Chris Peterson, co-owner of Rivendale Homes, is weathering the current housing slump by cutting new home prices at the Woodbridge subdivision by 25 percent and curtailing new home construction.(Press Democrat/ Christopher Chung)

Developer makes deep cuts to ride out housing slump, lays groundwork for rebound

MICHAEL COIT
THE PRESS DEMOCRAT

RIVENDALE HOMES

Founded: 1995

Headquarters: Santa Rosa

Founders:

Chris Peterson,

Bill Benjamin

Employees: 30

Revenues:

$66 million

Current projects: Woodbridge, Montage, Brookwood, Millbrook

and Camden Place

in Santa Rosa; Maplewood

in Vacaville

In three decades in the building industry, Santa Rosa developer Chris Peterson has never seen a housing slump this severe.

His company, Rivendale Homes, has been forced to make tough choices to survive.

Rivendale has slashed prices 25 percent in its Sonoma County subdivisions since the onset of the downturn in 2005. The company slammed the brakes on housing starts, the very engine that propels home builders. Today, Rivendale builds just one-quarter of the homes it would have erected during a typical month before the market slowed.

To make payments to its lenders, Rivendale is tapping into reserves it set aside for times just like this. And to cut costs, the close-knit company has laid off a quarter of its employees, many of whom had worked with Peterson for a decade or more.

Even now, with sales picking up, Peterson's hopes that the housing market may be stabilizing are tempered by the prospect of another difficult year ahead. He predicts local home builders will struggle financially throughout the year.

"That's when you're going to see the brunt of the bloodletting. Profits are way down, and there are some homes that we are losing money on," Peterson said. "In this market you just want to survive and be ready for the next turnaround."

He is confident but not unflaggingly optimistic, revealing a calm demeanor that has helped carry Rivendale through the ups and downs of the volatile building industry.

Across the North Bay and Northern California, builders are struggling through a slump more painful than expected. Many figured they had come through the worst a year ago after initially cutting back housing starts and reducing prices.

But then foreclosures took off and lenders began squeezing the money supply for purchasing homes.

The steep fall-off in sales and construction has shaken the county's home building industry, which has shed at least 400 jobs over the past two years, according to state labor statistics.

Developers aren't buying acreage for new projects as they wait for land costs to fall. Construction of new homes and apartments in Sonoma County could hit a 20-year low in 2008, builders warn.

"It's certainly been a challenge. These guys are really trying to figure out how to make it work and not necessarily make money but stay above water," said Greg Paquin, president of the Gregory Group, a Folsom company that tracks home-building trends in California.

Rivendale's aggressive moves to keep selling homes through the housing downturn demonstrate Peterson's determination to survive.

"This is a very severe cycle. No one's going to build if they can't make money," Peterson said.

Survived previous slumps

The company was founded in 1995 by Peterson and Bill Benjamin. It survived the housing slump in the mid-1990s and flourished during the housing boom of the early 2000s, becoming the county's second-largest builder in 2005 with $82 million in revenues.

But sales began to fall in late 2005 as builders were busy putting up 3,003 new homes in Sonoma County. They reacted by slamming the brakes on housing starts -- 1,955 in 2006 and 1,483 last year -- and started cutting prices.

Peterson saw the impact up close. Two years ago, Rivendale sold five homes per project every month. By the end of last year, the developer was selling just one a month.

The builder slashed new construction over the past two years. For several months last year, Rivendale didn't put up a single home.

"It really started to snowball. That was the slowest that I've ever seen it," Peterson said.

During the housing boom, Rivendale started 12 to 15 homes per project every month. Today, the builder begins about three a month as it works through a backlog of unsold homes in its subdivisions.

"All along the way we've reduced our inventory," Peterson said.

With fewer homes to build, the company has been forced to say goodbye to a quarter of its workers. From a peak of 42 employees two years ago, Rivendale has cut back to 30, letting go project managers and office staff.

"It's tough. You spend more time working with these people than your family. A number of these people have been with the company for 10 or more years," Peterson said.

Slashing prices

In an attempt to entice buyers, Rivendale has cut its prices sharply and frequently -- sometimes weekly.

Today, new Rivendale homes sell for between $350,000 and $450,000, about 25 percent less than at the housing market's peak in 2005. Those prices include $10,000 from the builder to pay closing costs or reduce loan rates to lower mortgage payments in the first two to three years, Peterson said.

The changes appear to be working. March was Rivendale's best month in two years, and the builder is now selling about three homes per project a month, triple the number from November and December.

"Hopefully price-cutting stops this spring. We've got a fair amount of pent-up demand," Peterson said.

With sales matching starts, Rivendale appears to have found a balance based on current pricing, said Jim Scally, new home specialist for North American Title Company.

"It's really tough to make those kinds of cuts. It's a gamble because you don't know how the market is going to react. Maybe they won't buy," Scally said. "Rivendale has hit the mark with their pricing. The market is proving it."

Other home builders also continue cutting prices on Sonoma County projects to keep pace with the market's decline. But discounting on new homes could be nearing an end here and in much of the Bay Area, Paquin said.

"You're starting to get a sense that sales are steady and pricing isn't going down as rapidly. We're seeing more and more of that stuff," Paquin said. "A lot of the Bay Area, we're within 5 percent of the bottom, and we may see it by the end of the year."

A turnaround, however, is more difficult to forecast.

Uncertain future

Sales of existing homes must pick up to give new home sales a boost. An increase in pending resales the past two months is a positive signal, but must continue to make a difference in a market where there remains a glut of existing homes for sale.

A slowing economy and sluggish job growth could be a drag on demand for new homes.

"The economy is always the wild card," Peterson said. "This credit crisis could make it a stronger recession."

Such uncertainty figures into bleak forecasts for home building in the county. Developers might put up 700 homes in Sonoma County this year, the smallest number in at least 20 years, economists say. The previous low was set in 1996 during the last housing downturn, when builders erected 1,464 homes.

The slowdown in housing starts means less demand for new building sites. Land costs will fall as a result, even in a county with urban growth boundaries that limit availability of buildable land, analysts said.

A developable acre sold for $800,000 to $1 million at housing's peak. Prices are only beginning to come down, and builders likely will wait until land costs settle at about half that range, analysts said.

"Anyone buying land today is very hesitant. You can't sell homes for what it costs," Scally said. "It's going to take the land people quite some time to realize that they're not going to get the same value that they were going to get two years ago."

Tapping into profits

Developers take out loans to purchase land, develop sites and build homes, with projects in Sonoma County taking four years or more to plan and complete. Future home prices must pay those costs and still produce profits.

"The land pricing has to be such that it makes sense in three to five years or seven years," Paquin said.

Home builders typically purchase sites just ahead of development because they can't afford to carry financing costs without selling homes. A vacant lot costs about $1,000 a month in interest and a completed home that hasn't sold adds an additional $2,000 a month, Peterson said.

For the past year, Rivendale has been tapping into its reserves to cover such costs.

Selling homes at a substantial discount has cut into profits. Rivendale's profit margins dropped from 10 percent in 2006 to 6 percent in 2007 and could dip to 3 percent or less this year, Peterson said. Builders typically aim for 8 percent margins, averaging strong and weak years, he said.

Some builders with land in hand will build for little profit. Others may not wait for the market to turn around and instead lose sites through foreclosure, Peterson said.

"The challenge you have as a builder is that once you start a project you can't stop," he said. "Every time a builder sells a home, he wants to start a home, just like an assembly line."

You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.

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