Ryland's chief sees risk of building slump

April 25, 1993|By Ellen James Martin | Ellen James Martin,Staff Writer

The recovery in the homebuilding industry is weak and susceptible to another downturn, especially if rates rise suddenly, the head of the Ryland Group Inc. says.

"Our forecast is that we're going to meander through the next three years," Roger W. Schipke, chairman and chief executive of the Columbia-based homebuilder, said in an interview after the company's annual meeting last week.

As with other homebuilders, Ryland's profits this year have been hurt by higher lumber prices, costly local building regulations and increased local government fees, including water hookup charges, Mr. Schipke said.

But the biggest threat to the homebuilding recovery, which began last year, is subdued consumer confidence, Mr. Schipke said.

"Disposable income is not moving," he said. "And we're not producing jobs on the national level. People have fears of whether they're going to have a job or not."

Analysts who track Ryland, like Michael L. Mead of Legg Mason Wood Walker in Baltimore, agree that the new-home market is not likely to rebound quickly.

"The average person today does not have the overall confidence in his or her career that he used to," Mr. Mead said. "The big paternal companies have downsized."

Consumer confidence rose immediately after the presidential election in November -- in what some economists describe as the "Clinton halo effect." But confidence slumped somewhat in the first quarter -- despite historically low mortgage rates.

"We're back to the '50s in terms of mortgage rates," Mr. Schipke said. "So you'd think homebuilding would be booming."

Mr. Schipke predicts that mortgage rates will hold steady for at least six months. But he noted that the homebuilding industry could be hurt by a steep rise in rates.

"It doesn't take much for a fragile market to decline," Mr. Schipke said.

The U.S. homebuilding industry can be expected to build just 5 percent more houses in 1993 than last year -- far fewer than in previous recoveries, when 20 percent gains were common, the Ryland chairman said.

Ryland expects a gain of more than 5 percent in new housing units this year but does not expect a robust 1993, he said.

Ryland's size -- it ranks among the top three publicly owned home builders, along with Centex Corp. of Dallas and Pulte Home Corp. of Bloomfield Hills, Mich. -- has given it the status and size to obtain the capital to fuel its home building business, Mr. Schipke noted. Many smaller builders continue to face a credit crunch.

Still, like builders of all sizes, Ryland has been hit with higher lumber prices. Since October, lumber prices have nearly doubled, although they have moderated in the last few weeks. Higher lumber prices have been widely attributed to reductions in federal land available for timber production, because of environmental concerns, in the Northwest.

On the average home built by Ryland, which sells for $148,000, lumber prices have increased about $5,000 since October, Mr. Schipke said. But because of competitive pressures, he said, Ryland is unable to pass on the cost to consumers.

"Our people are always walking the line between [profit] margin and volume," Mr. Schipke said.

The Ryland Group builds throughout the nation, as well as in several other countries. The Baltimore area is one of its stronger markets, Mr. Schipke said. Its other strong markets include Phoenix, Denver, Houston, Cincinnati, Indianapolis, Atlanta and Orlando, Fla.

The company's weakest markets, Mr. Schipke said, are in the Southern California regions around Los Angeles and San Diego. But, he said, those markets are beginning to "bottom out."

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