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STRATEGY

Small Homebuilders Find Success During Slumping Market

Focusing on smaller projects and relying less on investors has insulated small construction companies from market woes.
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While large homebuilding firms have been dealt a blow by the recent housing slump, smaller local firms that can better adjust to the shifting market are now thriving, builders and trade groups say.

"I keep a close eye on the market, but really a lot of builders my size haven't seen a slowdown," said Donny Mack, who runs Beaver Builders, a Sanger, Texas-based residential construction firm with just three full-time employees.

Beaver Builders constructed a dozen single-family homes in the $150,000 to $400,000 price range last year, and Mack said he expects to double that by the end of 2006.

"We have a few first-time buyers, but also a lot of empty-nesters looking for a smaller place," he said.

Mack, who has been building houses since the 1970s, said the companies currently getting hit are those that build large million-dollar homes. Rather than home buyers, many of the bigger firms rely on investors who tend to vanish when the market sours, he said.

In August, the number of housing starts dropped a full 6% from July to an annual rate of 1.67 million, as the pace of new-home construction slowed by 19.8% from the same period last year, the Commerce Department reported this week.

At the same time, building permits -- a closely watched gauge of the market's strength in the months ahead -- fell by 2.3% on a month-to-month basis and 21.9% from August 2005, the report said.
The National Association of Realtors is expecting home sales to be lower for the rest of the year, with new home sales dropping 16.1% to 1.08 million from last year.
"This year, sales are slowing, homes are plentiful, and sellers are negotiating," said NAR economist David Lereah.
Those kinds of numbers are putting homebuilder confidence in a tailspin, according to the National Association of Home Builders, a Washington-based trade group.

"They're experiencing falling sales, rising sales cancellations, and increasing inventories of sold units," David Seiders, the group's chief economist, said in a statement. "Many potential buyers now are waiting on the sidelines to see how the market shakes out before proceeding with a home purchase."

Still, Seiders said he believes the market's long-term outlook is strong, calling the current period an "inevitable adjustment" in the wake of the recent boom.

"The housing market that emerges from this correction will have better balance between supply and demand and will be able to ride on excellent underlying fundamentals for years to come," he said.

Until then, homebuilders are hoping to lure buyers, or at least prevent sales cancellations, by offering a wider range of incentives, including everything from attractive financing deals to home entertainment centers.

Mack said many smaller firms can also turn to remodeling during slower business periods.

"Whenever new homes slow down, remodeling hits the roof," he said. "Instead of buying new homes, people choose to upgrade their current homes."




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