Legendary builder

Legendary builder

HOMEBUILDERS by Jean Gruss | Editor/Lee-Collier

Arthur Rutenberg, 80, has been through numerous homebuilding cycles in Florida and he thinks we're close to the bottom of this one. There are opportunities for well-financed builders to acquire lots for less money.

Back in 1953, you could have bought a home from Arthur Rutenberg in Pinellas County that would have cost you as much as you pay in taxes today.

Rutenberg, 80, has been building homes in Florida for 55 years and he's seen his share of both good and tough times. His franchise system of 32 builders hasn't been immune from the boom and bust in the housing market. At the height in 2005, Arthur Rutenberg builders built 615 homes. In 2007, that number dropped to 425 homes.

Still, it's beneficial to listen to what Rutenberg has to say about the current homebuilding climate because he's seen so many cycles in Florida homebuilding. The Review caught up with Rutenberg in Naples recently and here's an edited version of the conversation:

Q: You've been through many ups and downs. How does this downturn compare or differ?

A: It differs in two ways. First of all, the characteristics that drove it are different. In other downturns, it was either high interest rates, or high unemployment or a bad economy. But this time, none of those factors were present. This is strictly an oversupply downturn. Then in terms of degree, it's the steepest of all the downturns, but the cycle before it in '04 and '05 during the boom years was the highest upside. Therefore we had the most to correct downward, so it's sort of natural.

Q: Tell us a little bit about your outlook for Florida homebuilding. Where are we headed?

A: The bottom of this cycle is probably here or close to here. But the problem with housing cycles and predicting them is the same as stock market cycles. Nobody can call a stock-market bottom and nobody can call a housing-cycle bottom. We only recognize them in hindsight three or four months after they're passed and we're back on the upswing. So the only thing I can tell you is that since the first of the year there's been a significant increase in sales office traffic and that is a good sign. How sustainable it is and how long it will take to result in a significant sales increase is difficult to say, but it's the right direction.

Q: Besides the increase in sales traffic, what other indicators do you look at that will tell you whether things are improving or not?

A: There was an excessive increase in prices in 2004 and 2005 in home prices and that's been pretty well wrung out of the market. There's a long-term trend line in Florida of 5% to 7% increase in home values per year and we're back to that trend line. Therefore, the correction has essentially been made.

Q: Is the Tampa Bay area better off than Southwest Florida?

A: A little, because Tampa Bay prices did not increase as much as Southwest Florida and there wasn't as much of an investor component in sales back in '04 and '05 in the Tampa Bay area as there was in Southwest Florida. Therefore, the overhang of new homes isn't quite as great there.

Q: What advice do you have for builders?

A: The tendency in our industry is to cut back on a lot of the niceties and specifications. We're being very cautious about that because we have a brand reputation to keep up. So we haven't joined in very much in cutting back on the size of our homes or lowering ceilings or using less expensive materials, because our customer base is still the same. The value has improved, but nothing has diminished except price. As far as advice, in general, the classic ways with dealing with a downturn is you divest assets and reduce debt. We've cut overhead, but we haven't slashed it. We're not immune to this cycle. We have to live in it. But fortunately we're not as hurt by it as the industry in general. If we start to see that current increase in traffic result in sales, we'll be reluctant to cut overhead any further.

Q: In the last few decades we've seen the growth of the publicly traded builders. In light of recent struggles, what's their future?

A: I think the public homebuilders have increased their market share over the last 10 years to a great extent. And I think they'll continue to increase their market share. They have enormous capital, they hold large land positions even though they've divested land positions recently. But they will be back and I don't see them leaving Southwest Florida on a long-term basis. They are builder developers and they generally stay below our price range. There are two public builders we compete with down here, WCI and Toll. The others are generally below our price range. They have a strong formula and they stay in the more moderate price ranges and do a good job. I think that 10 years from today their market share will have continued to increase.

Q: What are the opportunities for well-financed builders?

A: There's a lot of developed-lot inventory on the market and it's on the market at much more favorable cost and terms than it was in the past, so that's certainly an opportunity.

Q: Do you think they'll fall further?

A: I don't know. They might but we're pretty close to a bottom. I don't have any more ability to call that than anybody else, but we're close.

Q: Do you think the Baby Boomers will come to Southwest Florida in the huge numbers everyone is expecting?

A: I don't know what people are expecting, but the Baby Boomers are coming more slowly right now as the cost of housing and the cost of living in Florida increase and the allure of moving to Florida is somewhat less. You hear people talking about this much-publicized halfback movement from Florida back to the Carolinas, but that's not a significant issue in our price range. There still as in-migration to Florida, albeit slower. The Amendment One that passed recently was helpful. It will reduce taxes for the new homeowners. I think the Baby Boomers will continue to come, but the influx will be somewhat more modest.

Q: Are you concerned about slowing population growth? Is it temporary?

A: I'm not concerned about it. From our standpoint, we are in a very fragmented segment of the industry. There are many, many competitors out there, and if the market is a little smaller, we increase market share. We've increased market share during this downturn.

Q: What do you think about the tax-reform idea of replacing property taxes with sales taxes?

A: I never met a tax I liked. I think we have way too much government expenditure and if we had less taxes we'd have less government expenditures.

Q: Looking back over the years, how has the franchise system worked for your company?

A: It's worked well for us. We have a lot of very experienced franchisees now that have been with us for many years. Our franchise agreements are 10-year agreements. We have franchisees that have signed their second and third agreements. It's worked well for us in that we're fairly well represented now in Florida and we're starting to move north of Florida into Georgia and the Carolinas for franchises.

Q: What challenge does that pose?

A: Product. The product we're sitting in here in Naples is not appropriate for Charleston, S.C. So we need an entirely new line. We build using concrete block through most of Florida until you get to the I-10 corridor where it becomes frame.

Q: You're known for being an aggressive litigator when it comes to protecting your designs. How successful have you been?

A: We continually pursue the most egregious cases of copyright infringement. We don't pursue the majority of copyright infringement cases because there are too many of them. But we select about a half dozen a year and pursue those and we win them routinely. It's not expensive because the awards exceed the litigation costs. We're sorry we have to do that. It is a deterrent.

Q: In this environment, have you had to help any of your franchisees financially?

A: We used to have a company called ARH Service Corp. and it used to guarantee customers that their home would be completed if the franchisee that built their home went out of business. We discontinued issuing those guarantees in early '04 because we really don't see the need for it now. Our franchisees have been extremely responsible. I think we've gotten a lot better at selecting our franchisees. Our weaker ones have left the system. We don't see the need for it at the present time and we've had no franchise failures since that time. I think if something came up we would handle it case by case. We would cross that bridge if we came to it. When we were first franchising early in the game, we probably didn't have as good a handle as we needed to on selecting our franchisees and our average wasn't as good as it's been in the last 10 years.

Q: Looking out a few years, what are some of the changes we'll see in homebuilding?

A: I would say that technology is slowly creeping its way into homebuilding more and more. Automation is now available at realistic prices. For example, you can put a camera at your front door to see who's ringing the bell. We put a technology closet in the home today. It's audiovisual, data, wires. Secondly, outdoor living has become more important. We're putting more patio space around pools, cabanas, outdoor fireplaces with seating arrangements, outdoor kitchens.

Q: Is the "green" ecological thing a flash in the pan?

A: No, it's not a flash in the pan. The "green" thing should be taken in the context of what owners are willing to buy, not what the green organizations are willing to promulgate. The green certification is somewhat prestigious, but it's not necessarily something people will spend money on. However, better insulation, radiant barriers, things that have a payback in three or four years are very popular. People do generally care about the environment, but you also have to show them that it works. We are doing quite a bit of research to go through the products that are offered to us. We're very interested in that movement. The movement that I thought was going to be a flash in the pan was the traditional neighborhood design. When it was introduced 15 years ago at Celebration in Orlando I thought it was going to go away. But it has not gone away. If anything it's more popular than it was.

REVIEW SUMMARY

Company. Arthur Rutenberg Homes

Industry. Homebuilding

Key. Oversupply is driving the housing market's downturn