Al Darwan will be the first to admit that it has been a tough go in the residential construction market in recent years. He’ll be the last person, however, to let a slowdown in the sector deter his optimism for homebuilders and consumers. As president of the Homebuilders Association of Greater Chicago and owner of Plainfield, Ill.-based Buckingham Builders, Darwan believes a healthy economy will be the buoy keeping builders afloat.

Despite reluctance among some consumers, Darwan insists that homeownership remains one of the best investments a person can make in America.

In an interview with Construction Today, Darwan discusses the status of the nation’s residential construction market, why consumers and homebuilders have reason to be hopeful about the future of this sector and how industry professionals can adjust their business strategies to remain successful.  

Construction Today: How would you describe the current situation in the housing industry?
Al Darwan: Obviously, these are very challenging times for our industry. The good thing, though, is that they are accompanied with low interest rates and a relatively healthy economy. This makes it more possible for most builders to survive this correction cycle and it gives me the impression that recovery is around the corner.

CT: What are you seeing from both consumers and your business peers given the collapse of the subprime mortgage sector?
AD: I would not characterize what happened in the subprime market as a “collapse.” I would call it a “correction.” What was happening in the subprime mortgage sector from 2003 to 2005 was certainly unsustainable.

I believe if you have a reasonable credit history and an adequate loan-to-equity ratio on your other assets, you still can qualify for some subprime loans. I certainly do not expect to see some of the very liberal loans that took place in 2004 and 2005 for several years to come. You need to keep in mind, though, that subprime mortgages never represented more than a very small fraction of the market. The vast majority of mortgages have been conforming loans.

CT: Are there specific geographic regions that have been more resilient than others in withstanding the residential construction lull? What are some of the factors that influence this?
AD: It has always been maintained that the building business is a localized business. It is directly related to local economies. If the area experiences job growth, then the building business flourishes. The Pacific Northwest and areas of the Midwest are two examples of regions that have been more resilient.

CT: In what ways have builders in the residential construction industry adjusted to the lull in the marketplace?
AD: Naturally, your first instinct as a business manager when faced with a challenging imbalance in your cash flow is to cut down on your expenses. What is making this process more challenging than ever is the fact that nobody is able to predict with any amount of precision how long this correction cycle is going to take. As a result, how far and how deep the cuts should be are difficult questions to answer.

Builders are cutting down as much as they are able to. A significant component of our overhead as homebuilders consists of debt service for the properties we own. I am sure every builder is trying to aggressively market as many of their properties as they can without incurring losses. At times like these, this is a daunting task, although not impossible. All builders are cutting down on their staff and all of their other expenses. We are downsizing our offices, postponing the purchase of any new trucks and construction equipment, and cutting down on other dispensable business expenses such as travel and training.

CT: A downturn in the market and credit pressures have made buyers leery. What will need to happen in order for consumers to regain their confidence in the market?
AD: First of all, I do not believe that it is justifiable for some consumers to be leery. In general, homes have been and remain the best investment Americans can make. I say this for the following reasons:

• Home prices are still appreciating in many parts of the country.
• Even in the small parts that witnessed some price decline, those are areas that benefited from unusually high price appreciation over the last few years. The decline is only a small fraction of that appreciation.

If the stocks or bonds you own decline in value, you have only two options: You can either keep them and run the risk of losing more, or sell them at a loss. When your home value stops appreciating for a short period of time, you are still benefiting from living in it. You can’t do that with stocks and bonds. Your home’s first and foremost task is to provide you and your family with the quality of life you deserve. When good profit comes on top of it, this is the icing on the cake. We’ve all been getting lots of profits from our homes in terms of leveraging our down payment and tax savings, to name a few.

Regarding what should be done to regain confidence, some things are already taking place. The Federal Reserve Board reduced its short-term interest rate. Although this does not directly impact conforming mortgage rates – those less than $417,000 – it sends the right signal to the market that the Federal Reserve is not going to be taking a passive position anymore while allowing the housing sector to drag economic growth further. It also helps the availability of money for jumbo loans for credit-worthy borrowers.

In addition, it aids borrowers such as builders and their suppliers to add to their staying power by lowering the carrying cost of their properties and materials. Builders are already doing more than their fair share in holding their prices down and offering incentives to help new homebuyers in making the leap towards homeownership.

There is no credit crunch for qualified buyers taking out conventional loans for under $417,000. And this is where the bulk of all home loans are made. Today’s mortgage rates remain near historic lows at just above 6 percent for fixed-rate 30-year loans. In short, this is the best time to buy a home. People who purchased homes during the correction cycle of the early 1990s made a lot of money when the median price of a new home in 1991 was $120,000. In August 2007, it was $225,700 – up 88 percent.

CT: Many experts say a turnaround is expected, but nobody can really predict when. What are your predictions?
AD: I agree with most experts that the turnaround is imminent. If I knew exactly when it is going to happen, I’d be a millionaire by now. On the serious side, if the Federal Reserve cuts the interest rate making borrowing money more affordable, and if economic growth and job creation remain on the healthy side, I anticipate we are going to have a far stronger spring selling season in 2008.

CT: As owner of a homebuilding business, you know what it takes to stay competitive. What advice would you give other homebuilders given the current situation? What strategies have you used to stay successful?
AD: I am sure that all homebuilders who’ve survived so far have proven that they know what they are doing and that they are doing the right thing. In a nutshell: Cash is king. We all need to keep on watching our cash flow very closely. We need to cut down on our cash outflow to the max. This includes lowering staff to the bare minimum and re-negotiating our contracts with our suppliers and bankers to make sure that we are getting the best prices and rates.

CT: As you look forward to 2008, what are you most optimistic about in the residential market?
AD: I believe the worst is already behind us. Everything that could have gone bad concerning our business has already gone wrong. I trust that we are going to see the industry doing much better in 2008 than in 2007.