How 3 Embattled Builders Survive

By IVER PETERSON

Published: Thursday, January 10, 1991

With real estate prices falling and buyers treating the new-home market as if it had a wet basement and no rooms with a view, many builders are struggling to stay alive until the next upturn in sales.

Three home builders, operating in three different regions, have come up with survival strategies that seem to be working.

In New Jersey, K. Hovnanian Enterprises is pulling back from the overbuilt condominium market to concentrate on mid-priced houses in the central part of the state for baby boomers who are building their families and moving out of apartments.

In Southern California, Ira Norris has rethought his housing production system, from the first site plans to the last carpet tack, and is forcing supplier prices and his own profits down to where the market will buy. In Boston, Tony Green is working for the banks, finishing and selling developments that have been foreclosed.

“This is strictly a holding action,” Mr. Green said. “We’re just trying to keep our team together until the market comes back.”

In a decade the country’s home builders have seen their business go from the richest of times, in the mid-80’s, to some of the bleakest of times. Some builders have gone back to their old standby, the home-improvement trade; others are wondering what they will do after completing the houses on order, and many have failed, judging from the falling membership of the National Association of Home Builders, which has tumbled to 158,000, from 161,000 last April.

In 1986, the industry’s best year ever, 1.8 million single-family homes and apartments were built. In 1990, the industry put up 1.2 million single-family homes and apartments, the lowest level since the recession of 1981-82 and a drop in business from 1989 of 33 percent.

On Jan. 2, the Commerce Department reported that residential construction spending in constant dollars had dropped for the eighth month in a row to the lowest level since 1983.

“We have worked ourselves into a real recession,” said Kenneth Colton, executive vice president of the home builders group. “The terminology you will hear our members use is that suddenly the door slammed shut.”

The White House has predicted a short and mild recession. But with buyers already paying more for fuel and in taxes, and with war threatened in the Persian Gulf and lenders wary of making new real estate development loans, builders and industry analysts are pessimistic about an early upturn in their business. They point to the baby bust as evidence that the golden age of residential real estate, just ended, is unlikely to return.

Yet the market is not completely dead. An estimated 1.2 million new households are expected to be formed each year in this decade, down from 1.5 million a year during the 80’s. And mortgage rates, at a three-year low, have begun to lift the rate of housing sales slightly in recent months. A New Formula.

Mr. Norris, of Upland, Calif., looked at Southern California’s booming population but slumping housing sales and prices and decided that the traditional housing development equation had to be rewritten. His new formula has made him a minor legend in the high desert east of Los Angeles.

Normally, developers like Mr. Norris secure the land and obtain construction permits and then ask for bids from subcontractors. Subcontractors then call door, window, plumbing and framing concerns for prices, add overhead, an allowance for breakage and theft, a profit goal and mail in a number.

Mr. Norris, a big builder who has put up more than 500 houses a year since he formed Inco Homes in 1976, decided to squeeze that process by forcing his subcontractors to negotiate for their materials. “The problem is that these subs are used to being quoted prices, and so they’re lousy negotiators,” Mr. Norris said. A Matter of Survival

For subcontractors, he said, this approach is a matter of survival. “We realized that housing contractors that don’t concentrate on reducing their overhead and cutting their costs are not going to make it through this recession,” Mr. Norris said. “So we told them that we would cut our profit and overhead if they would do the same, and that we would be able to build a house that the market would not pass by.”

In addition, by putting 1,800 lots on 500 acres in the western Mojave desert town of Adelanto — a hard, but not unheard-of, 100-mile commuting trip to Los Angeles — he kept his land prices low.

The result of both strategies: a construction cost of $27 a square foot, compared with the normal $35 to $40 a square foot, and a two- to four-bedroom house that can be sold for $80,000 to $100,000, compared with $105,000 and up in the adjoining community of Victor Valley, said Mr. Norris, who has built more expensive houses in Los Angeles. Quick Sales

On Oct. 13, he put his first 55 houses on the market, and by nightfall had sold 47 of them. The remaining 8 were gone the next day, a Sunday, he said. Within a week, all 127 houses in his first phase had been sold, he said.

“He’s selling them as fast as he can build them,” said Patricia Chamberlin, the Adelanto town administrator.

Of the housing market, Mr. Norris said, “We’re predicting a blood bath out there in ‘91.” He added that with his new strategy “we are getting a lot of work and a lot of cash flow but not a lot of profit, but at least we’ll be intact and still be in business when the recession ends.”

And West Coast banks are still more open to lending to developers than those in the East. Mr. Norris raised 25 percent of the $32.6 million needed to build the 127 houses from an equity partner and the remainder from the Union Bank and the Security Pacific National Bank in Los Angeles.

To ride out the slump, the Boston-based Green Company is working down its inventory and helping banks sell development projects that were foreclosed. In 1987, Green started 70 town houses that went on the market for upward of $240,000. It has seven left, and will soon have none, although it has had to give enticements to close many sales.

“I don’t think there is a builder anywhere who isn’t willing to do a little something for a buyer to make a deal happen,” said Mr. Green, the company’s vice president for marketing. “For one person, it may take adding wood floors, another may have to save some money. So you customize the plan a little to cut the costs for him.”

The company, which built an average of 60 houses a year and was founded in 1964 by Tony’s father, Alan, who is chairman, also has six projects to complete and sell in the Boston area for banks.

Each has required a distinct treatment aimed at overcoming what Mr. Green considers the toughest obstacle to sales these days: buyers’ fear of getting a house that will lose value, as houses across the country have declined in value in recent months.

That is not only a matter of price. “It can be priced rock bottom, but if there’s a rusting construction trailer or no landscaping or the roads aren’t paved, they won’t touch it,” Mr. Green said. The Impression of Value

Builders can often add the impression of value to a whole development by investing more money in a few of the houses, Mr. Green said. Only 3 of 24 homes had been sold at the Arbors, a condominium development in Acton, Mass., when it was taken over by the lender, the Foxboro Savings Bank.

Hired to sell the remaining homes, Mr. Green’s company thought the problem was that the floor plan, with two upstairs bedrooms, did not fit the project’s high-end, $290,000 to $390,000 price range. The mostly older, second- or third-time buyers and empty-nesters who pay these prices often prefer to have master bedrooms on the ground floor, Mr. Green said.

But rather than reconfiguring all 19 of the unsold units, Mr. Green cut the price to $200,000 on all but 7 units. On those, he added 10-by-10-foot extensions to make room for a big downstairs bedroom, at an additional cost to the buyer of $35,000.

“That allowed us to present the unfixed-up home in a much more positive light, because it now appears to be, and is, quite a good deal compared to the fixed-up home,” the builder said.

Ten additional condominiums have since been sold, nine of them the unaltered models.

More important, from the bank’s point of view, the building permits, which are hard to get in the crowded and growth-conscious Boston suburbs, have increased in value for 36 additional units, offsetting the write-off of about 30 percent of the value of the development that the bank was forced to take to sell the units quickly.

And Mr. Green is counting on his alliances with banks serving him over the longer term. “If we do our job for the Bank of Boston or for Chase Manhattan now, those guys are going to remember us when the next run-up comes.” Mr. Green added, “We hope they’ll look at us and say, ‘Hey, those guys can do it even when things are pretty bad.’ ” ‘There Is Demand’

The basic element of Hovnanian’s strategy is to keep prices down.

“We have found that there is demand in the marketplace, but the key is that your product has to be priced properly, and that means lower prices,” said Ara Hovnanian, president of the publicly held builder, which is based in Red Bank, N.J.

Mr. Hovnanian’s company met this challenge in part by announcing last month that it would take a $19 million write-down on unsold properties in New Hampshire, New York and Florida, and auction the condominiums off at fire-sale prices. The write-down will probably produce a $14 million net operating loss for the year. The Hovnanian company, which became famous in the New York area by holding lotteries in the mid-80’s for eager town house condominium buyers, is backing away from the overbuilt condo market to concentrate on the higher-priced housing market.

Photos: Ira Norris, a Southern California builder, has survived in the current bleak housing market by forcing his land costs, suppliers’ prices and his own profits down to a level at which shoppers will buy. (Bart Bartholomew for The New York Times) (pg. D1); Tony Green is working for banks while he waits out the slump in the housing market. Mr. Green finishes and sells developments that banks have foreclosed on, like “The Arbors” in Acton, Mass., where he redesigned plans for additions to make some units more marketable. (Jim Bourg for The New York Times) (pg. D5)

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