Home Builders Shrink the Choices
For Carpet, Counters to Save Cash

Coast to coast, Lennar Corp.'s potential home buyers see different scenery, but they might encounter the same kitchen faucets.

The nation's second-largest home builder is whittling down options and moving toward a one-faucet-fits-similar-price-points model, seeing standardization and simplification as tools in a cost-cutting drive aimed at saving millions of dollars and surviving the housing slump.

Other home builders are taking similar steps. Beazer Homes USA Inc. says it reduced its carpet offerings by 85%. Pulte Homes Inc. cut back to 400 floor plans from more than 2,000, and Centex Corp. cut its roughly 4,500 plans in half, with more reductions under way.

Variety, builders have realized, costs money. That wasn't much of a problem during housing's heyday, when gross margins were as fat as 25%. Now margins are thin, and builder's stocks are in tatters; one index has them down more than 55% in the last year. Saving money has gained urgency.

"When you can raise prices every Monday morning, like it was during the boom time, it's hard to get the organization's attention on something as mundane as lowering cost," said Pulte Chief Executive Richard J. Dugas Jr.

With home prices not likely to increase soon and the limited pool of buyers demanding more discounts and freebies, construction is a logical place for penny pinching. Excluding the lot, the average single-family unit costs about $219,000 to build, according to the National Association of Home Builders. Cabinet and countertops eat up 5.7% of that total, while tiles and carpet command 5%. Windows cost nearly 3%, and appliances come in at 1.7%.

The savings potential goes beyond simply substituting lower-quality kitchen cabinets or cheaper carpet. Limiting the number of faucet styles, for example, lets builders order earlier and negotiate bigger bulk discounts from suppliers. Cutting countertop choices reduces the risk of installing Colorado red granite when the buyer specified Imperial red. Reducing and simplifying floor plans requires fewer architects and fees, and it speeds production.

Pulte projects typical savings of $10,000 to $15,000 per house.

The company sold 18,826 homes in the first nine months of 2007 at an average price of $324,000, but times are tough, industrywide. The builder lost $2.05 billion, as its margin turned negative and the company ate substantial land and goodwill write-downs.

"If you don't like cookie-cutter housing, you're not going to like the next several years," said Eric Landry, a Morningstar analyst.

The simplifying approach has detractors, though.

"Builders are looking at every type of option right now in sort of a desperate mindset to increase profitability," said John Fioramonti, senior managing director of Meyers Builder Advisors, a real-estate consulting concern. "I think that when they get a sort of cooler head and really look at the long term of what works in this industry, they'll realize this does not work. When somebody's spending a half-million dollars for a house, they want to be able to select some things that personalize it."

When they do, he said, they typically add 10% to 12% to the base price. That's why KB Home, the nation's fifth-largest builder, doesn't plan to abandon its nationwide design studios, which, in the third quarter, helped boost revenue by about $31,000 per unit. In Orlando, one of the company's largest studios, the thousands of choices include 270 carpets and 166 countertops. There are even exclusive Disney-themed products and Martha Stewart doors.

"It's the age of customization and consumer-driven choices," said Wendy Marlett, senior vice president of sales, marketing and communications at KB Home.

Hovnanian Enterprises Inc., the sixth-largest public builder by 2006 closings, thinks amenities "can make the difference whether someone sits out in this market or jumps in and buys a home," spokesman Doug Fenichel said.

Miami-based Lennar, which didn't comment for this story, has tried it both ways. The company has used some form of the "everything's included" model for years. It switched when it bought U.S. Home Corp. in 2000 and kept the former competitor's design studios. By last year, however, Lennar opted to phase them out.

"'Everything's included' was born in times that were more like these," Chief Executive Stuart Miller said in an earnings conference call this past summer. It brings "better value to the ultimate purchase price for the home, and that's going to work well in the declining market."

These days, Lennar, whose stock has fallen more than 65% in the past year, says it aims to offer the 20% of options that 80% of its customers favor. Selection is increasingly limited and simpler. The plan is to provide almost no choices, so the day of similar kitchen faucets nationwide aren't too far away, people close to the company say.

"I think a certain amount of simplification is good; it's better not to offer 10,000 SKUs [stock keeping units] if people don't buy 10,000 [SKUs]" said David Goldberg, a UBS analyst. "I think you have to offer enough choices so that you don't lose demand."

That's what Pulte aims to do. Like Lennar, it noticed customers usually went for the same options and upgrades. So it made those standard features and cut its offerings, giving buyers only a handful of choices for kitchen countertop colors, for example. At the Del Webb active-adult communities, choices were sliced from 10,000 to several dozen, said Pulte's Mr. Dugas. Pulte also has standardized window sizes, going from several hundred window SKUs to 28.

"The whole process has started to unlock dollars at every turn," Mr. Dugas said.

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