Volume 45, Issue 7 - September  2006

The Window Guy

Cashing in a Reality Check
National Builders Create Controversy
by R. Mark Reasbeck

Normally, I try to write this column like making a cake. You have the day-to-day business operation, which is represented by the cake mix and all of its substance. Then we take all of that and add a dash of humor to sweeten it to taste, just like the icing on the top. Hopefully, the finished product is tasty, filling and has you craving more. Today, I’m taking a more serious, and possibly controversial approach to a situation that has affected my business.

Boom or Bust

My business, Coyote Springs Window & Door, is in Las Vegas. Our town has experienced explosive growth over the past 15 years. Conservative estimates show that during that time at least 6,000 to 9,000 residents per month have been relocating here. Why Las Vegas? The answer is affordable housing, no state income tax, plentiful jobs and predictable weather (Yeah, yeah. It’s a “dry heat.”)

The west is full of ghost towns that were once thriving communities which were based on the economic rewards of “striking it rich.” When the mother loads became dormant, there were instant recessions as most of the miners moved to the next Boom Town, leaving a town to implode.

The mother load of affordable housing is about to dry up. Do I think Las Vegas will dry up and become a ghost town? Not even close, but “business as usual” is going to wear a new face.

Who is to Blame?

Okay, here is what I think is at the root of the controversy: big national builders. Yes, part of my customer base is to blame, and I’m going to substantiate that position for you.

Acquisitions- Large national builders were anxious to get into our market, so the easiest path is to buy out a local builder’s inventory and out-front land purchases. The local builder is not stupid and realizes that by selling his holdings, he can double and triple profits, for NOT building the homes. Many of the local builders in Las Vegas took advantage of this proposition. The is first crack in the affordable housing foundation.

Land grabs- Because of the building boom in Las Vegas, builders were seeking outskirt land that nobody wanted ten years ago. But just like in a junkyard, it’s all junk until someone needs a certain part. Then it becomes merchandise. Land that had bad soil conditions, within blocks of an old pig farm, suddenly became worth $400,000-500,000 per acre. This was because the prime areas were selling for $600,000-700,000 per acre. The national builders gobbled it up because there was a need. The land cost eventually gets incorporated into the cost of the house, which creates the second crack in the affordable housing foundation.

Absentee buyers- Have you ever seen people camping out at a model complex over night to sign up for a house that was nothing but a drawing on a brochure? It happened here, and it wasn’t even for people who lived here. Most of the time it was out-of-state investors looking to get in on the housing boom. I have seen as many as seven houses sold to people, and all they wanted to do was to put a minimum down and “flip” the house for profit when it closed. That little fiasco kept model home complexes reeling and selling out phases in literally hours, creating a “false” housing demand. By doing this, the builders didn’t realize that when the houses closed, that absentee buyer became his competition. These absentee owners placed “for sale” signs on the houses, pricing them just a little under the builder’s current selling price. This made the third crack in the affordable housing foundation.

Unrealistic expectations- Most of the national builders are publicly-owned and have stock holders that hold the chief financial officer’s (CFO) feet to the fire. Imagine the reaction if it was posted that ZYX Builders built 900 homes in 2004, 1000 homes in 2005, 1200 in 2006 and they project 900 for 2007. The stockholders would be outraged. 

The CFO would most likely be in the unemployment line. His backward projection would not be excepted even though the reality of the market dictates that 2006 may have been the peak year. This could possibly initiate the fourth crack in the affordable housing foundation.

Unnecessary overheads- This is the one that disturbs me the most. I have seen all of the national builders move their operations to the most elite office complexes. One in particular recently moved into an entire building, approaching 200,000 square feet. Included in that is new desks, computers, media centers and cartoon characters drawn on the walls. Several other builders have relocated into multiple locations (geographically determined) and still have many empty offices and extra unused conference rooms. As a small business owner, I have experienced growth spurts. After nine years in the same location, it took me three years to determine that as my sales went up and down on a graph, I postponed moving into a larger building until the peaks on the sales graph from three years ago were now my normal cycle of business. Peaks followed by valleys are the wrong reasons to invest in new equipment or bury yourself in a building that may have too much square footage. I’m positive that this is the fifth crack in the affordable housing foundation because overheads must be paid.

Unprecedented demands- How are the builders reacting to the downturn in business? It’s a very easy solution for them. It’s called, “beat-up the subcontractors.” I have been approached and advised (it may be a better choice of words to use threatened) that if I don’t reduce my prices by 10 percent across the board, I may lose the business. (This company recorded half a billion dollars in profit this past year.) 

They have also have figured out how I can do this. I get to “beat up my suppliers” for price reductions. Another builder asked if I could bring back prices from 2001. I said, “Sure, if I can buy one of your houses at 2001 prices.” 

We all know where that went. With price increases, surcharges and a volatile oil economy, how can anyone in their right minds expect a price reduction? If there are any price reductions, how about let’s start with dropping the over-inflated housing prices?

This creates the sixth crack in the affordable housing foundation. Lost contracts put people out of work, and they certainly can’t buy a house.

Unscrupulous practices- Timing is everything. I received a phone call today, out of the blue, from a home buyer in Orlando, Fla. He found my company on a website of one of my suppliers. He is buying a home that is using the same window I sell. He explained that he felt he was being ripped off by a national builder for his low-E option. 

Take this to the Bank
He explained he had about 26 windows in his home and the sizes were not uncommon. The upgrade price was $6,000. The man went on to question why his builder would charge that much when he is purchasing this to help save energy. He asked one, how many years would it take to recoup his $6,000 investment? Based on our conversation, I’m sure the man is going to cancel his contract. This is the seventh crack in the affordable housing foundation.

A foundation can only take so many cracks before it cannot support the structure. Whether the national builders realize it or not, we as subcontractors and suppliers are the heartbeat of the building industry. When trying to cash a check, there must be funds in the bank to make the check valid. The national builders need to realize that we are the resources that validate the check. If they continue to use the “beat up the subcontractor” policy, there will be “insufficient funds” and then the “reality check” will bounce. 

SHELTER
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