Analyst: Declining home prices have silver lining
Declining home prices have a negative impact on home improvement spending, and they trigger painful foreclosures, but in the words of one analyst, “the market needs to clear.”
Responding to a question from the audience during last week’s Home Improvement Research Institute’s Spring Conference in Washington, D.C., Morgan Stanley’s Greg Melich, managing director responsible for retail, discussed the positive side of declining home values.
“To the extent that home prices fall and it allows more people to get into the housing, I think it’s ultimately healthy for the market,” Melich said. “The market needs to clear. And we do see parts of the country where that’s happening.”
He also offered an interesting way to look at the definition of “homeownership” in an era of easy bank loans. “While we don’t like it and nobody likes to see anyone foreclosed on, the reality is that if you bought a house on a three-year 2% teaser loan in 2006 with 3% down, you weren’t buying a house. You were renting a house with a call option on the price still going up.”
Builders and dealers find ways to cut costs
By Brae Canlen
First-time home buyers moving into KB Home’s new developments in Fontana, Calif., or Tucson, Ariz., probably won’t notice the simplified roof lines on their houses. And they definitely won’t see the single plumbing tree shared by their two back-to-back bathrooms. But both these features are the result of the Los Angeles-based home builder’s value-engineered house plans.
“We reached out with a couple of premises to all of our trade partners,” said Steve Ruffner, president of the Southern California division of KB Home. Plumbers, electricians, framers, roofers and component manufacturers were asked to collaborate on innovative designs and materials that would cut costs without sacrificing aesthetics or important features.
One of the main targets of value engineering was the roof. In surveys, customers said they liked the Spanish or Craftsman style, but they weren’t too picky about the architectural details. “We wanted to give them that style but make it more cost efficient,” Ruffner said. Working with its truss manufacturers, KB Home was able to eliminate valleys, flashings and directional changes from the design, thereby reducing the amount of materials that went into each roof. “That was real money savings,” Ruffner recalled.
KB Home is one of several large builders to embrace value engineering; Beazer, Pulte, Lennar and other national builders have all been working on pilots that optimize the use of time and materials. “As things started to slow down, production builders began redesigning their own products to take costs out,” said Ken Kuehn, VP sales for ITW Building Components Group. “This forced our customers to redesign thousands of trusses.”
ITW supplies the connector plates and the software that component plants use to make roof and wall trusses. The company’s engineers also certify or “seal” the final designs. As a structural engineer for ITW, Dave Brakeman has watched roof designs in residential building become increasingly complex over the past 20 years. Extra dormers and gables were added “just for visual reasons,” Brakeman said, each one adding to the cost of the home.
During the building boom, a typical tract housing project could have 25 to 35 different types of trusses, according to Brakeman. With custom homes, there seemed to be no limit. “We’ve done custom houses with 100 different trusses, no two alike,” he said. “That’s not very efficient.”
Brakeman said he is now seeing much simpler rooflines, along with the use of more wall panels and I-joists — much of which he attributed to value-engineered designs. These components eliminate dimensional lumber and reduce the need for framers, something that may factor into home building once the downturn is over. As a result, Brakeman said, carpentry skills may start to wane among contractors. “In some markets, they’re not going to be able to ramp back up again,” he predicted.
Gary Saunders, president of Timber Truss Housing Systems in Salem, Va., is using value engineering as a competitive edge when bidding on jobs. At a large mixed-use project in Crozet, Va., “it came down to us and another fabricator,” Saunders recalled. Knowing that the builder wanted to fast track the project, Timber Truss sent a team out to measure the site and draw up new plans for the 79,000-sq.-ft. wood structure. By tracing the load paths and then spanning over them, the engineers were able to eliminate some footings and columns. Timber Truss also changed the spacing of the trusses from 16 inches on center to 24 inches.
The customer, Nielsen Builders of Harrisonburg, Va., had to go back to its architects for new plans and change the framing layouts, but it eliminated one-third of the trusses and also saved the cost of installing them. The project, a three-story residential, commercial and retail complex, finished ahead of time. “They wrote us a letter of recommendation,” Saunders noted.
In the best of all worlds, projects are value engineered from the very beginning, said Kirk Grundahl, executive director of the Structural Building Components Association, an industry trade group. “The builders need to engage the component manufacturers early in the design process,” he said. “They want value engineering, but they also want the lowest cost, which can be mutually exclusive. You need a partner that is pretty knowledgeable.”
While there were many discussions before the housing downturn about a “collaborative supply chain” between builders and suppliers, that talk has begun the walk into true cooperation. Builders, lumberyards, component manufacturers and framers must work together to reach a value engineering payload. At Hayward Lumber, the nine-unit chain of central California lumberyards, the effort involved its Santa Maria manufacturing plant and Weyerhaeuser’s iLevel division. Using Javelin software, Trus Joist I-Joists and a Hundegger saw, Hayward developed its proprietary Fast Floor system.
“We’re cutting the floor system to the exact lengths,” explained Richard Pinson, director of sales for Hayward Building Systems. “When it gets to the job site, [the workers] don’t even have to break out their Skil saws.” With an estimated 40% to 50% savings in labor costs, builders like Pulte and Lennar are both using the Fast Floor system in residential projects, according to Pinson. Later this month, the Fast Floor system will be installed in the new Pismo Beach Medical Center.
Done right, value engineering is a blank canvas where builders can try new methods and materials they might not have considered before. It’s an opportune time for products like LiteSteel, a lightweight steel beam that’s working its way into the lumber and building materials supply chain. Although “LSB” is in wide use in Australia, the product is just now being introduced in the United States as a cost-saving substitute for headers, beams and supports. While the price is comparable to engineered wood products, LSB is 40% lighter, making it easier to transport and install, according to its manufacturer. And it can be cut with a circular saw, drilled, screwed, bolted and nailed with conventional tools.
“You don’t need a crane to deliver LSB, so it can arrive with the framing package,” said Jeff Hoffman VP business development for LiteSteel Technologies. Aimed at the single-family residential and light commercial markets, LSB is being distributed from its new Troutville, Va., facility through two-step distributors. Custom home builders are already using the product for basement and garage beams, roof and ridge beams, and for long span headers. LiteSteel is also scaling the heights of the nation’s top 20 builders. “We’re in discussions,” Hoffman said.
The prolonged downturn has given the building industry plenty of time to contemplate how houses might evolve in the future. Saunders, the Virginia truss builder, recalled how “every [tract] home was being built like a custom home” during the boom cycle. “It was like granite countertops,” Saunders said. “Everybody had to have the best because they could afford it.”
Things have changed considerably in Timber Truss’s market, which covers a 200-mile radius around Roanoke. One local builder is offering smaller, simpler “starter” homes that start at $150,000. “Nobody was building in that price range before,” Saunders observed.
In Southern California, one of the epicenters of housing inflation, KB Home is targeting first-time homeowners with its “Open Series” models. Through value engineering, the company can offer a three-to-five bedroom house for $200,000 to mid-$300,000. For the price of a typical condo before the downturn, buyers get to design their own floor plans and live in an energy-efficient home built to Energy Star standards.
On March 27, KB Homes reported a 26% year-over-year increase in orders for new homes during its first fiscal quarter of 2009. President and CEO Jeffrey Mezger credited the nationwide rollout of the Open Series homes, which have been able to compete with resale and foreclosed homes through affordable pricing, he said.
Home builders group appoints new leader
The Home Builders Association of Northern California (HBANC) has named Cheryl O’Connor as its acting CEO, replacing Joseph Perkins, who has resigned to pursue other opportunities.
O’Connor has served in executive positions with SummerHill Homes, Warmington Homes and Taylor Woodrow Homes.
The HBANC is working with local government agencies in Northern California to lower impact fees and provide timeline extensions for entitlement maps of new residential developments. On a statewide level, the organization led support for California’s $10,000 tax credit program for buyers of new homes. In its first five weeks, nearly 30% of the $100 million fund has been dispensed through new home sales.
Headquartered in San Ramon, the HBANC is a trade group comprised of nearly 800 home builders, trade contractors, LBM suppliers and other industry professionals.