I’ll never forget sitting in my job trailer back in 2004 at one of the new mega developments that had just popped up in my native Wake County, where the capital city of Raleigh, N.C., is located. This is where we had almost 100 houses going and had just pulled another 20 heating and air permits for a new section going up and another 80 to 90 or more for another four or five giant subdivisions all within Wake County, plus another 100 or more permits on top of those for various kindred ones in Charlotte, Greensboro and Durham also that same week.
I thought, “Geez, this is nice, no one has ever seen anything like this but anyone with any common sense knows this is nothing but a humpty-dumpty scenario and eventually it won’t be able to sustain its balance and when it falls off its wall, it’s going to leave a huge mess for all.”
Little did I or anyone know how big that inflating egg on the ever-growing high wall actually was or how big a mess it would help create, then foster The Great Recession. All we knew was that the level of new residential expansion was totally unsustainable and that we all better make the best of the situation because if we didn’t someone else would.
It had taken a substantial effort by my new bosses to lure me from the good side of commercial HVAC project management and estimating to what I consider the darker side of being a project manager. Then almost immediately I was promoted to branch manager for what would become their largest division (each separate branch requiring the branch manager to hold all the appropriate state contracting licenses, which I had for both commercial and residential). This was a chance for me to sit in the big saddle for what I knew would be a wild ride … This was just too irresistible!
My family business growing up consisted of having equal parts commercial, residential and service. And to be honest with you, I always hated residential because the margins were much lower and the risk much higher than for commercial. The relentless pressure to keep prices as low as possible meant the metrics for turning the same actual dollars per thousand expenditure took twice or three times more overhead on housing than shopping centers. Quite frankly I resented the hell out of that. That said, my new bosses had figured out their own unique way of handling the vice-like price pressures of high-volume, low-profit residential HVAC work. They had caught the bell curve of the then starting to expand housing bubble egg and were committed to riding it out until it either quite growing or ended up falling off that wall. All I had to do was make sure we hit a consistent 98% first time inspection pass rate, which we did and all were happily making money when …
I’m not sure exactly what happened next, but whatever it was, boy did it happen.
I remember sitting in the main sales office for the above mentioned development and accidentally listening in on an onsite loan officer’s pitch to a potential new buyer for what I called a “ready-made ghetto in five years.”
The potential buyer evidently was up front about not currently having a job, nor did his wife, and he had heard that they could still become first-time home buyers because of a huge pile of cash the company had accumulated to help new homeowners, such as themselves. Within minutes with no down payment, no credit check and nothing else other than a signature on the dotted line and a promise to pay a $20 thousand dollar balloon payment in 15 years, this nice young couple literally walked away with the keys to their new home and future nightmare, but this was not my problem. All I knew or really cared about was that sale had made my company another $1,311 profit.
To this day I still feel something wasn’t right with that whole situation, and I still have suspicions but no honest clues as to what happened and more importantly why. It was like a couple of shiploads of greenbacks showed up one day and were slipped into the U.S. banking system that created cheap mortgages, which created bottom-floor mortgage pools, creating mortgage-back securities so-called “derivatives” that everyone knew protected these new mega developer-owned mortgage banks and other regular financial institutions from true failure. This domino effect would funnel losses to the U.S. taxpayers, so a lot of eagle eyes turned to blind ones as we all made comments in private, riding this soon-to-be scrambled egg train all the way to the bottom as it finally feel.
Market is in coma
Contrary to popular belief, the market for HVAC and plumbing work in new residential work hasn’t died, but it’s in a coma and will be probably for the next 10 years or so. With the massive inventory of unsold homes just sitting there, losing value, and the banks, etc., do what they can to try to sell them, keeping new homes from being built and reducing the value of what’s on the shelf.
When the blocks of land required to create these mega neighborhoods is still valued at $25,000 an acre, (raw land literally just across the street from them can be bought for $5,000 to $10,000 per acre) the underlying value of current inventory is going to have to find that middle ground between for a more normal, regular and common sense new housing market ever to emerge down the road. When existing values of new and never occupied homes continue to decline the next three to five years until near desperation to unload them finally creeps in, then and only then will the next much smaller waves of market-appropriate tiny developments pop up.
It used to be that an ambitious project manager with the correct state and local licenses, wanting to go into business for themselves, could start off with a truck, a couple of mechanics and a handful of new houses to put the mechanical in. This often was a tried-and-true way of starting a business. That way is now and will be blocked for the next few years. The only exceptions expected will be around hotspots, such as oil and natural gas fields.
If you combine that with a still slow new commercial market, it is easy to say that if you’ve got a decent job, do whatever it takes to keep it, and want to find that American dream of owning your own business and home, then that hard rule of now having to have 20% total purchase price in cash to put down first needs to be a goal of yours. Just keep working as smart as well as hard as you can. Maybe, just maybe, good things will happen for you, as they should!
Kent Craig is a second-generation mechanical contractor with unlimited Master’s licenses in boilers, air conditioning, heating and plumbing. You may contact him via e-mail at: [email protected].