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'These are trying times in the housing industry'

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Home Builders Association executive Bob Weiss talks abouthow the current economic crisis is affecting Kentucky construction
By Ed G. Lane

Bob Weiss
Bob Weiss is executive vice president of the Home Builders Association of Kentucky and also serves as chief lobbyist for the housing industry in Kentucky. Since Weiss assumed his position in 1985, HBA’s membership has grown from 1,700 member firms to more than 8,000. During his time at HBA, Weiss has served as a member of the Kentucky Affordable Housing Trust Fund Commission and the Governor’s Earthquake Readiness Task Force, and was named president of the Kentucky Society of Association Executives in 1991. He also served on the board of directors for the National Association of Home Builders (NAHB) Executive Officers Council in 1989, 1990, 1991 and 2000 and was president of the NAHB Executive Officers Council in 2003. He is the current president of the NAHB Green Building Task Force and chairman of Junior Achievement of the Bluegrass. Weiss and his wife, Diane, reside in Versailles with their son, Pete.


Ed Lane: The top question our readers want to know concerns the financial health of the 8,000 builder members of the Home Builders Association of Kentucky. How are your members faring in this economy?

Bob Weiss: These are trying times in our industry. But having just returned from a national meeting in San Diego, the comforting thing is that Kentucky builders are not as bad off as those in the real estate and construction industries in states like Florida, Nevada and California.

Those states not only experienced a lot of overbuilding, but they also experienced the huge home-price escalations. Sooner or later, the bubble was going to have to burst. The bubble didn’t burst nationwide; it burst in states where homes were increasing in price – as much as $10,000 every month. In Kentucky, we have had modest price increases. In fact, our home prices are still going up. Although statistics are down as far as the number of starts, Kentucky home builders are still active in the industry.

EL: Are you suggesting this is a buyer’s market and you might find a bargain out there?

BW: In some Kentucky markets, a spec homebuilder who had not found a buyer may have had to drop his or her price. Our members have always said, if you can move a piece of real estate move it – no matter what. It’s better than sitting on an unsold home and waiting for somebody to buy it at a price you might never achieve.

There are some bargains out there.  Homebuilders are ready to sell, but bargains are relative. You are not going to find a $800,000 house for $400,000, but you might find one for $720,000. That’s still a bargain, because home values have been stable in our state.

EL: What is the number of new homes built in 2008 to date versus 2007?

BW: Recent data from the National Association of Home Builders based on MSA districts around the state (Bowling Green, Elizabethtown, Lexington, Louisville, Owensboro and the Cincinnati/Northern Kentucky area) indicate Kentucky is down about 50 percent on housing starts based on its best year, which was 2005, when our builders constructed about 21,000 new homes.

At the end of 2007, starts were probably down to about 11,500 new homes. At the end of 2008, I think starts will be down to just between 9,500 and 10,000 homes. One of the overriding things that I tell my members is, “It proves that they are smarter than they get credit for because they aren’t starting new homes they can’t sell.” There still are 10,000 homes being built in Kentucky, and that means people are still buying new homes – many are on a custom-design basis.

EL: Has the reduction in home building also impacted membership in HBAK? 

BW: I am amazed that out of its 8,000 members, the HBAK is down about 260 members through September of this year. We have some benefits like insurance programs for builders that they can’t get elsewhere.

There are some nearby states where homebuilding organizations have already lost 1,000 members. Kentucky has been very fortunate. Our average Kentucky builder constructs about five homes a year and does some remodeling projects. Our members are agile and can adapt to the times a lot easier than some of the bigger builders.

EL: How has the average price per home been impacted over the past 18 to 24 months?

BW: New homes are going to be more expensive because prices are still going up. If you want to build a new home and you can afford to build and you have the credit rating to build, you should build now because the prices are never going to be the same. Values of spec homes that are out there on the market have probably dropped a little bit because some builders may be motivated to sell those. As far as custom homes, if you’re ready to go – now is the time.

EL: Is a lower average home price related to market conditions, average s.f. size, quality of exterior veneer and interior finishes, or green construction?

BW: Material costs are probably going up. The current trend is for new homes to get smaller. People don’t need big homes. Homebuilders are building smaller houses with more amenities. Unless you have 12 kids and need a house with seven or eight bedrooms, large homes are probably going out of vogue.

EL: What is the outlook for homebuilders during the first half of 2009?

BW: 2009 is still going to be a tough year, a lot tougher than we initially thought it would be. Our national economists originally talked, a year and a half ago, about coming out of this recession in second quarter 2009. Kentucky should be coming out of the downturn by the end of 2009, if not the first part of 2010. 

EL: How much responsibility for the downturn do you place on Freddie Mac, Fannie Mae, lack of underwriting standards and sub-prime loans?

BW: They all played a part. The bottom line is that even though Kentucky wasn’t heavy into either sub-prime loans, 125 percent value loans, or no-doc loans (in California), our state suffered because of the actions of people around the country. When you turn on the news, the reports don’t discriminate between Kentucky and California. They tell you home values are plummeting. That’s just not the case in this state. 

Underwriting standards have already changed for home and car loans. We’re going back to the days when I bought my first home and the banker looked at me from across the table and said, “I’d like to see 20 percent down.”  

EL: Do homebuilders carefully analyze market data?

BW: Some builders did build like there was no tomorrow, but a lot of builders did analyze the market – what’s hot and what’s selling. There are a couple builders who absolutely hit home runs on the over-50s market. They studied that market and saw there was a need. They are still building and still selling in that market today. The other aspect now is energy efficiency that has come back in the form of green building. 

EL: What trade areas seem to be the most robust housing markets in Kentucky?

BW: Comparatively speaking, I find that Kentucky’s rural areas have not been hit as hard as those areas in the “golden triangle.” There’s still a lot of activity in Somerset, Bowling Green, Owensboro and London. Builders in those markets tell me that they are staying busy. In Lexington, Louisville and northern Kentucky, builders have found niches in which to build, and that’s where you will find building activity in those markets.

EL: What key demographic factors are driving growth markets?

BW: Fifty and over is a key category. The National Home Builders Association’s Over 50s Council is building for seniors – people who are empty nesters who want to move out of the 3,000 s.f. house into the 2,000 s.f. but still have all the amenities that they have in their existing house. The big factor is whether they can sell their house to move into the next one. These homebuyers are ready, they have cash, and lots of build-up equity to invest in their new homes. This will be a real hot market as the economy moves out of recession.

EL: Why are technology and green construction gaining momentum?

BW: Buyers are looking for a way to save on their utility bills when they move into their new home. In Kentucky, it dawned on people that they really need to save even if our prices for electricity are low – the lowest in the country.
When buyers start paying $4 a gallon for gasoline, they are motivated to save.
 
HBAK formed a program about a year ago called Green Build Kentucky. The program uses two guidelines – one is the Energy Star Program, which is an EPA-approved energy efficiency program that guarantees savings on your utility bills, and the green part is the National Association of Home Builders Green Building Guidelines.  

EL: On an average home, about how much more does it cost to go green? How long does it take to get a payback?

BW: One of the homebuilders in Lexington told me that he markets his Energy Star and Green Program pretty much like he markets a granite counter top. Energy Star can be added to the price of a home for about $2,000 – $2,000 gets you to the basic level of Energy Star and Green.
 
The payback is very quick. Energy Star savings in your home’s monthly energy bills might be $100 a month.

EL: What does “effective insulation” mean?

BW: In the Green and the Energy Star home, builders use foam insulation. It creates a tighter fit around the framing components and keeps air from infiltrating into the home. The goal is to tighten up your home so that you don’t have outside air flow coming in, while at the same time keeping the air quality high.

EL: How do renewable materials fit into a green economy?

BW: Renewable material manufacturers combine scrap wood particles with a glue-like substance that is hardened under pressure. With a cap added, it might become a floor joist. The cap on each side of it strengthens it. Believe it or not, builders also get more points on a green building if they buy lumber from people who reforest and manage lumber as a renewable crop.

EL: Are computer management systems being used to enhance utility efficiencies in houses?

BW: Building designers are creating more of what previously was called a smart house. The National Association of Home Builders went down that path almost 15 years ago. The technology can save utilities costs, and it’s just a matter of whether builders are using it. Some is used in starter homes, but as you move up in price you find more and more technology in housing.

Wiring every room for computers and digital television is the way homes are being wired today. For years, critics said that homes hadn’t progressed technology-wise since the days of flush plumbing. All of a sudden, we’ve come into the digital age and that has made the residential wiring totally different. Now people are wiring for all their future needs.

EL: How is waste reduction achieved?

BW: More and more builders are recycling construction waste. They’ll have two dumpsters on a job site – one each for things you can and can’t recycle. Waste management companies are actually catering to green builders. Some builders now have a passion for recycling.

EL: What about toxic reduction?

BW: Toxic reduction relates to paints, carpets and adhesives used to put the house together. In fact, green products are coming out everyday. As we speak, there are new paints that do not have any fumes at all; Porter Paints and Sherwin Williams are the companies that offer those as part of their green series. Builders strive for a positive indoor air quality, and anything they can do to achieve that they are going to do.

EL: Working with local communities, builders have to obtain zoning and planning approvals, building inspections and certificates of occupancy. How do you see that process in Kentucky right now; is it more streamlined and easier to work with local governments?

BW: It’s a real interesting issue. We have a real dichotomy in this state. There are counties that you don’t need a building permit to build a home. In fact, there are probably just under half of the 120 Kentucky counties do not require inspections on new homes – other than plumbing and electrical. A recent law passed the state legislature that makes the builder responsible to know the building code, whether the home gets inspected or not. 

In Louisville, Mayor Abramson put together a blue ribbon panel, which includes builders and regulators, to take a look at streamlining the process because it got so out of hand. In Lexington, builders have what they call the dreaded engineering department, but I think that’s getting a little bit better as they start to open up dialogue and talk to each other. Elected officials are starting to realize that new housing is economic development, and there are good-paying jobs being created.  

Homebuilding is approximately 13 percent of the gross national product in the United States. In Kentucky, I think it drops to about 6 or 7 percent of the gross state product. 

EL: In-fill and downtown versus more suburban development: How do you see that trend breaking?

BW: There has still got to be a balance. When I was younger, I would have loved to live in a central business district because all the amenities are downtown for young people. When I decided to have a family, I wanted to move out to the suburbs. When I get older, I might want to move downtown again. So it’s a personal matter, and everybody should have the right and choice to live wherever they want.

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One-On-One
Home Builders Association executive Bob Weiss talks abouthow the current economic crisis is affecting Kentucky construction

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