 Where have all the Homebuilders Gone?
Survivors of a Market Downturn
by Mike Henle
Las Vegas homebuilder Mick Galatio has a passion for his industry considering that he’s also the president of the Southern Nevada Home Builders Association (SNHBA) during one of the worst economies ever. The 55-year-old Galatio remains upbeat, although he is also brutally honest when he says “I’m afraid we’re in this for awhile.” When he took the gavel of the SNHBA, he mistakenly figured that the market would stabilize by this summer.
Galatio is a member of what might be termed the survivors of the local homebuilding industry. He’s operating in a Titanic-type of environment hanging on by the end of his fingertips while leading the largest and oldest trade association serving the residential construction industry in Nevada.
Many key personalities have left the local homebuilding business. Lewis Homes sold to KB Homes during the peak a few years ago, and it’s a sure bet that many who held on wish they had taken the cash and run.
The Challenges
Truth-be-known, Southern Nevada has been rocked by the economic downturn when it has long been believed that the area was immune to such a possibility. But any remaining builder will tell you that this particular challenge has surpassed the last blip in the early 1980s or the early 1960s when foreclosures and unfinished housing projects dotted the Las Vegas Valley. Meanwhile, the lending industry has tightened requirements and dealing with regulatory bodies has gotten worse than ever. Construction defect attorneys have invaded Nevada earning a reputation tantamount to axe murderers.
And as if things are not bleak enough, another 800 workers have been eliminated as possible homebuyers with the sudden announcement that the Boyd Group has ceased construction on the $4.8 billion Echelon situated on the grounds of the old Stardust Hotel.
Hanging on to survive the downturn, the barrage of bad news and the onslaught of the attorneys are the following, to name a few: Rhodes Homes; Pardee Construction; KB Home; Richmond American; Christopher Homes; RS Development; Wagner Homes; Woodside Homes; American West; Christopher Homes; Celebrate Homes; Lennar; Amstar; Pinnacle Homes; Signature Homes; Storybook Homes; and Pulte Homes. Some have refocused their energies to other markets, while still others try to finish existing neighborhoods.
Some builders keep on keeping on, although they’re counting their blessings in other markets. Don White of Pageantry Homes is now building single-family homes in Washington State, while Mark Doppe – formerly of Carina Homes before selling to Lennar – is involved in commercial construction in Washington State. Still others are rumored to be following suit and pursuing more stable markets.
The Survivors
In the meantime, the survivors of the homebuilding industry remain troopers scraping and clawing for the next deal while trying to maintain their sanity.
Galatio’s persistence and calm nature are true testaments of his dedication. A former Marine, Galatio is a skilled craftsman who journeyed west from upstate New York in 1975 looking for work in construction, ranging from framing and finish work, to pouring concrete, hanging drywall and supervising job sites. He eventually joined Bill Schroeder of Nevada General before plunging head-first into home building by forming Desert Wind Homes with partners, John Heard and Mark Casey. In fact Galatio had plans to relocate to the northwest before the economy soured leading him to say, “Now I am just trying to get through this downturn market and essentially start a rebuild.”
Now the sole owner of Desert Wind Homes, Galatio is a breath of fresh air in a miserable business environment. Undoubtedly operating with a discipline learned in the military, he’s refusing to panic while under attack. “I tell my bankers I have been hit by the bus, and I’m hanging to the bumper by the ends of my finger tips,” says Galatio. “When I look in the bus, there is no bus driver, but just a bunch of bankers. Right now in our situation, the bus has hit us. We’re hanging on hoping that between the bankers and the recovery we will survive it. It’s important that the banking industry works with us and is willing to take write offs and losses like we have. We are asking them to take losses by discounting the loans because we have lost all of our equity money that was put up for the loans.”
Galatio said there were some hints that companies wanted to buy him out, but no solid offers ever materialized. “I have always wanted to maintain the business,” he said. “I have a good down home staff, and we built from the bottom up. It’s day-to-day what we’re doing right now. I consult with my counterparts in the building business, and we’re all facing the same challenges. There is no real answer how we’re going to get through this.
“The studies say we’re going to be into 2009 before we see a recovery, but I’m starting to think it’s going to be 2010.”
Galatio was a tank crewman in the Marines, and jokingly remarks that he needs a tank now to survive the current struggles. “I now have some general contracting jobs for an assisted living facility with 114 units in Boulder City,” he said. “On the same job, we’re renovating a closed restaurant, which will serve as the cafeteria and lounge area.”
One of the biggest issues in any business during tough times is keeping people motivated. Galatio said speaking with his fellow builders helps because they are able to counsel one another by sharing stories. “The outlying areas like Mesquite, Pahrump and Coyote Springs are going to be tough markets,” he said. “Because of the gas prices, people are looking to live close to where they work, so the market is trying to stay closer to the center of things.”
Looking for a Recovery
Perhaps one of the most interesting builders remaining in Southern Nevada is Signature Homes founder Richard Plaster, who has an MBA in finance from UC-Berkeley and an undergraduate degree in psychology from Stanford. The two degrees undoubtedly work to his benefit during the current challenge.
Plaster’s company is celebrating its 30th year in business. From day one, he has been the one who was able to read the future and react before the downturn hit. “I think this was a fairly predictable bubble,” said Plaster, who first worked in the banking business before leaving corporate America to pave his own path. “We have seen these cycles before, more so in California. People should have anticipated this. Some did, and some reacted more effectively than others.”
Plaster’s own foresight led him to build 1,000 income-producing apartments. “Without them, I might be sweating bullets,” he says now. “We actually thought we were in better shape than we are since we hadn’t bought any land since 2003, so we didn’t pay excessive amounts. But sometimes those things are very difficult to know.”
Plaster said his strategy is to conserve assets. In addition, there are taxes to pay on unused land not to mention payroll and the rest that goes into the homebuilding business. “The problem now is trying to figure out how long this is going to last,” he says. “Most people don’t understand how these things end. They don’t bounce back dramatically. We could see housing starts go back up, but we’re not going to see price levels go up any time soon. And anyone betting on land values coming back is mistaken. We are now seeing problems in every development area. In fact they are saying that office vacancies are now 17 percent, and the re-sale market is very weak, too. This is a monkey around everyone’s neck.”
Frank Wyatt, president of Pinnacle Homes, has reduced his work force by 40 percent while also eliminating advertising. In addition, he said the company is going to hang on to its land. “Right now the only people buying land are those people who are trying to buy it at such distressed prices that it’s not worth it for us,” he said. “We’re better off sitting on it, paying the interest charges and just waiting this out.”
Wyatt predicted the rebound would be noticeable by the middle of 2009 adding that sales have dropped 60 percent since the peak. He added that the company will review its floor plans during the lull.
Dennis Smith brought his home builders research expertise to Southern Nevada from Arizona in 1988. His opinions and numbers are utilized by just about everyone in the homebuilding business. He blames much of the current problems on the lending industry, which created a hot market with softened qualifying requirements such as stated income loans. When the foreclosures soared, the rest of the market nosedived. “We knew there were going to be a lot of foreclosures when they were offering no qualifying loans and no requirements to get loans,” said Smith. “Prices were going up at unreasonable rates, and it was easy to see that was all going to change relatively quickly. When it did change, we knew that housing prices would eventually go down. When there is a peak, there has to be a down side, and that’s exactly what happened. What no one was able to predict was another factor that took it lower, and that was the credit crunch. There are buyers out there, but a lot of them cannot qualify.
Smith said before we see a recovery, the decline needs to end. “It’s going to be flat first,” he said. “That’s the first stage of recovery. First, it needs to stop going down. That, in my eyes is part of the recovery, but that’s going to take time. When re-sale prices stop decreasing, the demand will get closer to equalizing the supply and we will have a normal situation. We are starting to see that in new homes, but not in re-sales.”
Smith said investors are still looking for land based on distress sales. “They believe in the long-term viability of the housing market in Las Vegas,” he said, adding that new home sales reached about 39,000 in 2005. “We might have about 11,000 sales this year,” added Smith, who has been tracking the housing market for 35 years.
So, where have all the builders gone? Well many of them are still here, holding on … barely. Like the rest of the real estate industry – they are focused on making smart moves and continuing to position for the return of the market in 2009 or 2010.
Mike Henle is a LasVegas-based freelance writer and the author of” Through the Darkness: One Man’s Fight to Overcome Epilepsy.” He can be contacted via e-mail at mhenle@aol.com, or through his Web site www.mikehenle.com.
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