When the housing crunch hits home

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(FORTUNE Small Business) -- Dear FSB: I manufacture custom gable-end vents and am experiencing a lot of down time with the housing slump. I'm looking for a business idea that will offset my lost business. I've toyed with the idea of building small craft crates with scrap wood from my vents. I've also considered starting a coffee shop or deli, but don't know where to begin and don't see much need for one in the town where I live.

- Vickie Cowger, Filer, Idaho

Dear Vickie: You're right to be worried about the effects the downturn in the housing market will have on your business. In fact, we''re in the midst of one of the sharpest declines in the housing industry on record. The National Association of Realtors (NAR) recently reported that the national median home price showed the largest ever quarterly in almost thirty years in the final months of 2007. New housing starts fell 25 percent between 2006 and 2007, according to the U.S. Department of Housing and Urban Development, and most experts expect them to fall more in 2008.

In other words: you're right to be considering the options available to you. The big question is: what to do?

Branching out from your current business to a totally new one like food services is probably not the answer, according to Laura Willett, a professor of finance at Bentley College in Waltham, Mass.

"Branching out into another high-risk and totally unrelated business may not help her and could actually hurt her," Willett says. "Normally, I would recommend that she sticks close to what she already knows."

Rather than starting from scratch with something new, an expensive proposition, why not diversify in areas close to the business you're already in?

For example, you might consider selling another product to accompany your gable-end vents, such as shutters to keep rain or snow out of the vents during inclement weather, Willett says.

Another option, if you haven't already done so, is to expand your company's reach to new markets where the housing downturn is not as severe. According to statistics from the NAR, the average home price in Boise, the closest major market to you, dropped 5.5% in the fourth quarter of 2007. But other parts of the country are still seeing double-digit growth in home prices, including not-too-distant markets like Yakima, Wash., where prices increased 18%, or San Jose, Calif., where they rose 11%. Finding a partner or distributor to sell your vents into those markets could pretty up your bottom line.

Alternatively, you can try to tap into niches where demand and interest is growing, despite the overall market.

For example, the National Association of Home Builders recently launched a National Green Building Program that provides education, verification and certification to builders who want to build green (or eco-friendly) homes. Figuring out a way to cater to a fast-growing green construction industry could get you out front in what may be the next big thing in construction and allow you to differentiate your company and your products from those of your competitors.

"The idea is that she needs to get creative and look for complementary products that will sell even during the down times, or look for other distribution channels to move her current product," Willett says.

But beware: introducing new products and services will cost you money up front. Do your market research first and figure out what the demand is for anything you offer, how much you'll realistically be able to charge for it, and whether the benefits are likely to outweigh the costs.