My New Kentucky Home
Bill Jagoe’s grandfather built and sold two homes during the painful latter years of the Great Depression in the late 1930s. Bill Jagoe and his brother Scott have been building and selling new homes in Kentucky and southern Indiana through the Great Recession. Bill Jagoe’s son, William Rush Jagoe V, is 21, and may–as it turns out–pick another profession altogether.
“I worked on job sites from the time I was 12,” Bill Jagoe tells us. “I didn’t raise home builders. I want my kids to think about other things to do. But we’ll see.”
click image to access Jagoe Homes site.
Bill and brother Scott qualify as a “how-the-hell-are-they-doing-it?” story right now, starting more specs and scoping out new lots from other builders and developers to keep up with demand that will probably take them to 440 homes and beyond this year. That would equal their best year ever.
“We’ve been going after a buyer we’ve seen in the market who wants a spec,” Jagoe says. “We’re seeing people who, once they’ve made their decision, they don’t want to wait.”
While other private home builders struggle to keep the lights on and the doors open, Jagoe’s outperforming its own expectations. “In traffice we’re 149% of budget, and we’re 148% of budget in sales. We’re finding that, even with foreclosures around, we can still talk to our customers about value. They’re still payment-driven and they still act on emotion when it comes to saying yes. You just have to get to that emotion, and they’ll suddenly want it now.”
The Jagoe family name backs up the relationship the company has with home buyers, trades, lenders, and suppliers, but the personal touch and the entrepreneurial fire-in-the-belly hasn’t stopped the firm from constant process improvement efforts. Over the past few years, the Jagoes have pulled in sales and marketing guru Bob Shultz, operations and lean construction specialist Scott Sedam, and management/technology advisor Noelle Tarabulski to remake every way the company operates and does business with its various stakeholders.
Other builders are reefing their sales and exiting markets, but not Jagoe. They’re new to the Bowling Green, KY, market thanks to a deal they picked up from a builder who wanted out. “They wouldn’t let me into Bowling Green when I tried to get in three years ago.” They, being municipal officials, planning board members, trades, and other builders. “Now,” says Jagoe, “they’re asking me if I want to buy their land.” Jagoe has his sights set on 20% of Bowling Green marketshare by next year. “That could be 100 homes or 200 homes for us alone, depending,” he says.
“I get to work each week, and I think, ‘what can I change about the way we do things today?,’” Jagoe muses. He’s taken 90% of marketing and sales dollars out of newspaper advertising and plowed in into relationships with Realtors and an improved Web effectiveness. “We used to sell one in four traffic customers, and now we’re at one in three. If you give me a go today, I can get you into a new home in 77 days, give or take on entitlements and permits.”
Building cycle time is huge these days. “Your not making profit on the land appreciation, so it’s going to be process management and speed that gets you your margin,” he says.
Bill’s son Rush may not go into home building, but he knows cycle time by heart. As of Sunday, he’ll set out pedalling with two of his friends from San Francisco to Charleston, S.C. Just another way to ride out the downturn.
Who’s Not Moving Why?
Source: William Frey, Brookings Institute, via NY Times. Click to access article
Some trends become evident before they become clear. When it comes to American households’ patterned behavior and what it means, few get it as quickly and clearly as former American Demographics editor Cheryl Russell, who runs New Strategist Publications out of Ithaca, NY.
When an astonishing data point comes out from the U.S. Census Bureau — which is almost never — you can count on Cheryl, who eats, sleeps, and breathes Census data, to help decipher how it compares and what it really says.
Her latest American Consumers newsletter takes on the latest Census shocker on household mobility trends. Here’s a direct excerpt, complete with a dollop of business wisdom at the bottom of the passage.
If you really want to know how the priorities of Americans are changing, then take a look at their reasons for moving and how those have changed over the past few years.
- Not buying: The number of people who moved because they wanted to buy a home fell by 48 percent, from 3.9 million in 2000-01 to just 2.0 million in 2007-08–the largest decline among all reasons for moving. While there probably is some pent up demand for buying a home, it is possible that many Americans are reconsidering the importance of ownership now that they know the risks.
- Moving closer to work: The number of people who moved to shorten their commute increased by 80 percent between 2000-01 and 2007-08, rising from 1.2 to 2.2 million–an 80 percent rise and the largest increase among all reasons for moving. This is bad news for the far-flung suburbs, which will be last in line for any economic recovery.
- Delaying retirement: The sharp drop in the mobility of 60-to-61-year-olds is reflected in the 38 percent decline in the percentage of people who moved because of retirement between 2000-01 and 2007-08. Retirement savings have been decimated and the age of retirement is rising, which is why state-to-state migration has plunged. This trend could gut destination retirement areas.
- Staying closer to home: The data show an ominous decline in the number of young adults who moved to attend or leave college, with the figure falling by 26 percent between 2000-01 and 2007-08. This decline is occurring as a growing proportion of students opt for less-expensive in-state public schools and is yet another warning sign for the nation’s overpriced private colleges.
- Downscaling expectations: The percentage of people who moved because they wanted cheaper housing climbed by 35 percent between 2000-01 and 2007-08. At the same time, the percentage who moved because they wanted a better home or apartment fell by 29 percent.
Americans are dropping out of the housing market, delaying retirement, and downscaling their expectations for college and home. These trends may be temporary, but the best way to survive them is to assume they are permanent.
A Call We’ve been Waiting for: Recession’s Nearing an End
You just have to hand it to the resilience of the U.S. consumer. We’re 6% of the world’s population, but acccount for 40% of the world’s consumption. And, right now, that’s a good thing.
Personal consumer expenditures in the first quarter swung 6.5% from fourth quarter 2008 to first quarter 2009, to a 2.2% increase.
With all that is fouled up in business investment right now, the consumer is the X Factor of recovery. Will the 80% of the nation’s workforce that will manage to steer well clear of the sinkhole of income loss manage to bouy the economy?
To listen to one housing player working the trenches in heartland, rustbelt markets, the answer may be a louder and louder affirmative. “You couldn’t even get through Lowe’s the other Saturday,” said this residential construction executive. “People want to put up their fences around their yards, and they want to get going with projects. And if the wife says she wants to move now on that new house, then now’s the time it’s going to happen. These are Americans. Lots of them don’t want to wait to get through the anxiety and delays of a foreclosure purchase. They want it now.”
Questions about the strength of the recovery and the persistence of after-effects of the downturn will continue to arise, but per the Economic Cycle Research Institute’s Lakshman Achuthan, the steeper the economic decline, the faster and stronger the snap-back. Achuthan’s correctly called the last several recessions and recoveries based on his basket of long and short-term indexes, and he’s saying now that early Summer 2009 will wind up marking the end of this recession.
Here’s his call this a.m. on CNBC.
Home Builders Sell Against Angst
Part of selling is an inevitable appeal to the magical thinking of a potential buyer. When it comes to selling a home — the MaGilla of purchase decisions — what more magical thinking to appeal to right now than shelter from the economic maelstrom.
The expression “recession-proof” conjures the image of protection from all that is a mess with money, income, and one’s livelihood.
Home builders are getting creative at doing everything in the book to get people who can buy a home in these worst of times to do so, and Chicago-area builder Bigelow Homes struck a note that caused both buzz and deals.
Big Builder editor Sarah Yaussi has this analysis of Bigelow’s effective sales promotion around the recession-proof theme.
The builder has this newsclip posted on its own Web site to support the push.
Bottom Dollars
The Second Derivative has spoken. Or has it?
Everywhere, smart and experienced people have begun to find their own words to say that the bad news may still be bad, but is growing worse at a slower rate. Toll Brothers CEO and Chairman Bob Toll says as much in his comments about 80% of the nation’s housing markets in a “first signs of light” interview with CNBC “Mad Money” host Jim Cramer.
The steepness of the deterioration is changing to a more gradual decline. Not everything is as bad as it was. Things have to shift from nightmarish, to horrible, to frightening, to bad, to concerning, before they can flip across the gulf to okay, no?
Bob Toll contends that if you’re out in the field, you’ve already started to get a sense that things are improving, and we hear that from a number of people in a number of markets. The traffic that fell off a cliff in September and October of last year when the financial crisis crescendo-ed began to respond to reset price levels, better interest rates, and government stimuli.
But there’s so far to go.
If you are a believer in the “green shoots” theory, then you’ve got to be thinking there’s something that’s going to cause consumer spending to regain a comfortable stride despite a widening sphere of dread about job and income loss. You’ve also got to believe that residential investment will reemerge as a positive in spite of home price deflationary forces that may be expected to continue.
Calculated Risk puts it this way in comments about the President’s top economic advisor Lawrence Summers’ assessment of where things are:
The “unremitting freefall” might be ending, but what will be the source of growth? Usually residential investment (RI) and personal consumption lead the economy out of a recession – and both remain severely impaired this time. There is too much excess inventory for any meaningful recovery in RI, and the process of repairing household balance sheets has just begun (I expect the savings rate to continue to rise for some time).
Meanwhile, too many banks can’t rise above their profound technical solvency issues to do much more than sit and wait for more deposits and more cash from U.S. taxpayers, via the Treasury. They’ve crimped investment in households, in communities, in companies, and in the future–existing only in cryogenic suspension as once-prized borrowers pick a number and get on line to wait for markets to reopen.
“Green shoots” theorists have not only to believe in the resumption of consumer spending and residential investment, but the reignition of willing buyers and sellers of assets among people who’ve been paralyzed by fear to put a price tag on just about anything.
Like other things, housing downturns have phases and stages, whatever their duration or depth.
At this stage, when construction lending is for all intents and purposes shut down, and when banks are awaiting word of their fate from regulators and White Knights before they engage in the world of markets, and when buyers of homes are doing all they can to postpone the need to move before it’s absolutely necessary, one real estate player in the mid-Atlantic market describes survival this way.
“We’ve done all we can with our lenders, and all we can with our costs. Now it comes down to one thing, or we’re done. We’ve got to sell something. We know there’s not a lot selling in our market, but there is something. So our life depends on stealing a sale from somebody else–existing homes, or foreclosures, or another new-home builder. Either we’re going to steal the sale, or we’re not going to be here.”
This is what it’s like even as “green shoots” theorists talk about a “bottom” as if it were encouragement that next bank payment or two might be last ones to stress about.
Toll Talks Up “Expressions of Interest”
There are two reasons analysts and the media may continue to be overly focused on housing’s negative headlines, according to Toll Brothers CEO and Chairman Bob Toll.
One is they may not be close enough to the market to pick up the change in buyer behavior that’s happening in sales offices in about 80% of the country’s markets, he says. If you don’t see people turning up as traffic, then coming back with “expressions of interest,” backed by a non-refundable deposit, and finally returning to go to contract, then you’re focused on lagging permits and starts data.
The other reason analysts and journalists may be accentuating the negative, says Toll, is “They may not be doing their jobs.”
Toll is not going so far as to affirm CNBC’s Jim Cramer on a June 30, 2009 “housing bottom,” but he is relieved that things are better than they were worse.
Here’s a seven-minute blast of cautious optimism from one of home building’s most brutal realists.
Robert Shiller Pitches a Fix
Slightly absent-minded Yale economist Dr. Robert Shiller is reminded that he’ll be speaking to a roomful of home building executives the morning of May 13, in Chicago, as part of the Builder 100 proceedings.
“I’d very much like to do that,” he says. Why is the renowned housing expert so passionate about wanting to talk to residential construction business leaders? He does because he feels he has a fix for two parts of what ails them right now.
“We want to get some liquidity into the market for single family housing, which it so desperately needs right now,” says Professor Shiller in an exclusive interview with HousingCrisis.com. “People have their life savings in their houses, and many of them are overleveraged, and many of them have every penny of their wealth tied into what happens with their home,” Shiller says.
“The home builders made mistakes. They overbuilt. That’s because they didn’t have a good indicator of what was going to happen to demand,” Shiller notes.
He wants to talk especially to home builders because in the next couple of weeks a private enterprise company he founded is introducing a way he says will allow home builders to concentrate more on what they’re good at–manufacturing, marketing, and selling the American Dream to home buyers–and get out of the business of what they’re not good at. Namely, the real estate speculation business.
Dr. Shiller is now on a mission. He wants people and companies to be able to invest in housing not as flippers or speculators on the roofs over their head, but via highly transparent securities that they can predict the behavior of.
MacroShares Major Metro Housing Up (NYSE: UMM) and MacroShares Major Metro Housing Down (NYSE: DMM) ETFs are designed to deliver 300% of the return (up and down) of the S&P/Case-Shiller Composite 10 House Price Index, which measures the average price of a house in 10 major metropolitan markets.
The funds don’t actually own houses, of course. The only asset they hold is Treasuries. They track the index by working like a teeter-totter: When house prices go up, assets are shifted from the Down Macro to the Up Macro, and vice versa. (As a result, the funds can only be offered in pairs, with equal numbers of Up and Down shares.) This unique structure is what allows the funds to track something like house prices, where there is no underlying asset.
It is important to understand, however, that the funds will not directly track the price of the index. The S&P Case-Shiller indexes are reported monthly with a two-month lag; that is, the June index price reflects house prices for the three months ending in April. The funds’ net asset values will be based on this lagging index price.
“Home builders should do what any smart business executive should do with respect to the ups and downs and unpredictability of house prices and real estate values,” says Shiller. “They should hedge their bet that prices will appreciate.”
Here’s Wall Street & Maine analyst Bill Gloede’s recap on the news Shiller’s creating this week.
Click on image for access to FAQ on Dr. Shiller's new enterprise.
It is of note that these ETFs will soon begin trading. Back at the beginning of 2008, Dr. Shiller, the Yale economics professor half of the Case-Shiller Home Price Indices, told Les Shaver in a Big Builder cover story that builders ought to be able to hedge their inventory to guard against wild swings in the housing market (see a related Q&A here).
Starting May 11, anyone, builders included, will be able to trade UMM, for “up” major metro housing, and DMM, for “down” major metro housing, both of which will track the S&P/Case-Shiller Composite 10 Home Price Index. This will mark the first time investors will be able to play the national housing market without actually taking a stake in futures or swaps or issuers with credit risk.
“Home builders should focus their skills on what they’re best at,” says Dr. Shiller. “I can’t wait to tell them about the ways they can get a lot of risk out of their business models related to real estate so they can keep resources where they need to be in their companies.
Here’s a short CNBC segment on the whys and wherefores of Dr. Shiller’s plan.
For more of the lowdown, home building leaders can come to Builder 100, Wednesday morning, May 13, at the Peninsula Hotel in Chicago at the Builder 100 conference.
President & CEO Kim Shelpman Puts Holiday on Ice
In Melbourne, Fla., home building is not what it was. Mercedes is stalled out, and Holiday is, well, taking some needed time off from the Florida residential construction market.
Tom Eggleston ankled his CEO post at C.P. Morgan as a cost-saving move 18 or so months ago, but it couldn’t save the company. McStain Neighborhoods’s CEO Eric Wittenberg did the same, and McStain continues operations on life support with no headquarters offices.
In this case, president and CEO Kim Shelpman is taking one for the employee-owned Holiday team, hoping that taking her salary off the top of the cost-base can give the company time to find its stride in non-Florida markets.
Here are some of Shelpman’s comments to Big Builder senior editor Teresa Burney this afternoon.
Click image for access to Holiday Web site
“It’s all good stuff,” said Shelpman. She stressed that, as being on the boards of trustees and directors, she still has ties to Holiday, where she worked as CEO for nearly three years.
“Truthfully it was my decision to make. We were obviously going through right sizing the company and at the end of the day it made all the sense in the world to put my name on the list.”
“It gets to the point where you are looking at a very different company. Again, sacrificing myself made more sense than anything else.
“I had thrown it around for probably the last month or two because we were planning a company reduction. As you are shrinking, the decisions get tougher and tougher. You are getting into you’re a-player layers. None of the decisions are easy, but at the end of the day it made sense to put my name on the list.”
“The company is a fantastic company to work for and I want to see them weather the storm and be standing and ready to take advantage of the opportunities when the market turns.”
“The love I have for the company has never diminished and I want to see them be survivors.”
She said she doesn’t have a plan for yet for what she will do next. “I wish I did have a plan,” she said.
We would not encourage getting in a golf match for money with her when she’s had a couple of weeks off. As soon as she gets tuned up with the flat stick, she’s going to be lethal to opponents.
Staying Influence: It may be the next best alternative to staying power.
You still hear it plenty these days, even in these worst and most uncertain of times. It’s what a private home building company executive will tell you makes the biggest difference between his operation and public residential construction companies that may or may not find this or that market fit to build in.
“We’re here to stay.”
When he says it, it’s certainly about selling new-homes to people who want or need them, with a solid name in the community to back up the promise. It’s a way of expressing the belief that real estate–and home building–is local. If prospective home buyers view you as part of the community, and they know where you live, doesn’t it make sense that they’d put more trust in you with the biggest purchase decision they’ve got to make?
It may. But that’s only part of what they mean when they say, “We’re here to stay.”
It’s just as much a statement about buying land from a developer or a farmer. During the run-up of the early 2000s, land was a game of magic numbers, and developers and land sellers got to name their price on home building lots. Now, those public builders who were tripping over one another to outbid everybody on every piece of dirt that showed up in auction are now tripping over one another to exit markets that don’t pencil for them. For, developers and land sellers, “we’re here to stay” means they can and will work with you, even to the point of soft take downs, so that you’ll have access to lots and they’ll continue to have a willing buyer in the market.
It’s also about a local banking relationship that may go back generations. Yes, today so many of the community banks you used to deal with have been scarffed up by regional, national, and even global players. Now, after talk up the kazoo about partnerships for the first several years of the decade, many of those “partners” are among the disappeared. Your accounts have been turned over to special services “don’t call us, we’ll call you” departments whose business goal seems exclusively set on getting as much of the money they may have loaned you back in their tills immediately, while discussion of continuing to lend as they said they were going to is out of the question.
Clearly, a bank partner will mean something different to the average private home builder when this crisis has run its course. But “we’re here to stay” today means that capital in the community, in the submarket, in the marketplace, might set its sights on home builders whose word is their bond. Even before the global credit and liquidity reset values to assets, people locally know what locations are worth, and they’re going to pay for them. Being a “we’re here to stay” kind of builder is an opportunity for people and banks who still have money and want to put it to work investing in something they know.
“We’re here to stay” means that your subs, trades, and materials suppliers won’t get left in the lurch, like with the others who just pull up their stakes and exit the market.
“We’re here to stay” is also about hiring people with more attitude and, maybe, less aptitude. If you’re like most private home building companies, you’ve had to let go of no less than half, and more likely seven people in 10 who worked for you in 2006. It’s the same everywhere. Who you’ve got left has to not only be an “A” player for today’s market, but has to help you have the ideas to deal with even a worse times than now before they get better.
Ultimately, the truth in the claim “We’re here to stay” depends on being able to build a home in a desirable community, fast, well, and efficiently, things you can only do if you’re in a local people business. Per-square-foot direct costs mean more to being here this time next year than perhaps ever in the history of U.S. home building. That’s sole proof of a home builder’s staying power.
Herb Allison Gets Promotion and a Raise to Run TARP
The President has nominated Fannie Mae CEO Herb Allison to take the helm of the U.S. Treasury’s Troubled Asset Relief Program.
- The Wall Street Journal reports on the nomination.
The 65-year old former chairman of TIAA-Cref and Merrill Lynch executive will probably get a raise. He’s been taking no salary in his current job, running Fannie Mae since September, when the Fannie and Freddie Mac got put under government conservatorship.