Two Michaels, a Big Loss
We’re saddened with the passing of two industry lions we got to know in our travels, Mike Ulinski on August 7th, and Mike Vesey, on August 28th.
Two Mikes, both 50 years young. They both fought the fight against cancer. They both will be missed by those who were inspired by their hard work, their tireless natures, their devotion to others, their passion.
Here’s what Jeff Orleans, chairman of Orleans Homebuilders–where Mike Vesey served as president and chief operating officer of the Bensalem, Pa.-based public home building company–had to say this morning:
Michael Vesey, far right
“What do you say about such a special kid, who was brighter than the rest of us, but never let on? He was a big, strong, Irish kid, who led by example with hard work and who was never ‘easy,’ but very, very fair.
“I worked with Mike’s father many years ago, and when Mike got through at Penn, and got his CPA, he called me up to say that he was interviewing me to determine whether he should come and work for me. He was like that, confident, but it wasn’t arrogant and it came down to him believing that he wanted to learn everything there was to know about construction in the field before he came into the headquarters office.
“Most of all, he was a great and inspiring family man, husband and father to his four wonderful children. That’s why we’re going to feel such a loss.”
Jeff Orleans calls Mike Vesey the “son I would have chosen if I could have chosen.” Orleans and his company have had three-and-a-half years to try to come to grips with their loss, but until the past few months, Jeff says, Mike never gave up the fight.
Ulinski, had been vice president of marketing and sales for Masco Contractor Services, and had been part of a team that built the unit into a $3.5 billion national juggernaut, serving scores of high volume home builders with a portfolio of installation, products, and consultative services.
Ulinski, during his time at Masco, also obtained his MBA from Eastern Michigan University.
Mike’s energy had no limits during the middle part of the decade. He spoke with Big Builder senior editor Teresa Burney in June 2006, amid Masco’s roll-out of a synergistic solution for home builders that married Masco’s product and service portfolio in a way that makes sense for production enterprises.
Mike Ulinsky, far right.
“It’s a work in progress,” says Ulinski. The company’s is betting heavily on a solution called BuildLogix, described by Ulinski as a process that organizes its service providers in a way that offers money and time-saving synergies for builders.
The purpose of the program is to bundle home building services that are scheduled to occur sequentially in construction. For instance, Masco might offer to install cabinets, countertops, and hardware for the doors and drawers, taking the burden of scheduling several contractors, and the inherent downtime in the process off the backs of builders.
“Once we are doing multiple products in a house, if you can get them to become sequential, with one thing right after another, then there are savings,” Ulinski says. “There is no hand-off downtime [from one contractor to another] or errors.”
Karen Mendelsohn, Masco Corporation’s vice president of sales and marketing, says that Mike Ulinski was the “consummate professional, with a huge passion for everything he did in his life, whether it was work, family, community, or hobbies. He had a zest, a zeal, an adventurous spirit that was contagious. He was perhaps the most optimistic person I have ever met.”
Mendelsohn recalls a quintessential Ulinski moment when she first started with Masco in early 2000, moving over from PPD (Peerless and Delta Faucets).
“My husband Rich and I were attending our first Builder 100 event at Lake Las Vegas, and I was brand new at Masco then,” Mendelsohn recalls. “Mike and his wife Mary made it their business to introduce me to all the builders at the event, and I realized the deep respect these folks had for him. He was officially working for me, but he took me under his wing at that first night reception, and from that moment I had credibility because I was there with him. I loved Mike.”
Two great guys whose ability to inspire knew no bounds. Two guys who have gone too soon. We’ll miss seeing them around.
How Will You Budget 2010?
Do home builders widely believe the recent uptick in housing sales trends is sustainable? They’re optimists for one, and they’re forward-lookers (and spenders) involuntarily.
We’ve been talking to quite a few lately. Despite cautiously optimistic notes creeping into the scripts of some of home building’s more astute and outspoken leaders, below the surface, we’re hearing far more caution than optimism in most of the industry’s plans. Rightfully so.
Most smart home building company executives are putting a playbook together that prepares and aims to manage expectations–running now through the first part of next year–for another leg down in their business.
There’s still too much in housing to work out and work through for anywhere near normalized supply and demand to resume. Given the choice–1) to manage as if the bottom is here or near, or 2) to manage as if the bottom is still some clouded time ahead–it’s pretty clear how most people will wind up needing to manage.
Hopefully, everyone’s pair of rose-colored eye-glasses has been driven over multiple times in the driveway.
The September-through-November budget planning season for home building enterprises will be one of the toughest exercises in (in)visibility management to date. Probably even harder than last year at this time, because a majority of 2009 business planning occurred before the financial cataclysm that blew most 2009 projections out of the water last October.
Right now, the number of X factors, random possibilities, and semi-predictable negatives is significant.
An unabated foreclosure wave will play havoc with supply in many markets. An unabated job and income loss wave will mess equally with demand in many markets. Each of those huge forces lags measures of housing starts, sales, months’ supply, etc. A large layoff of financial services executives from a single company can take months to work its way into the housing dynamics of a local market.
Still, these waves can and will hit a lowpoint; eventually their destructive effects will whimper out, succeeded by effects that will restore scarcity and organically create demand.
But now, even venturing a sales projection of flat-to-2009 actuals can be troubling, because it’s exceedingly difficult to trace actual performance back to: a) did we make this happen? or b) did we get help from a market turn?
Question “b” in itself is a riddle. If three forces have been at work to help turn the market for the past few months, how much weight do you give to each–affordabliity, interest rates, and home buyer tax credits?
Now, if you’re not selling to first time buyers, you can subtract the tax credit as a potential helping wind, at least directly. However, even though most everyone’s conclusion is that the $8,000 federal first-time buyer tax credit doesn’t help the move-up market, we disagree. If distressed and foreclosure purchases are even as much as 40% of first-time buyer homes, that means the other six out of every 10 homes are either new or existing homes. Among those existing home sales, leaves a fair number of resale homes being bought under the tax credit program where the seller can then go and become a move-up buyer.
What projections can’t absolutely count on right now are interest rates and the $8,000 tax break. What they can count on is the effect of the relationship between greater scarcity and more-home-value-for-the-money than many folks have seen in a very long time. Months supply of new-home inventory is, in fact, moving toward a tipping point from excessive to right about normal.
At any rate, a budget of flat to ’09 actuals is probably the safest bet for most organizations. This would factor in a slow start to 2010, and a run-rate in the back half of the year that might serve as a standard third and fourth quarter for a couple of years, barring any further shocks to the system.
So what do you do now, especially if you’re a private home building company and you’ve got to make a strong case for a community commercial loan officer or investment group to go to their credit committee to get you some money so that you can go vertical just enough times in 2010 to make a go of it for another year?
We talked with a fellow in just such a position, A. Preston Moore, who’s VP-Commercial Loan Officer at Charlottesville, Va.-based Virginia Community Bank, and he had some insights that could apply to any number of local and regional home building companies who might be in a position to help banks work through some of their REO land holdings.
Let’s say, hypothetically, you can come to Preston with two contracts in hand for new homes on lots the bank owns, and you need your construction loan.
“We look at the usual financials, pro forma, and assumptions,” says Moore, but it’s more than that. “When you’re right here in the community, and you know everybody, you can take a different approach to loaning a builder money. Mostly, we look at: ‘can he build it fast?’ ‘does he know really what his costs are going to be?’ We check in with the trades and see whether he’s paying his bills on a timely basis. And ‘can he hold on to the buyer through the settlement?’
“We won’t extend ourselves beyond two homes outstanding at any one time,” says Moore. We see this translating into an opportunity for most private home builders to pro forma two homes per community per month, which is probably bump-along-the-bottom mode for another 12 months or so.
So most home building company executives, as much as they’d like to see better headlines and more positive press, don’t see a big sea change in the numbers. Many of them will make as conservative as possible assumptions, starting at zero each month, and then see what things look like. Especially after Nov. 30.
Any insight for others on budget assumptions to consider for 2010 planning?
Fitch to be Tied
The aptly named Roelof Slump has spoken [everywhere, but here quoted in the Wall Street Journal].
“The cure rates have really collapsed,” said Roelof Slump, a managing director at Fitch.
Cure rates, which ran at 45% for prime loans as a rule, are coming in at 6%. Unless that changes, there’s big trouble ahead on the more than three-quarters of home mortgage loans that are prime.
Still, while one might have hoped this would not be the case, it can not come as a surpise that underwater loans and lost jobs would spread delinquincies and foreclosures into the prime market.
The risk has been calculable. What can’t be predicted is whether policy and, perhaps a market sentiment shift, will stem the tide before it peaks to worst-case scenario levels in 2010.
The less our admired analyst Bill at Calculated Risk comments subjectively, the more one surmises that he believes the scary numbers speak for themselves.
Still, we believe this psychological indicator–underwater mortgage holders failing to cure–may improve with a kick at the first sign that demand and access to credit normalizes after volume in transactions stays strong for a bit.
Housing Cycle Semantic
It was officially late August ’09. Leading edge Baby Boomers had taken to flocking in droves to rally against their President’s health care plan. They were exercising their Bill of Rights license to flock in droves to rally against their President, bear arms, curse and vent their spleen, and go on random road trips to the annoyance of all of those who continued to feel obligated to show up at their jobs day after day, and read about the rallies in the news.
Good ol’ time protest felt good. Running through James Madison’s Amendments, and exercising as many of James Mason’s Bill of Rights as one could think of or make up felt good. At least, better than the alternative, sweltering in business attire during summer’s dog days, gazing wistfully at each ATM we passed as if it were a temptress, beckoning seductively as we supressed our base instincts to spend with abandon.
Sweating, not acting the spendthrift, not using home equity or credit cards for granite counters, or a new Navigator, or Muffy’s 50th, or a Belize holiday, not sending our own private debt bomb into the global econo-sphere had gotten to feel a little deprivational.
Yelling and screaming, and not letting Senators and Representatives get a word in edge-wise to our ranting questions about why we won’t be allowed to just continue making a few senior management executives for a few health maintenance insurance organizations very, very rich people at our expense felt like a relief from the doldrums of consumer retrenchment.
Eight years of W was morphing, quite probably, into eight years of W, and some fair number of people, it’s clear, were hopping mad.
And in real estate and business, it was the better of times, it was the less worse of times. We could only begin to wonder, what the dickens is going on here?
All reality had become, in fact, second-derivative reality, where not-getting-bad-as-fast was the new good. In second-derivative reality, no sign of bottoming led to incipient bottoming which led to a bottom, which in turn led to apparent signs of recovery. Much was uncertain. What was clear, though, is that those with the most technical knowledge about what went wrong a year earlier and what continued to ail the system were far more fearful and dour about these “apparent signs of recovery” than the ones who know less.
Like diets and exercise, we listen to the ones who know more; but we act with those who know less. Why? Because the odds of having Nouriel Roubini, or Robert Shiller, or Paul Krugman as a next door neighbor are slim. They may be afraid of a W; ones who know less are less afraid of that.
I.e. the “rest of us.” For the “rest of us,” that glass is not three-quarters empty. Never mind more people on the dole, more people spending so long on the dole that the dole’s running out, and more and more industries running aground on the realization that maybe there’s no real place for them in the real new economy. The real new economy is that, real. The unreal new economy is what all the media hubbub was about for the first six or seven years of the current millennium. If the media companies that got rich off their spin and sales from buying into the unreal new economy could purge their archives of how they’d cannonized the same business executives they’re hanging today, they would.
In the real new economy, jobs will come back slower, but they’ll necessarily come back in more sustainable parts of the economy. Are we already discounting and investing in stocks based on that?
And so, back to real estate. Apparent signs of recovery threaded together with lower asset costs that neared affordability levels not seen for decades. These “corrected” prices, in turn, blended with historically low interest rates and tax credit incentives to make “the rest of us” stop being so afraid of how prices were still caving, and start being afraid of what they’re always afraid of when times start to get better.
That is, a next door neighbor who can brag that he or she paid much less for more. We should all be so lucky as to be afraid of that.
Here’s what we know. Home building organizations of all stripes and sizes are trying to buy land now. Many of the neighborhoods they’ve been able to sell homes in in this tough market are filling up, and they need to be replaced with new communities, new stores, if you well, so that selling–and life-breathing cash–can continue.
So even though most home building companies have land holdings they can not move in today’s market, they need to find lots that can be turned quickly into sales for the demand level that is out there and expected to get incrementally better.
Builders, just like home buyers, tend to like to brag that they got more for less. So late August ’09 dog days are not at all as sleepy a time in home building as you might imagine.
Code of Correction: Appraisers Stressed as they Get Assessed
Home appraisals are headline news. Wherever one’s opinion lands on the controversy created with the May 1 introduction of the Home Valuation Code of Conduct, what’s not said in all of the stories is that two separate and distinct issues–not one–bedevil the home valuation process these days.
One issue is ethics, which the new HVCC tries to address. The other profound stumbling block is precision, or lack thereof, in a service that has huge implications for a seller and a buyer.
Here’s how one of our most intelligent friends has described the dilemma:
The more I think about the whole appraisal issue the more I recognize that it is fundamentally flawed and needs to be completely rethought. It’s not merely an issue of whether or not foreclosure sales should be counted among comparable sales. The fact is that the intrinsic flaws were not really obvious or serious while the market was strong and growing for the last fifteen years or so. But now , using appraisals as they are presently conducted as the only basis for determining house value is totally inadequate. The analysis of the various comparable sales is far too simple and does not properly identify the components that create value, i.e. a kitchen can be worth $10k or $100k, but that level of detail is not part of an appraisal. Also, most appraisers’ qualifications are inadequate to complete the quality of appraisals that are required, not are they properly compensated. How much time and effort can somebody expend when the fee is less than $500.00. Replacement costs, propely discounted, have to play a bigger role, and the parties (sellers, banks etc.) have to have more transparent roles/opportunities to contibute to the valuation process. It’s going to be very difficult to change the system with all of the entrenched interests.
- The Wall Street Journal revisits this hot button topic with “Reappraising Home Appraisers.”
- The New York Times reports: “In Shift of Appraisals, Lenders Add Power and Critics.”
Each of the stories dances along the double helix of ethical conflicts of interest and a breakdown in accuracy. Each asserts that white collar crime occuring at a household transaction level rolled up into the real estate tsunami that came crushing in by the end of 2006.
What these stories fail to address is that you can make rules to make it tougher for the con men and women to insinuate themselves into the home selling and buying equation, but that doesn’t mean you’ve fixed what’s wrong with the appraisal process.
Big Builder’s “Appraisal Angst” cover story for August illustrates in tragic detail how haywire the HVCC has gone when it comes to its own intentions–which are to protect consumers and banks from B.S. valuations.
Click to expand image to full-size.
But instead of creating a better B.S. detector, New York Attorney General Andrew Cuomo’s overzealousness creates consequences that inevitably suck value out of property. How?
- Quantity trumps quality thanks to the new code;
- Time–which is material to value to both a potential seller and a potential buyer–has been hijacked in all practicality by the new practice.
The HVCC looks to us to be a one-foot-on-the-platform-one-foot-on-the-train measure. Its genesis springs out of a moral turpitude that ran rampant in real estate during the bubble. Its intent is laudable. The reality of its effect, however, is both intrusive and silly, for as it’s set up it’s more about home dvaluation than home valuation.
One time-honored rule of real estate–location, location, location–loses significance altogether as the code plays out. Now it’s dislocation, dislocation, dislocation.
Weigh in on this in the comments box, or take a three-minute survey to let us know where you stand on the issue.
Long Absent, the Word “Frenzy” Resurfaces to Describe Home Buying
The fingers type the words “buying frenzy” with zest. Possessed of their own emotional impetus and trajectory, the digits that ply their trade on the keyboard most of the day realize that they have sorely missed typing out the terminology of our now utterly bygone risk-a-philia and profligacy.
Thus, zestily noted from Calculated Risk last Thursday.
I’ve talked with several people – and there is a buying frenzy right now. First-time homebuyers, especially those with a limited down payment, are desperate.
From the Chicago Tribune: First-time buyers race to beat credit deadline
With a growing sense of urgency, first-time buyers are searching for homes, worried that time is running out on an $8,000 federal tax credit.
Real estate agents say they’re seeing a surge of first-timers who want to close on a property by Nov. 30, the deadline for the credit. The rush has set off bidding wars and stirred up a normally quiet August market.
“We’re inundated,” said Paula Clark, an agent with Coldwell Banker.
To meet the Nov. 30 deadline, buyers need to have a contract by around Sept. 30, because inspections, mortgage approvals and other details typically take about two months.
Also from Reuters: Race is on as U.S. home buyer tax credit nears end
“I am willing to settle for something” to finish buying quickly, said 20-year old Kielar, who works at the Denver County Jail, and is a part-time student. The tax credit carrot “is speeding up the process,” she said, adding that “$8,000 could help remodel the house, redo carpets and cabinets.”
For loans backed by the Federal Housing Administration (FHA), which require a minimum 3.5 percent down payment, the $8,000 can be also be applied upfront toward the purchase rather than later on tax returns like other mortgages.
In addition $8,000 to the Federal tax credit, there are some state programs, as an example from Newsday.com: NYS rolls out tax credit for first-time home buyers – but most of the frenzy is being driven by the Federal Tax credit.
We’d contest some of Bill’s conclusions on Calculated Risk.
He asserts that the level of demand is unsustainable at the low end, even if there’s an extension for the current first-time buyer tax credit — there are proposals in both Houses of Congress to extend, enhance, and boost the tax-credit program — beyond the Nov. 30 deadline. He says once you get rid of “pent up” demand from among the 43% of buyers who are first-time home buyers, you’re done with the momentum boost.
We believe that conclusion doesn’t take into consideration a normalized demand from among first-time buyers from among those people who’ve been working on their credit, saving for a down payment, and want to flow into the dream of homeownership. Not to mention “pulling forward” first-time buyers who might jump off the sidelines a bit earlier than they might have because stars–prices, interest rates, and tax credits–are only aligned for just so long.
The other point we’d take issue with–although we believe Calculated Risk probably can show supportive data, and we’re playing devil’s advocate here–is that his analysis is that the high rate of REO and short sale/distressed deals means that those homes that are purchased by buyers using the tax credit are not producing any demand for “move-up” homes.
Even if the distressed purchase rate is near half, that means that the other half–many thousands of sellers–are completing their deals in the teeth of the market, and would be on the market for a higher priced home, either new or existing.
I.e. our conclusion is that the boon in first-time buying does not confine demand to the lowest end homes, and can favorably benefit move-up, and second time move-up sellers.
Still, the fingers do relish typing the words “buying frenzy.” But now they have it out of their system.
Irrationally Predictable–The Future Can Rid the Past of its Nasty Baggage
With apologies to behavioral economist Dan Ariely, we wondered how in the days of abundant new bars of Ivory, Safeguard, and Irish Spring in the 1970s, our mother insisted on compiling soap slivers and using them to the bitter end.
Our mother came of age in the 1930s. By the time we were born in the mid-1950s, the 1930s were “the good old days, when people looked after one another.”
Here’s how the math works, thanks to the genius of Jessica Hagy, who at the very least should be a candidate for undersecretary of the Department of Treasury. Her minimalist brillance appears in Indexed, a blog.
Click image to access Indexed site.
Taking ‘Stock: It’s a Long Way from Mud to Dirt
Maybe it’s just the time of year, or maybe it’s the time of man, but wasn’t that Bob Toll talking about how some of Toll Brothers’ markets in 21 states are “still stuck in the mud?”
Subliminally, a guy whose dad so wanted him to be a lawyer but who had to rebel and do his own thing just had to have been inadvertently channelling Aug. 15-17, 1969, Bethel, NY, when he used so colorful a turn of phrase to describe foot traffic among some of his company’s 228 active communities.
Some two years earlier than the mud-, music- and peace-fest at Yasgur’s farm, fresh out of Penn Law, Bob bought–with dad’s help, but against his better judgment–a spot of dirt in Chester County, north of Philly from fellow big builder Jeffrey Orleans’ grandfather. It was the site of the first Toll Brothers house in June 1967, which sold for $17,490, and reaped a profit of about $400.
By the time we got to Woodstock, Bob and his brother Bruce were on pace to complete and deliver 40 homes, with total profits of about $12,000. Now, less than half an hour down the New York State Thruway from Bethel in New Paltz, NY, you can buy a Toll Brothers home at Mountain View at Gardner for $500s to $600s, one of whose gross margins more than equals the entire company’s earnings in 1969.
We suspect Bob was a wiser-than-his-years 27-year old when Woodstock took place. Much of his good fortune and shrewd business decision-making springs from having known exactly where to buy dirt as the Woodstock generation traded in matted hair, holey jeans, smelly feet, and rolling papers for places in law, medical, business, and engineering schools, and assumed elevated positions in American society within the 10 years following Jimi Hendrix’s stirring final concert encore.
A generation whose signal event was more famous for what didn’t happen than it was for what did went on and made lots and lots happen.
That same generation became particularly enamored of economics and market theories of beautiful minds like Harry Markowitz, William Sharpe, and Merton Miller, as Paul Krugman notes in his review of Justin Fox’s The Myth of the Rational Market.
Boiled down, these theories transformed business assumptions. Suddenly, a “market behaves” and a “market should behave” fused. Ultimately, actual behavior trumps what ought to occur. Dan Ariely’s “Predictably Irrational” and George Akerlof’s and Robert Shiller’s “Animal Spirits” help explain why markets stray from efficient behavior.
This is relevant here. Not only does Bob Toll understand dirt. He understands where ”efficient market theory” falls short in explaining how housing behaves.
Toll said he thinks the order uptick represents a genuine sea change in buyer attitude. Just a few weeks ago, if someone said at a cocktail party that they had just bought a new home, their sanity would have been questioned, Toll said. Now it’s more likely that they would be quizzed on the deal they got.
“There is now fear on both sides,” Toll said. “We fear not selling, and they fear missing” a deal.
Toll thinks the turnaround is gaining momentum. “Once a market turns, it begets more turning,” he said.
When Bob Toll looks at his 837 orders across 228 communities in the company’s Q3–ending July 31–and expresses confidence that what he’s seeing is “indicative, not anecdotal,” the only conclusion can be that something real is going on.
What his summary remarks point up–of real significance to a big builder audience that is half public companies (by marketshare) and half private–is the strengthening force of bifurcation between those companies who have access to construction financing now and those living off the vapor of their cash reserves in hopes of a stroke of good luck demand around the next corner.
Public builders have used the past 12 months to value-engineer their product line offerings to turn inventory for at least cash-generation purposes, if not profit contributing goals. In markets where publics are active, that leaves privates fewer price point posiitions to go after, and they’ve got to put a lot of skin in the game to keep building.
Now, Toll’s also saying that at the upper end of the volume market, having access to building dollars may be at the expense of some custom builders who are stuck for construction financing.
So, going into budgeting and planning for 2010, privates–especially ones who’re active in the same markets publics are building–must have one thing on their mind. Winning.
The right product in the right price position in the right location built with the right process and the right vendor structure and supported and sold through by the right team… It’s a lot of things to get right.
This September through November planning period is likely to be even more intense than last year. The seismic shocks to the financial system of 12 months ago have now mostly found equilibrium. Now, it is what it is. Whatever you do, don’t stay stuck in the mud.
Pirrello’s Law: Think Different, Act Local, Eat Someone Else’s Lunch
Mad props to Big Builder award-winning “Big Money” columnist Jamie Pirrello for another strong post, this one pointing up the hard but true reality home builders–particularly, privately capitalized home builders–face today.
It’s profitable sales or die, and there’s less and less ways to get there.
- A deleveraging economy, and a housing market that’s correcting a two-legs-up-with-no-leg-down 15-year span mean little to no rising tide of demand through the next planning cycle.
- People cuts have been done; while more costs can come out via more centralized structure, better matrix management, greater trust across disciplines and operations, slashing one’s way to profitability has more or less been accomplished by now.
Hence, if 550K S.F. home sales now represents a “good” year run-rate, there’s one and only one way to make it on a recovery trajectory with a slope practically indetectable to the naked eye. For the privately financed home builder, that is “eat somebody else’s lunch.”
Pirrello puts it more diplomatically:
The answer is through differentiation; providing the opportunity to charge a premium price because your value is noticeably superior in comparison to your competitor’s. It’s through innovation and staying ahead of your competitors in understanding today’s customer, not yesterday’s customer. It’s not imposing more rules, policies, and procedures on your people, but demanding and giving them the approval to act with common sense. It’s no longer accepting mediocre performers, but actively recruiting top talent.
Pirrello’s assumption is that within each price point range in each submarket, there is a position. Characteristic of that position is a balance of absorption rate and profitability. Thing is, there’s no way to get it without winning it.
Which means there have to be losers. (Which is good only for those who’re in the history business.)
Bob Toll: Unplugged
Bob Toll on CNBC’s Realty Check with Diana Olick: