Spot market: for custom builders, it is time to think local

Custom Home, April, 2003 by Bruce D. Snider, Shelley D. Hutchins

Custom builder Tim Chupp enjoyed a bumper year in 2001, and judging, by the activity in his Valparaiso, Ind. market, 2002 promised to be even better. "The way it was looking last spring, it was going to be my best year ever," says Chupp, whose small company specializes in high-ticket, architect-designed homes. But a healthy flow of prospects yielded only a trickle of signed contracts. "We bid the most work we ever bid, and we had the least work we've ever had." He finished the year with volume down 80 percent.

On New York's Long Island. in the exclusive Hamptons communities where Frank Dalene spent the last decade building showpiece homes for the elite of Manhattan's financial industry, stormy weather on Wall Street has translated into a drought of new-home projects. "That type of house, that end of the market. the bottom pretty much dropped out of it," Dalene says. Seattle custom builder Joe McKinstry describes his market as "horrible."

A glance at the news might lead one to expect such stories, as clients rattled by threats from abroad and jittery about the economy hold fire until the dust clears. But in Vero Beach, Fla., custom builder John Huryn finds conditions pleasantly unchanged from the boom years that to others are looking more and more like history. Huryn has three homes worth a total of $7.5 million in construction or under contract and another $2 million project in negotiation. In Las Vegas. where business took a dive after 9/11. architect Eric Strain reports that the custom market has roared back. "The upper, end homes are selling like hotcakes." he says. In the Washington. D.C,, area. business has been so strong for so long that architect Stephen Muse has become superstitious about discussing it. After his firm's usual mid-winter lull, he says, "In one 24-hour period we had six calls for new work."

So what really is going on out there? A couple of years ago, that question would have been easier to answer. Through the late 1990s and into 2001, builders and architects in almost every custom home market had more work than they could handle. Today the picture is not so simple. The sluggish economy, a lead-balloon stock market, and security concerns at home and abroad have taken some of the wind out of the custom market. Rock-bottom interest rates spurred total housing starts and existing home sales to record numbers in 2002. But the custom home market is more discretionary than the general housing market, and thus more susceptible to concerns about the economy. And, sure enough, custom builders across the country report greater caution and cost-consciousness among their clients. But beyond that observation, conditions vary widely by location and market niche. During the boom years, a flood tide of work masked the normal variation among markets. Now the waters have receded somewhat, exposing a landscape full of peaks and valleys.

In Seattle, a city reeling from the collapse of the high-tech bubble, the loss of thousands of Boeing jobs, and a slow-motion recovery in the national economy, Joe McKinstry faces a market transformed. Two years ago, he says, clients with a $1.5 million budget "would have been desperate" to hire a builder. Today the shoe is on the other foot. A potential client recently appeared with a set of schematic drawings, calling for fixed bids with a guaranteed nine-month construction schedule. "And by God, we all lined up and gave the price based on a couple of napkin sketches," McKinstry says. The Microsoft Millionaires who turbocharged the custom market here in the 1990s are still around. But while they once vied to be the one with the coolest new house, "Now they're competing to get the best bang for the buck. Two years ago, budget smudget; just let us know what it's going to cost with a change order." Now they're counting the last penny. McKinstry has stayed busy enough to avoid layoffs, but he has deferred raises and major expenditures, anticipating a drop in volume from last year's $5.2 million to perhaps $4.5 million. "I would be happy if we did that," he adds.

Across the continent in Vero Beach, Fla., John Huryn says his market--mostly vacation and retirement homes--is "as strong as it ever was." In an uncertain economy, most high-end clients can take a wait-and-see attitude. But it seems that those whose retirement plans include a Sun Belt home--and an income-tax-free Florida residency--may be less willing to wait. In towns like Vero Beach, which enjoys a limited quantity of undeveloped shorefront property, there is an additional incentive to act quickly. Huryn reports that some clients are exploiting the psychology of scarcity by building custom homes as speculative investments. "They definitely don't want to put [their money] in the stock market."

But feast and famine scenarios are only part of the picture. Numerous markets around the country, especially those only mildly affected by the 1990s boom, have seen either a soft landing or conditions virtually unchanged from recent years. Architect Ellen Dickson characterizes her Chicago market as generally less subject than the two coasts to extreme ups and downs. "People are being very cautious with their dollars" she notes, but her own residential business is holding steady, "mostly due to demand for additions and interior remodels." Similarly, while the Hamptons market for new high-end homes may be in recession, as Frank Dalene suggests, remodeling remains strong. "That part of our business is booming," he says. Builders like Dalene, who diversified into remodeling, maintenance and repair, and commercial construction when new-home business was strong, are looking very smart right now. "That," he says, "was a lesson we learned coming out of the 1991 recession."