Market Trends
A Conversation with Steven Mungo, President of the Mungo Companies
May 26, 2010
MidlandsBiz:
Your dad, Michael Mungo, passed away recently. What is his legacy on the local home market?
Steven Mungo:
He built nice neighborhoods where people wanted to live. In the 1950's, Dad understood that people wanted more room to live and that they would be willing to move across the Saluda and Broad Rivers from downtown to do so. He built his first residential development at Fox Hall Valley in the Dutch Square area and then moved further out to his neck of the woods, the St. Andrews area, to build Whitehall. We are proud to carry on his tradition today.
People always thought that my Dad was a genius because of the 7 recessions that he predicted. In Dad's view, it was preparing for the 12 recessions that he predicted that never happened that was the secret to his longevity. No one could have predicted the breadth and depth of this current economic downturn, but business had been rising pretty continuously since the Reagan years. We were overdue for some sort of a correction.
MidlandsBiz:
What are some of your earliest memories of growing up in the home building industry?
Steven Mungo:
Dad was a workaholic, so if you were going to be a part of this family, work was a given. One of my earliest memories is Dad putting us to work at the Coldstream Country Club development that he was building. I was jealous because my older brother Stuart got to drive the tractor and I had the glamorous job of picking the crabgrass out of the greens on the golf course.
Midlandsbiz:
How has the Mungo Companies been impacted by this recession?
Steven Mungo:
In 2003, we formed a separate company called Mungo Construction that primarily builds low cost housing for publicly owned housing authorities. It has proven to be a niche industry that we are well suited for, and that has given us steady work through this down period. We have done work here locally at the Rosewood Hills development and in the Upstate for the Spartanburg Housing authority, for example. It helps to be diversified.
Over the past couple of years, the affordable market (homes less than $175,000) has been relatively steady. Anything over that price and the absorption rate of new inventory has been declining. While Mungo has a variety of price ranges in our housing portfolio, we are strongly positioned in the affordable house range so this, too, has also helped lessen the impact of the downturn.
Coming into the recession, builders, including us, were very active acquiring land, a key raw material in residential development. People talk about a real estate bubble, but there was also a land bubble. As long as builders were able to sell homes at higher prices, they were fine; but when housing prices declined, they couldn't get a high enough price on the finished home to make a profit on the lot. There is an optimum ratio of between 18-22% for the price of the lot compared to selling price of the home. Today that ratio has grown to 25 -35%; in California ratios of 50% have been seen.
Some of the larger national builders wrote down the value of their lots, took a net operating loss on their properties, and filed amended tax returns to earn back much needed cash to help keep them afloat. Private builders have not had that luxury. 30% of all local private builders have gone out of business in this recession, and the number is higher nationwide.
MidlandsBiz:
How do you deal with the public relations aspects of building in environmental areas?
Steven Mungo:
There are always "no growth" people who criticize everything you do. Residential construction is a highly regulated industry so land issues come up everywhere we go. There is no reward for trying to push the envelope by building near environmentally sensitive areas - you just become a lightning rod in the media. We follow the local codes and our due diligence with all properties. We live in this world, too; we don't want to destroy the environment.
MidlandsBiz:
What trends do you see with green elements being incorporated into homes?
Steven Mungo:
Green is obviously the trend of the future and Mungo Homes has won an international award for one of its communities. But if you offer the average customer green features in an à la carte fashion, they won't pay for it. Green costs more upfront and in this day and age, not everybody has the cash to pay for premium features. Very few people walk into new homes and ask about the power bill. They do walk in and ask how much for hardwood floors.
MidlandsBiz:
Have prices started to stabilize?
Steven Mungo:
The days of the ridiculous offers are over – which is a good sign, and an indication that prices are stabilizing. Someday, we are going to look back and laugh at some of the offers that we received these past couple of years. We had $200,000 houses marked down to $190,000 and people offering $125,000. No thanks!
MidlandsBiz:
Are you buying anything right now?
Steven Mungo:
Banks are starting to put foreclosed inventory back on the street. We receive calls daily about cases where builders or developers have entered into a residential development under capitalized and got caught in the market. Generally, these have tended to be either large scale projects (that are out of our risk tolerance) or very small scale. We think that more inventory is coming in the pipeline so we have been very cautious about acquiring properties.
Our current strategy is to buy finished lots because it's cheaper than building on or improving an empty one. We are managing our balance sheet conservatively and have used the past couple of years to lower our debt level. Interest rates are still low right now, but will most likely rise over the next couple of years and we don't want to carry large amounts of debt in that kind of environment.
MidlandsBiz:
Are you in other cities?
Steven Mungo:
We are in the Greenville/Spartanburg market. We have been in Charleston for six years, Myrtle Beach for four years, and we also have a division in Raleigh.
MidlandsBiz:
What are some of your favorite local neighborhoods?
Steven Mungo:
Ivy Green in the Irmo area is a very successful neighborhood that sold well and that has maintained a high level of interest in the resell market. Houses do not sit on the market very long in Ivy Green. We incorporated a central park that gave it a livable, community feel. As lot sizes were slightly smaller, we made sure to put in extra parking throughout the neighborhood.
We love to do innovative stuff in new neighborhoods, but it's tough to pull that off in today's market that is still very much driven by price.
MidlandsBiz:
What are some of the major trends in housing today?
Steven Mungo:
The major trend is the importance of creating a comfortable, lifestyle environment. People want more than just homes, they want neighborhoods. People want to know how a community lives, how it looks and feels, and are less concerned about the size of the lot. Landscaping is important and something we are proud of at Mungo Homes. In many of our new neighborhoods, we have systems in place for lifestyle management that are a part of homeowners' regimes fees: grass cutting and power washing service etc. These are features that have proven to be popular with all of the demographics, but especially the single female.
MidlandsBiz:
What role do you play currently as Chairman of the Executive Committee for the Home Builders Association of South Carolina?
Steven Mungo:
The role of Chairman is mainly to be the head cheerleader and spokesperson for the industry. I am frequently down at the statehouse talking to members of the Senate and the House about how their votes will affect our industry. You can hire lobbyists to go and do the work for you, but you gain more traction when you talk to the representatives directly as a business owner. I can tell them how a decision will impact whether Mungo Companies will hire someone, or let them go.
Our mandate is also to make sure that South Carolina is creating a business- friendly environment. We support tort reform and anything that has the potential to reduce the number of frivolous lawsuits.
We are currently dealing with the requirement that sprinklers be built into all new homes by the year 2011 and are adamantly opposed to it. While it will no doubt improve fire safety, we feel it is a matter of consumer choice and should not be imposed on the building industry. Fifteen other states have opted out of the code including North Carolina and Georgia.
MidlandsBiz:
Where do you see the housing market in 5 or 10 years?
Steven Mungo:
The population is continuing to increase and people are going to have to live somewhere. The pendulum has swung too far the other way in this correction. With the lack of construction work and the possibility of immigration reform, many of the skilled trades have returned to Mexico creating a significant loss of capacity in the home building industry. In 2013, without the skilled trades, I'm not sure that we are going to be able to build the stock of homes necessary to support the population and we will enter into a shortage of homes.
About Mungo
The Mungo family has been building new homes and communities in the Midlands since 1954. With the philosophy of quality, value and integrity, Mungo was recently named the 38th largest builder in the country and is the only builder in South Carolina ever honored with the prestigious National Housing Quality Award.
For more information on Mungo Homes, visit www.mungo.com
For more information about the MidlandsBiz Market Trends partners, click on any logo below:
