Small Builders Sacked by Slump

July 17, 2007 — -- When it comes to woe in the housing market, there's plenty to go around. Tuesday, the National Association of Home Builders said confidence among its members had dropped to its lowest level in more than 16 years.

"Builders are actively trimming prices and offering buyer incentives to work down their inventories, but meanwhile there is a large supply of vacant existing homes on the market, and affordability problems persist despite efforts to attract buyers," NAHB chief economist David Seiders said in a press statement.

For the past two years, as home sales have taken a massive dive from their record highs, the big national builders like Lennar, DR Horton, Pulte and Centex seem to be getting all the headlines.

These corporate builders put up hundreds of thousands of homes every year. And because they are publicly traded, they also talk to investors with every quarterly report, pointing to the massive "oversupply" of new homes for sale and talking about billion-dollar write-downs on new communities that won't be built anytime soon.

But small builders -- the folks who build fewer than 25 homes a year -- are a big part of the home-building industry and are suffering through the downturn too.

According to NAHB these smaller players account for more than 80 percent of their membership and build one in four houses in the United States.

Marsha Elliott, president of Terrestris Development Co., is one of those entrepreneurs who built her Chicago-area home-building company during the past 22-years.

"In the last eight to 10 months [the downturn] has really impacted my business's bottom line," Elliot told ABC News. "I did something that I've only done once before, which is when I finished up a community I needed to eliminate two positions from the company payroll."

Elliot's business had been booming. Just two years ago -- at the height of the boom -- she had 36 homes under construction. Today, her company has workers "finishing up just 12 homes."

But despite the drop, Elliot says she's one of the lucky ones. There have been no massive layoffs and because she asks for significant down payments before starting work on a "high-end" home, people are not walking away from signed contracts.

But some of her peers were not ready for the big drop in sales of new homes. "I think it's a definite possibility that many of the smaller builders won't be around to see the recovery a year from now," said Elliott

Analysts said small builders have some built-in disadvantages when it comes to long-term downturns in the market.

"The big builders can often tap into national markets for financing -- issuing stocks or bonds -- to raise cash when sales are down, whereas a smaller builder is not going to be able to do that," said Bernard Markstein, senior economist with the National Association of Home Builders. "That's going to be a bigger problem as this housing slump extends."

Markstein said smaller players often have to rely on local banks to finance.

"My feeling is that most of our lenders are going to be amenable to helping builders get through the existing projects, but some people probably just won't get through it," said Elliot.

But being small also comes with advantages, said Markstein. "They can be a little more tightly managed and turn on a dime a little more quickly. And they have lower cancellation rates than big builders."

Markstein said he's also seeing smaller builders turning to nontraditional sales tactics to move homes. Auctions are one way smaller players are selling homes that may be available because the original buyers have backed out of a contract.

And Markstein said when small builders are facing tough times, they can do something the big boys can't -- they can move. "I certainly have gotten calls from builders who are researching going to a new area."

The forecasts from the NAHB don't predict a national recovery getting under way until next year, when big and small builders have been able to burn off some of the excess inventory that has been pushing prices lower and forcing them to increase incentives to get buyers to commit to a new home.

"All we really want is for the fear to go out of the market," said Markstein. "Essentially, this is going to turn around when the consumer realizes that it's not going to get any worse and prices are likely going to be going up in the future."