are coming into the remodeling market at a lower price point in general with customers who are price sensitive. Many have moved over and see enough opportunities to stay in it,” Baker says.

Staffing Plans

As workloads have fallen during the past few years, so has the number of employees that architects and builders are able to keep on staff. However, only 7 percent of respondents plan on reducing their office staff levels in 2010 compared to 14 percent in 2009. One conclusion could be the worst is behind us and, frankly, there’s not much lower to go.

Still, Crowe is surprised that 81 percent of respondents plan on maintaining staff levels in 2010. “In terms of the health of the housing market, 2008 was 40 percent worse than 2007, so maybe these businesses have already cut staff levels to a minimum. They have trimmed to survive and they made it through 2009,” Crowe says. “And it’s interesting if you compare the roughly 45 percent who expect revenues to increase in 2010 but only 13 percent say they plan to hire more staff. Maybe they believe they can work efficiently, but that gives me pause.”

Regardless of staffing levels, builders and designers were able to operate profitably in 2009, at an average net margin of almost 9 percent.

Average home size continues to drop, so say the 79 percent of respondents who indicate custom home sizes less than 4,000 sq. ft. Because homes are smaller, design is more important than ever to maximize the space homeowners are able to afford. When asked which product or service helped them differentiate themselves from competitors in 2009, 27 percent said design skills ranked first.

For the complete 2010 Market Trends report including more results, please visit us online at rdbmagazine.com/2010markettrends.