Why Barratt American's CEO Cares About First-Time Home Buyers

Barratt American CEO Mick Pattinson now builds move-up, move-down and infill housing aimed at affluent California baby boomers. But he refuses to surrender his passionate advocacy of affordable housing for first-time buyers. Senior Editor Bill Lurz examines the motives and history behind this homebuilder’s strategy.
By By Bill Lurz, Senior Editor, Business | September 30, 2007

Barratt American Homes CEO Michael "Mick" Pattinson.
Judged by the portfolio of causes he has championed, you might think Barratt American Homes principal and CEO Michael "Mick" Pattinson, 59, has a passion for politics and the law. But it's really housing affordability — especially for California's downtrodden first-time home buyers — that he cares about most. He's an affordable housing advocate, even though his building business is increasingly targeting older move-up and move-down buyers.

A decade ago, Barratt American ranked No. 171 on Professional Builder's 1997 Giant 400, with $70.15 million in 1996 housing revenues from 374 closings. That works out to an average sale price of $187,567. This year, Barratt American is No. 115 with 397 closings in 2006, for $250.83 million in revenue. The average sale price last year was $631,813. "The baby boom generation is still the big target, and they're buying move-up, move-down and luxury product," Pattinson explains. "I saw a development recently here in Southern California where elevators are standard in two-story homes. It's probably a good idea. We might steal it."

Why He Cares

Pattinson has been president of Barratt American since 1991. Then a division of publicly traded British parent, Barratt Development PLC, the firm had a rule that 50 percent of every development should be targeted to first-time buyers. No wonder Pattinson became their political and legal advocate.

"Most builders hate impact fees as much I do, but they are reluctant to get involved in litigation," Pattinson asserts. "They don't want to be in conflict with cities and counties that really control our livelihood. But we do it because it's the right thing to do. We represent a largely powerless constituency — first-time home buyers — who bear a disproportionate burden of regulatory, infrastructure and fee cost abuse by municipalities. Much of what those local governments are doing is against the law."

British-born Pattinson got his start in the housing industry in England in the 1970s, handling office duties in an architectural firm that repaired residential buildings. Later, he was a salesman for builder H.C. Janes, purchased by Barratt PLC in 1976. He headed Barratt's division in France before taking over the Southern California operation in 1991. All through the 1990s and into this decade, Pattinson has led battles against local government abuses and the California construction defect litigation crisis that, for 10 years, virtually wiped out attached housing in the state.

"I believe that's over now," Pattinson says. As president of the California Building Industry Association in 2002, he led the fight for passage of California's landmark SB 800, the 'right to repair' law that helped curb litigation. Attached housing, a key to getting ownership housing prices within reach of first-time buyers, is again part of the product mix for many California builders.

"But keep in mind that when we went into the defect litigation crisis, attached housing was priced in the $100,000 range," says Pattinson, "and now there's practically nothing below $300,000 anywhere in Southern California. We paid a price for what happened in that era."

Cash Is King

After leading his management team's $165 million purchase of Barratt American from the British parent in August, 2004, Pattinson has had his hands full dealing with California's housing recession the last two years. "Our deal was a leveraged buyout," he says, "so we had to bring all that debt down as fast as possible. Fortunately, at the top of the market in 2004 and 2005, we were selling land to public builders and liquidating inventory to get cash. We sold two projects in San Diego for $225 million. We generated a lot of cash just before the fallback."

Barratt American now has 10 projects under development, and the vast majority of them target move-up and move-down baby boomer buyers. The flagship is Fanita, a 2,500-acre master-planned community in Santee, Calif., east of San Diego, that will eventually have 1,380 move-up homes. "We're currently bringing in financial and land development partners," Pattinson says. "Building will start next year." He's also doing high-density infill developments targeted at affluent buyers moving to the city.

Why No Entry-Level?

"Entry-level consumers have been frightened to death by what they read about subprime mortgages and falling home prices," he says. "They believe that stuff a lot more than sophisticated buyers at the top of the home ownership pyramid. In 2006, we saw a reluctance to buy at the top of the market, but this year, the top has come back—not just buying houses, but at prices that are good for us."

Still, Pattinson has not abandoned his advocacy of first-time buyers. He's spent much of this decade in various courts, usually winning. One of those wins came in California Supreme Court, where a case against the City of Rancho Cucamonga, begun in 1992, ended recently with a judgment in Barratt American's favor. "The municipality was raising fees because there wasn't much building going on and they needed money. Does that sound familiar today," he asks. He's now in settlement discussions on a case against Orange County, which Barratt claims collected $19 million in excessive plan-check and inspection fees. "That money went into the general fund, generating interest of about $1 million a year," Pattinson says. "We challenged them and won."

He points out that most impact fees are the same on an entry-level home and a $2 million estate. "We're sick and tired of passing these fees of $50,000 to $70,000 per home on to kids who are just entering the workforce and already carrying college education loans of $50,000 to $100,000 and paying $3 a gallon for gas to drive to work."

Pattinson wants to build entry-level housing even though the market, production costs and impact fees are pushing him in the other direction. "This slowdown is an opportunity to regroup, retool and redesign our product for the market that will emerge with recovery," he says. He plans to do some small, entry-level projects, but worries that recovery will trigger another big spike in costs.

"Land sellers, product manufacturers and the trades are all going to want to recover lost profits when the market comes back. Local governments got their snoots in the trough during the housing boom. They don't want to hear that the feed is gone."

Units 397
Housing $250.83 billion
Entry-level 61%
Move-up 33%
Second move-up 6%
Zeroing in on baby boomers with move-up, move-down and urban infill product
Source: Professional Builder Giant 400 Report, April 2007