Tracking Trends in Custom Homes

It’s mostly good news for those who design and build custom homes heading into the second quarter and the rest of 2007. Results of Residential Design & Build’s 2007 Market Trends survey reveal many positive market indicators, such as that average custom home square footage isn’t decreasing. Other noteworthy indicators are that more custom builders and architects are reporting higher profit margins, and that most custom home firms plan on hiring or maintaining staff in 2007, not firing employees.

Most importantly, almost everyone who responded to our survey has a positive outlook on the 2007 custom home market. When asked to categorize their outlook for the 2007 custom home market, 92 percent of readers said it was excellent, good or fair. Of those, 58 percent said excellent or good. Despite all the bad news the mainstream media reports on a steady basis about the housing market being in crash mode, those in the custom home market maintain their positive attitudes.

In fact, builder confidence continued to rise in February to the highest level since June 2006, according to the National Association of Home Builders. NAHB reports the demand side of the single-family market is improving, and housing starts should bottom out in the first quarter of 2007. NAHB further reports how quickly housing conditions stabilize will depend on how quickly investors pull out of the market.

As even more evidence of good things for custom home builders and designers, more than 90 percent of RDB magazine’s survey respondents say they plan on either hiring more staff in 2007 or maintaining current staff levels. Less than 7 percent plan on letting people go.

Our survey results reveal virtually no change in the number of homes designed or built annually by Residential Design & Build readers during the past three years and projecting into 2007. Most custom home building and design firms that responded to our survey (66 percent) design or build 10 homes or fewer annually since 2004.

Not only are the same number of custom homes being designed and built each year, the average square footage of homes designed or built either increased or remained the same for roughly 90 percent of RDB readers between 2005 and 2006. The concept of “smaller is better” may have received plenty of press coverage in recent years, but the reality in the custom market is the majority of homes are not getting smaller, and for some they are actually getting bigger.

Insulated custom market

During a time when the national media’s story has been the housing market’s sky is falling, custom home architecture and builder businesses are doing well. Results of our 2007 Market Trends survey support anecdotal evidence that the custom home market has been insulated from the overall housing market correction of 2006 and into 2007.

For example, since 2004 there has been virtually no change in the number of clients who pay cash vs. finance their new custom homes, according to our survey. Over the past four years, the number remains steady at 33 percent who pay in cash, indicating these clients are not being affected by the fluctuations of the national economy. The steady number of homes designed and built over the past four years also points to a wall around the custom sector, protecting it from the effects of the slowdown in the production market.

The results of the American Institute of Architects’ home design survey index in March, which computes percent of respondents reporting improving conditions minus those reporting weakening conditions, also point to a wall around the custom market. Architects reported the following numbers: Custom/luxury homes, 5.2; second/vacation homes, -7.1. These numbers might not break records, but compare them to the first-time home market at -40.8 and it’s obvious the custom home market is doing well.

In terms of running their businesses better, more building and architecture firms report they are making higher levels of profit, another sign that this market isn’t affected as much by the ups and downs of the national economy. From 2004 and projected into 2007, the percentage of architecture/design firms making profit margins between 11 and 25 percent rose from 37 to 48 percent, an increase of 11 percent. During that same time period, the percent of architecture/design firms with profit margins less than 5 percent dropped from 13 to 10 percent.

The number of construction firms making between 11 and 25 percent profit margin rose from 53 percent in 2004 to a projected 62 percent in 2007. During the same time, the percent of construction firms with profit margins less than 5 percent dropped from 12 to 6 percent.

Design/build firms are making more profit as well. Between 2004 and through 2007, the percentage of firms making between 11 and 25 percent profit rose from 52 to 57 percent. The best news is for design/builders, however, that during the same time, the percent of design/build firms with profit margins less than 5 percent dropped from 17 to 9 percent.

One could deduce that business owners are making more profit because they’re getting smarter. Or, is it because all boats float downstream? It is important to ensure higher profit margins as a result of smarter business practices, and not because a business is riding its industry’s coat tails.

One piece of evidence from our survey results indicates the custom home market wasn’t completely untouched by the general housing market slowdown. More than 30 percent of survey respondents say their unsold inventory level increased in 2006 over 2005 levels. However, NAHB reports inventory of new homes for sale edged down in January to 536,000 units, the lowest since February 2006. If the indicators are correct and the housing market picks up steam this summer, unsold homes will begin to sell.

Industry involvement

Nearly 700 readers participated in the RDB 2007 Market Trends survey. Just less than half of respondents represented construction firms, 36 percent represented architecture firms, and 15 percent worked for design/build firms. Half the architecture firms reported annual revenue of $250,000 or less. The largest segment of construction firms (34 percent) reported annual revenue between $1 and $5 million.

Many ways exist for these firms to be involved in the custom home industry. Association membership, however, is one that is easily measured. What we discovered is roughly 30 percent of RDB readers are members of either the American Institute of Architects or the National Association of Home Builders. This means there is plenty of opportunity for more of you to be involved.

Of architects and designers that read Residential Design & Build, 36 percent are members of AIA, while only 19 percent of design/builders and 3 percent of builders belong to AIA. When it comes to belonging to the NAHB, 41 percent of builders that responded to the survey are members, while 26 percent of design/builders and 8 percent of architects belong.

A major benefit associations offer those in a particular industry is continuing education. Our survey results reveal that 15 percent of RDB readers have taken an NAHB designation course; 65 percent who took an NAHB course work for a builder firm, 20 percent work for a design/build firm, and 15 percent work for an architecture firm.

A total of 35 percent of the 2007 Market Trends survey respondents have taken an AIA continuing education course; 68 percent who took an AIA course work for an architecture firm, 18 percent work for a design/build firm, and 14 percent work for a builder. Continuing education is out there and available, and taking advantage of the opportunity to advance one’s knowledge and therefore one’s career is an essential part of moving the custom home industry forward.

Advertising/Marketing

Among all survey respondents — architecture firms, construction firms and design/build firms — 62 percent invest less than 2 percent on advertising or marketing, while 28 percent spend between 3 and 5 percent.

But spending money is not the only way to get new clients. Word-of-mouth is a more popular method, according to our survey results which reveal that 90 percent of architecture firms get new business from referrals and 8 percent get it from advertising/marketing. Interestingly, construction companies and design/build firms are much less dependent upon referrals for new business, but still rely on them; 76 percent of builders and 78 percent of design/build firms get new business from referrals, while 19 percent of builders and 15 percent of design/build firms get new business from advertising/marketing.

When those referrals and fresh leads turn into potential clients walking through the door, an average of 69 percent of survey respondents say they refuse jobs from those who are perceived to be difficult to work with. The message here is not to be afraid to turn away business, possibly to your competition, which can be more difficult in a slowdown than when times are good.

So who are your competitors? Survey results indicate an average of 58 percent of your competition comes from firms similar to yours. In addition, 18 percent of competition comes from upscale track building, which emphasizes the importance of differentiating your product from your competitors. Furthermore, survey results indicate that 16 percent of competition comes from existing housing stock and remodeling projects.

Market factors

Regional market differences make it impossible to paint with a broad brush in any market. Still, we asked survey respondents across the country to rank the trades in which they find it most difficult to locate good subcontractors. Listed in order of most to least difficult, the results are as follows: electronics integration, finish carpentry, framing, foundation and concrete, and roofing. The seemingly sudden rise in popularity of home electronics products could be the reason for a perceived shortage of quality systems integrators. Luckily, the Custom Electronic Design & Installation Association is ready to help with its installer locator at cedia.org.

It’s important not only to know your subcontractors, but also to know your clients. According to our survey results, more than half of all clients in the custom home market are between 40 and 50 years old. Architecture firms tend to have slightly older clients than construction firms, while construction firms have twice as many clients between 30 and 40 than architecture firms.

Regardless of age, the Internet is king when searching for new products and product information. Our survey results reveal that 90 percent of RDB readers rank the Internet as either very important or important as a source for product information; 87 percent get their product information from magazines; 76 percent get it from manufacturers; 72 percent listen to clients; 62 percent turn to a colleague; and 61 percent trust their dealer for product information.

With entire cable channels and TV shows dedicated to home improvement, remodeling, decorating, purchasing and constructing homes, one might wonder where TV shows ranked on this list. Only 22 percent of designers and builders rely on TV shows as sources of product information. It’s important to remember, however, that clients watch these shows, too. Perhaps this explains why 72 percent of you use clients as sources for new product information.

For survey results not in this article, refer to the charts and graphs to the right.

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