[Cover Story] Housing Horrors

If your termite business has suffered from the sick real estate market, you may have to wait another year before the situation improves. Economists are predicting new housing starts and sales of new and existing single-family homes to decline through most of 2008 and s-l-o-w-l-y increase by year’s end.

That’s not good news for pest management professionals like Arrow Exterminators Government Affairs Vice President Rick Bell, Atlanta. “We have previously done a pretty brisk trade in wood infestation reports,” he said. “Requests for letters have gone down 30 to 40 percent.” And so has the termite, moisture control and carpentry repair work that usually followed. “If the housing market is not moving at a pretty good pace, then the houses aren’t selling and the people aren’t getting the houses inspected.”

Western Exterminator Company Vice President Debbie Byrne, Anaheim, Calif., said termite volume was down 20 percent in 2007. Most California banks require homeowners to obtain a termite clearance, so fumigation and major repairs often occur prior to putting a house up for sale. “Certainly (the real estate) market has impacted us quite a bit in the last two years.” Pest services are helping offset Western’s losses, but smaller firms that do mainly termites are “hurting,” said Byrne. “We’re seeing those companies coming in and wanting to sell their business. If this continues they won’t survive.”

The decline in new-construction pretreats are directly tied to housing starts, said Adam Jones, vice president of quality assurance, Massey Services, Maitland, Fla. According to the market research firm Metrostudy, permits in Florida for single-family homes declined 51 percent last year. Massey Services’ borate pretreats likewise are down 50 percent, said Jones. The state’s high foreclosure rate is “dramatically” impacting termite renewals, “our most profitable segment,” he added.

In Charlotte, N.C., Buzz Termite & Pest Control Owner Ted Brown saw pretreats fall 25 percent from 2006, despite the area’s stronger housing market. Business from volume builders was the first to dry up, he said. Custom builders have since followed suit.

Allgood Pest Solutions Partner Chuck Tindol said new construction was down 30 percent, mainly due to Atlanta’s “horrible” housing market. “Atlanta hit rock bottom (in 2007),” said Tindol. “It’s only going to get worse.”

THE PERFECT STORM. The pest management industry has survived down housing cycles in the past, but “right now we’re at the convergence of all the wrong things happening at the same time,” said National Pest Management Association Technical Services Vice President Greg Baumann.

One is the 2005 policy issued by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD) that meant to clarify when wood-destroying insect (WDI) inspections were required for government-guaranteed loans. “All it did was cause confusion,” Baumann said. The “poorly worded” document has led many to assume inspections are no longer required. “People aren’t reading the whole policy,” Baumann explained, particularly the “unless” clause that says inspections should continue to be done in areas where they have traditionally been performed. NPMA is working with senior FHA staff to clarify the document, but in the meantime some lenders and real estate professionals, who typically follow HUD guidelines, are dropping the requirement.

Arrow Exterminators Realtor Relations Vice President Nancy DeLany has seen this first-hand. “Many lenders were requiring wood infestation reports as part of their closing package and now that is no longer a requirement by the majority of lenders in the state of Georgia.” Inspections now fall under due diligence — buyer beware, she said. It’s a double whammy to both the pest management industry and home buyers, Bell said. “We’re a transient market in metro Atlanta and a lot of people move here who aren’t familiar with termites or termite pressure and if they don’t know to get an inspection on a house they may be buying, then six months or a year down the road they could find they have bought a very serious problem.”

Heavy competition and excessive inventory are forcing builders to reduce costs, which may mean eliminating pretreats, said Baumann. “They’re looking for every dollar they possibly can squeeze out of construction.” Building code inspectors focused on life safety issues may not prioritize termite prevention, he added.

The subprime dilemma has piled on the woes. Many who bought homes with low down payments, interest-only and adjustable loans now cannot meet their obligations, resulting in skyrocketing foreclosures. Banks are dumping houses “as is” so inspections aren’t required, and investors intent on flipping houses often don’t ask for inspections of any kind, explained Baumann. Short or quick sales back to lenders to avoid foreclosure also are becoming common, said DeLany. In December, President George Bush announced a subprime rate freeze to help reduce foreclosures, but it’s too early to tell how the program will affect the market long term, said Baumann.

“The real shock came when Wall Street went into a turmoil and didn’t know how to price ‘jumbo’ (mortgages),” recalled National Association of Realtors Spokesman Walter Molony. Rates for loans more than $417,000 shot up 1½ points higher than conventional 30-year fixed rates last summer. Coastal California and southern Florida markets were “seriously hurt” by the jumbo crunch, he explained. “Ten percent of (real estate) contracts fell through nationally because of the loan commitments that did not materialize. In high-cost markets as many as 30 percent of contracts were cancelled (last) August.”

This “unprecedented” disruption is improving, as jumbo availability has improved and the Federal Housing Administration is stepping in to fill the mortgage void for low and moderate income buyers and borrowers with blemished credit, said Molony.

Stricter lending guidelines have resulted, said DeLany. The Mortgage Bankers Association expects purchase origination to fall by 15 percent to $1 trillion in 2008, then rise about five percent in 2009, as home sales and home prices pick up.

Add these problems to the lack of termite swarms, aggravated by drought conditions in California and the Southeast, and you have the perfect storm, said Arrow’s Bell. Baumann agreed, adding that, “All of these things by themselves we’ve survived over the years, but every single one of these issues is converging right now. That’s a problem.”

BRIGHT SPOTS. Not all areas or pest management firms are suffering from a collapsing real estate market.

North Dakota, Vermont and the metro areas of Salt Lake City and Yakima, Wash. — though not hotbeds for termite activity — saw sale prices of homes increase.

Highly diversified firms and those that don’t rely on WDI/WDO inspections are weathering the downturn. “We don’t really see the housing market affecting termite production in any way,” said David Robinson, general manager, Truly Nolen, Salt Lake City. Home closings that require termite inspection are few in Salt Lake City. Most of his $75,000 in yearly termite work is from finding termites or damage during remodeling.

“We’re not getting the pinch from the housing market at this point,” added Houston’s ABC Pest, Pool & Lawn Services President Raleigh Jenkins, whose 2007 revenues were up 12 percent “even with termites no longer the major factor they used to be.”

Ray Johnson, president of Johnson Pest Control, Sevierville, Tenn., saw termite production modestly increase last year. Business in general is up 12 percent and he has hired three new employees. Johnson Pest Control performs WDI letters only for homes it has treated and currently has under guarantee.
In Yakima, York’s Pest Control Owner Bob York expects termite work to continue to increase as housing expands into undeveloped areas, especially desert land near old river beds. “I’ve run across termites in houses that are less than six months old.”

Burke Pest Control President John Burke, Binghamton, N.Y., also is finding termite damage and activity on the increase, even with minimal swarming. “It seems to be increasing in our area over the years.”

SURVIVING THE MARKET. Diversification is key to surviving the current market downturn. “If you put more items in your wagon, you have more items to sell,” said Arrow’s Bell. In the past four years, Arrow has added mosquito and wildlife control, and handyman services to its repertoire. “It’s critical for us to try as hard as we can to have a value-added service,” Bell said. The hope is that cash-strapped customers will cancel lawn or pool service but keep pest control “because they recognize the value.”

With pretreats accounting for 75 percent of Buzz Termite & Pest Control’s business, Brown plans to expand his general pest and moisture control offerings to “make sure I’m offering (customers) all the services I possibly can.”

Massey Services and Western Exterminator Company also are proactively cross-marketing existing customer bases.

Other professionals are moving to business models that sell termite prevention using non-repellent liquids and baits. “Eighty percent of the termite work we sell is preventive,” said Dr. Phil Nichols, entomologist, Middleton Lawn & Pest Control, Orlando. “We’re teaching our inspectors, whether they find termites or not, to propose a preventive program,” added Fredericksburg, Va.-based PermaTreat Pest and Termite Control President Jack Broome.

Black Pest Control Chief Operating Officer Mike Davis has combined general pest and termite prevention into a combined quarterly program that’s generated $1.3 million in annual revenue in the firm’s Charlotte market, alone.
In the past, “we didn’t have to do much but sit and wait for the phone to ring, but the last two years you can’t do that,” said Western’s Byrne, who forecasts moderate termite growth in 2008.

Arrow Exterminators is putting more effort behind educating real estate professionals on the importance of WDI reports for home buyers, said DeLany.

“Our diversification happened at the right time,” said ABC’s Jenkins. An increase in rodent exclusion for homes and office buildings has made up for termite losses.

“The whole business model has to change slightly,” said Baumann. He suggests aggressive marketing to “people you might not have talked to before: lenders, real estate groups, building code officials.” Rather than marketing exclusively to homeowners as in the past, “we now have to be creative because our customer in the near future might be the banks,” he said.

WAITING FOR 2009. According to the National Association of Home Builders, the long-term potential for housing activity is good. “By the end of 2009, we may be at a pace of 1.5 million units of new housing production (including manufactured homes), said Chief Economist David Seiders. The Mortgage Bankers Association expects new home sales to rise by about six percent for all of 2009.

Yet some in the real estate industry say “we’re probably looking at 2010 before we see it turn around,” said DeLany. “Hopefully it may not last that long.”

In the meantime, Western is keeping its termite department intact by shifting personnel to job duties in pest control in anticipation of recovery. “Because it will come back, it’s just a matter of when,” said Byrne.

The author is a frequent contributor to PCT magazine and can be reached at anagro@giemedia.com.

The Crystal Ball

The housing market took some serious lumps in 2007. Existing home sales in October were down 20.7 percent from September 2006 levels, according to the National Association of Realtors (NAR). Sales of new, single-family houses were down 23.5 percent from October 2006, creating an 8.5 month supply, reported the U.S Census Bureau and Department of Housing and Urban Development (HUD). And, privately-owned and single-family housing starts were 16.4 and 7.3 percent below last year’s levels, respectively.
How long can we expect the housing crisis to last, and more important, when will it begin to improve?

As reported by The Associated Press, Fannie Mae CEO Daniel Mudd expects “a very tough 2008” and continued weakness in home prices through next year. Mudd called 2007’s defaults and foreclosures the worst mortgage crisis “in recent memory.”

Other forecasters report home sales should bottom out in the first quarter (National Home Builders Association, National Association of Realtors) or third quarter (Mortgage Bankers Association) of 2008. Starts should reach a low in the second quarter (MBA).

Sales of existing homes will show “slow gains” throughout the year, said NAR Spokesman Walter Molony. However, a recovery is unlikely to occur before 2009. “If you’re going to compare to the volume in 2005, you’ll be disappointed, but in historic terms we’re returning to more normal sales volumes.”

New home sales should slowly improve in the second half of 2008, but will continue to be “weak,” said Molony. “We’re looking for an additional decline of about another 13 percent in 2008.” If your livelihood depends on this market, “you’ve got to hunker down,” he said. “There’s a lot of pain in the new home sector.”

The new home sales market takes a long time to adjust, explained Molony. It takes years to acquire land and permits, and then build. “(Builders) can’t turn on a dime, so they’re rightly pulling back because they need to support the price of the inventory that’s out there. Further contractions by builders are actually healthy for the market in that it will reduce the inventory and firm up prices.”

Starts should be up in the third quarter, “assuming the inventory overhang stabilizes,” said NAHB Chief Economist David Seiders, who spoke at the group’s Forecast Conference in Washington, D.C., on Oct. 24. NAHB projects total housing starts to register 1.363 million in 2007 and 1.2 million this year, an 11.9 percent decline. Single-family starts are expected to show a 50 percent decline from their peak in the first quarter of 2006 to a trough in the second quarter of this year. Given the oversupply of homes in a number of markets, any significant increase in homebuilding is probably years off, said MBA Chief Economist Doug Duncan, speaking at the organization’s Annual Convention & Expo in Boston on Oct. 17.

Consumer confidence is a wild card, said Molony. “A hard thing to predict right now that you really can’t plug into an economic model is the scare factor of headlines.” Many buyers are on the sidelines, waiting for signs of stability before jumping into the market. “Once they start coming in we’ll start to see (pent-up demand) begin to be unleashed.”

Energy costs, inflation, interest rate and tax policies, employment growth, dollar value, and housing inventory will affect these forecasts.

Foreclosures: Business Opportunity?

Will empty, foreclosed homes become prime digs for termites, rodents, roaches and other pests? Already slimy, green swimming pools of those in California have become breeding sites for West Nile virus-carrying mosquitoes, forcing public health officials to take action. Foreclosed homes generally mean cancelled contracts and renewals, but do they also pose a business opportunity?

They do, said Western Exterminator Company Vice President Debbie Byrne. Some foreclosed California homes will need termite inspections and completions to go back on the market. “We are looking into…that market now for termite” business, but services for other pests also could be a possibility, she said.

In the Southeast, homes for which termite renewals have been dropped lose their guaranteed protection, explained Massey Services Quality Assurance Vice President Adam Jones. New owners will need a preventive treatment for the structure, even if it was recently pretreated, to reacquire that guarantee. “It’s an opportunity for us to go back on a regular basis and keep in touch with those structures and try to remarket and resell services when somebody does eventually move back in.” 

National Pest Management Association Technical Services Vice President Greg Baumann suggests contacting bank loan processors to offer periodic inspections of foreclosed properties and control services for any problems that might hamper a sale.

Finding the right person to contact, however, may be a challenge. The mortgage industry is huge and the functions within one company can be scattered nationwide, said Washington, D.C.-based National Vacant Properties Campaign Co-Founder Joseph Schilling. “Contacting mortgage servicers and their field representative offices might be a good place to start.” The Mortgage Bankers Association’s list of property preservation contacts may prove helpful, but “a lot of the responsibility, I think, is going to get hoisted on the shoulders of local code enforcement officials,” said Schilling.

What have you done in your business to help combat the slowing real estate market?
(Respondents could choose more than one answer)

• 32% — Tried new marketing methods
• 22% — Contacted current customers to try to cross sell services they’re not using 
• 22% — Other* 
• 21% — I’ve thought about offering new services but haven’t done so yet 
• 19% — Offered new pest control-related services (i.e., other GPC services) 
• 14% — Decreased my advertising budget 
• 12% — Offered new “add-on” services (i.e., gutter cleaning, holiday lighting, etc.) 
• 12% — Increased my advertising budget  
• 9% — Laid off staff 
• 3% — Cut staff salaries
• 1% — I’ve exited the termite control market 

*“Other” responses include: we did nothing, making personal sales calls, offer quality service that competitors can’t, exhibited at more trade shows, went “green,” targeted more commercial monthly accounts, asked customer referrals and more.

About this survey

PCT magazine sent out a survey via Insight Express, a third-party, online marketing research firm, to a random selection of its subscribers on
Dec. 14. We received 223 responses.