Economic Forecast and Strategies for Building Suppliers: Summer 2006

Summary: What to do about the long-predicted slowdown that has arrived in the housing market

As the representative of dozens of national and regional building suppliers, the law firm of Levy • von Beck & Associates pays close attention to the economic outlook for the construction industry as a whole, and to the building supplier market in particular. So, where is the industry headed? Let’s start with a few observations:

  • The long-predicted slowdown in the housing market has arrived. With interest rates rising, consumers expecting slower price increases, and those investors looking to flip houses escaping the market, there is a major shakeout in the industry.

  • Big homebuilders, such as Centex, Standard Pacific, Quadrant, Toll Brothers, Lennar, and D.R. Horton, all report contract cancellations of as much as 40%. Still, the big boys will survive this cyclical downturn.

  • Small builders will suffer as inventory surges. The average time to sell new homes has risen to 300 days in the southeast and Midwest, especially for higher priced homes.

  • The National Association of Home Builders has announced that their members are more pessimistic than at any time since 1990. They are cutting back on new home starts in all but five states, including Idaho, North Carolina, Oklahoma, Washington and Wyoming.

  • The booming condo market has burst. There are 150,000 condos on the market, mostly in Las Vegas and Florida. Some areas have a one- to two-year supply.
OUR CONCERN:

If homebuyers continue to defer their purchases, prices will fall. And, if big industrial states continue to lose high paying manufacturing jobs, as is occurring in Michigan, there will be a spillover effect to surrounding states. Spec vacation house builders will take the biggest hit, depressing the market around them.

So, how does this impact building suppliers? We expect to see increases in:
  • Foreclosures
  • Bankruptcies
  • Residential builder defaults
  • Subcontractor defaults
What will happen in the commercial construction market? Some of the current residential contractors will move to the commercial side to keep crews busy.

And as they enter the market and compete for work they have ignored for years, they will inevitably drive down margins. Further, some will prove their incompetence at handling commercial work by underestimating costs, and then by failing to complete jobs they start.

Contractors will have to cut their margins to stay alive.

OUR RECOMMENDATION:

Examine your customer accounts and your credit policies. Look at your accounts receivable and examine any account in the sixty day column. Remember that an account sixty days past due has less than a 50% likelihood of paying. Can you afford to lose those accounts receivable?

What can you do?
  • Treat every potential sale as a job account. Pick a dollar threshold for new jobs and set up job accounts.

  • Don’t let the accounts go past due: Stick to your credit policies.

  • Send out job notices to establish lien rights.

  • Don’t let your lien rights lapse. Monitor the accounts and file your liens on time.
If you do suffer a loss, consider that for every $1,000 you lose, you have to sell and collect another $20,000 to make up for that loss, assuming you have a net 5% margin. It is much easier to avoid a loss than to make up for one after it occurs.

Maybe we will experience a soft landing, as some economists predict. Regardless, you can help yourself by tightening up now, watching your receivables, and filing liens when in doubt. If you have any concerns, call us to discuss the situation.

LEVY • VON BECK & ASSOCIATES, P. S.
ATTORNEYS AT LAW
600 University Street, Suite 3300
Seattle, WA 98101
(206) 626-5444 - Fax: (206) 382-5527
www.levy-law.com