Custom Market Remains Healthy, Active

The effect the general housing slowdown has had on the custom home market has been relatively minor, despite the subprime mortgage crisis’ damage to the economy. Most custom home professionals (about 80 percent) retain a positive outlook on the 2008 market, according to our 2008 Market Trends Survey.

In a period when home values have dipped for the first time in decades, and housing starts have taken a sharp drop, more than 90 percent of design firms and custom building companies plan on either hiring more staff or maintaining current employee levels through 2008. Our survey results indicate only 3 percent of architecture firms, 6 percent of design/build firms and 9 percent of builders plan on reducing staff. This is good news for the custom home market.

Our survey also reveals only 15 percent of RDB readers report a decrease in the amount of square footage in the homes they designed or built in 2007; virtually no change from 12 percent in 2006. Of the remaining 85 percent of readers, far more (65 percent) report 2007 square footage levels as flat compared to 2006 (40 percent), and far fewer (20 percent) saw an increase in the amount of square footage in 2007 compared to 50 percent in 2006. Based on these numbers, it’s clear that custom homes did not get smaller in 2007; they just didn’t get much larger.

Not all the news was positive. Key indicators from this year’s survey point to concern about the general housing market slowdown, fear of rising material costs, and a slight decrease in profit margins. However, data reflects only a slight downturn and nothing to suggest the custom market is in danger of collapsing.

While it’s true more of our readers this year chose “poor” as their outlook on the market than did last year, compared to historically low market confidence levels from production builders this February, the custom market is doing relatively well.
Results of the American Institute of Architects’ Home Design Trends survey released in February confirm the custom market is doing better than the production market. In its survey, the AIA compares the percentage of respondents reporting improving vs. weakening conditions. Architects designing custom/luxury homes report a -15, but the move-up and first-time home designers report -45 and -64 respectively. Yes, the custom market has dipped slightly, but not nearly as much as the production market slide.

In the Home

RDB readers identified the most asked-for rooms and features in 2007, and the top five from last year’s survey turned up in the top seven this year. Multipurpose family/media rooms were the most requested feature in 2007, followed closely by energy efficiency and a home office, which was first on last year’s list. For the rest of the list see the chart on page 30.
Once again our survey results reveal a disconnect exists between what homeowners want and what they pay for. As stated previously, media rooms were the most requested room in 2007, but home electronics is one of the first products sacrificed when budgets get tight.

“Buyers have sugarplums in their heads,” says Mark Perlman, president, Empeco Custom Builders in Grayslake, Ill. “They want all this great stuff and when push comes to shove, they don’t do it. With electronics, for example, we find a lot of people are wiring for sound because it’s cheap to put in wire, but they won’t put in the speakers until later. Electronics is not like countertops where you can wait to buy one later. We don’t push anyone into something. If they want it, great; if they don’t, fine. It’s whatever they want and what the budget allows.”

Getting It Done

Builders historically report difficulty finding good subcontractors, and 2007 was no different. RDB asked readers which trades are the most scarce in their area. Across the country, survey respondents ranked electronics integrators (19 percent) as the least plentiful, with finish carpenters (18 percent) and framers (13 percent) taking second and third. The rest of the list includes, in ranked order, concrete, plumbing, electrical, roofing, HVAC, painting and landscaping.

Hard-to-find trades are only part of the construction equation. By far the issue creating trepidation in the minds of most custom home builders and designers (21 percent) is the market slowdown. Second on the list of concerns is cost of materials (13 percent), with cost of land a close third (11 percent). RDB readers were most affected in 2007 by the cost of copper, concrete and wood, in that order.

“My personal belief is that the probability of price increases in building materials is greater than the probability of price decreases,” says Barry Rutenberg, president, Barry Rutenberg Homes in Gainesville, Fla. “The prices of the building materials should be determined by the market. As the number of building starts increases sometime in the future and the market improves, the suppliers, just like the builders, will have more pricing power.

The danger for builders is that in today’s market they might have to price the home very aggressively and yet may not purchase the building materials until much later. Hopefully, builders and suppliers can work together for a mutual benefit.”
Prices of products touted as green could rise now that practically everything in society is tinted green. Green home design and construction is gaining momentum, but that doesn’t make it easy to build a green home. Half of RDB readers (49 percent) report difficulty finding subcontractors to work on green projects or with green products. While the green movement is center stage in the nation’s psyche, clearly more work and education are needed to win over those who put hammer to nail.

“There’s a little bit of a misconception of green building out there,” says Ray Tonjes, president, Ray Tonjes Builder in Austin, Texas, and chairman, NAHB green building subcommittee. “It’s not all about products. It’s more about our attitude toward typical building. I think there’s not a big learning curve to build green. It’s really just a thoughtful process and awareness of what we’re doing,” he adds.

“I also think it all depends on your starting point. Mine is different than others’. I have a group of subs that have adjusted to my ways. I think [adjusting to green building] may be more of a problem in markets that have not been dealing with an energy code like we have in Texas,” Tonjes continues.

When asked who is pushing green, 27 percent of respondents stated they were. Twenty-three percent stated clients were driving the green home movement, while 17 percent report it’s the government behind the wheel. Anecdotally, home builders tell us buyers clearly drive the demand for green homes and products, but our survey results tell a slightly different story. The great news is builders and architects are not simply along for the ride.

“Builders are doing better with green than they realize,” Tonjes says, “but again you must realize that everyone has a different starting point. And that’s why it’s hard to generalize builders’ involvement in green. In Texas over the past six to eight years, we’ve had a statewide building and energy code, and a residential construction commission that provides 1-, 2- and 10-year warranties for our product and its performance. So the bar has steadily risen. Every area is unique.”

The chart on page 31 shows the list of products whose importance increased with clients in 2007. Interestingly, the top six products directly affect a home’s energy efficiency: windows, energy-efficient products, insulation, home technology, HVAC equipment and appliances. Even if clients are interested in these products for reasons other than green, the opportunity to upsell environmentally friendly products could not be more ready-made.

Who Responded?

More than 500 readers responded to the survey. Slightly more than half the respondents were builders, a third of them represented architecture firms, and about 16 percent were from design/build firms. Roughly 40 percent of architects/designers belong to AIA, and 40 percent of builders belong to NAHB. Roughly a third don’t belong to any association.

Continuing education is important to roughly 20 percent of builders and 18 percent of design/builders who completed an NAHB continuing education course. More than 60 percent of architects/designers took an AIA course, and about 25 percent of design/build firm representatives did the same.

The majority of architecture firms represented in our survey results (69 percent) claim annual revenue in 2007 of less than $500,000. About half of the builders who responded to the survey report annual revenue in 2007 between $500,000 and $5 million; about 20 percent of custom builders report annual revenue of more than $5 million.

We asked builders, “Who designs the homes you build?” The largest group (39 percent) uses both AIA-registered architects and non-AIA designers. Slightly fewer builders (38 percent) use only non-AIA designers on their projects, and 23 percent use only AIA-registered architects. Clearly today’s home designs are influenced by a variety of perspectives.

Advertising and Marketing

Industry participation and annual revenues mean nothing if customers aren’t walking through the door. The comment heard so often from readers — “We don’t do any marketing” — is true; our survey results reveal the majority of leads in 2007 (82 percent) came from word-of-mouth referrals. Ten percent of RDB readers say leads come from money spent on advertising, and the rest of their leads come from sales staff, the Internet or other sources.

Survey respondents plan to convert those leads into profits in 2008, according to our data. The majority (76 percent) plan on making profit margins between 6 and 25 percent in 2008, which is down only slightly from 80 percent in 2007.

When asked if they have downgraded their offerings because of the down market, 72 percent said no, and 21 percent said yes. However, a small group of 7 percent is planning to downgrade offerings in 2008.

Regardless of how they do it — downgrade options, upsell to green — custom home designers and builders will survive.

Meanwhile, remember these key findings from our survey:

  • Profit margins will remain steady in 2008;
  • Square footage is flat at worst — homes aren’t smaller;
  • Designers and architects take three times more continuing education classes than builders;
  • Products that buyers find most interesting have energy efficiency applications;
  • The opportunity for upselling to green products is there for the taking;
  • Green subs can be difficult to find, but they’re out there.

Will 2009 bring with it a change of fortune? No one knows. Whatever the future holds, RDB magazine will report what happens when we publish our 2009 Market Trends Report.