Infill Home Building Goes to the Back Burner

D.R. Horton made sweeping changes in its strategy recently, ones we look at for insight into how other home builders behave at this juncture in housing’s boom and bust cycle.

On both coasts, Horton divisions that focused on multifamily for-sale residences got orders to sell or opt out of their land positions and wind down. The company was “going back to its roots in entry level, single family homes… They’re getting out of the condo business,” an executive who’s familiar with Horton’s recent action plan tells us.

It was just about this time of year in 2006 that Horton’s management leaders affirmed that urban infill , multilevel, podium- and midrise style homes were a big part–a double-digit share–of the company’s future. And Horton had company in its embrace of the “inner rings” of urban areas as a rapidly emerging market for the nation’s biggest builders–the leadership at Pulte, then-Centex, Lennar, KB Home, and Hovnanian each asserted that closer-in urban home building would represent between 10% and 20% of their operations by 2010 or 2012.

This is where the market was headed, they said. Younger buyers prefer to be nearer their downtown jobs, and empty-nest Baby Boomers would downsize in droves out of the exurbs into cultural hubs for their “next phase” of being Boomers.

That was theory circa 2005-06.

That’s history now. Housing’s 2002 to 2006 boom came and went without teaching most greenfield single family home builders skills they needed to know about differences in capital management, the land and city politics game, nor construction operations to succeed with an inner-ring push.

Put it this way, $35 per square foot in direct costs may be fact for some home builders today or it may be malarkey. But it’s the standard of the moment in terms of an operating efficiency that has had to match new homes with foreclosure sales, and is going to have to continue to do that.

That means the cost per square foot metrics for urban building are a dog that won’t hunt in today’s market.

Horton, like the other publics save Beazer and Hovnanian, has amassed a cash war chest. Dry powder to pounce on opportunity or to have on hand for more rainy days.

Here are a couple of factors that could burn through those war chests in no time:

All of this means Horton and the other home builders are now under the gun on several levels.

It’s an awkward time where a balance sheet strategy gets more emphasis than an operating long-term strategy. Horton knows this only too well. They know the inner-ring plan was the right one for the future. They, and almost all the other home builders who tried it with the exception maybe of Toll Brothers, didn’t have the capital runway to learn that business.

It’s going to hurt them down the road.

September 21, 2009 | Filed Under Financial Crisis, Home Builders | 2 Comments 

JP Morgan Research Marks a Housing Market Turn

This morning, Michael Rehaut, home building and materials analyst at JP Morgan, writes:

While fundamentals will likely not demonstrate an uninterrupted solid rate of improvement over the next 6-12 months, we believe that not only is housing solidly past its trough, but over the next 24 months will continue to recover and drive further upside to the current rally in the homebuilder stocks. Importantly, we believe a key distinction between today and the last three and a half years, during which time we have largely maintained our negative stance, is that during the downturn not only did supply rise, but demand also consistently fell as different buyers exited the market. Today, despite being elevated, supply appears more manageable, while demand has begun to stabilize and even slowly reemerge. In such an environment, we believe the builders will once again demonstrate positive order growth – historically a powerful positive catalyst – and home price declines will near their end, resulting in the abatement of impairment charges.

The moving target on supply is the foreclosure wave and how and when it gets absorbed during the 24-month period Rehaut eyes for stabilizing of home building’s landscape. As for demand, despite an uptick in the past quarter, some $12.2 trillion in lost household wealth will probably weigh heavily for some time on home buyer motivations. That figure knocks psychology as well as financial means for a loop in predicting buyer behavior.

“The desire is still there for the American Dream of homeownership,” says Senator Johnny Isakson (R-Ga.), who’s backing a hotly contested measure to extend and expand an $8,000 tax credit due to expire Dec. 1. Isakson is convinced that the domino-effect of a sudden, forceful, brief shove in demand for all price points in housing with taxpayer money would pay off in jobs, stabilized household equity, consumer spending, corporate earnings, and resumed economic expansion. “It wasn’t the focus on homeownership that was the problem, it was lending money to people who could not afford homeownership.”

Builderonline.com’s Boyce Thompson has doubts an extension to the credit is in the cards thanks to the incipient broader economic recovery.

But the sustainability of the current recovery is what’s in question. Minus a home buyer tax credit, particularly in the seasonal low-ebb of housing from December through February, we’d be looking at another brutal stretch for an industry that could put people back on payrolls.

Is Rehaut right to look at year on year comps ahead and conclude we’ve reached the bright line moment? He’s not going too far out on a limb with a prediction for improvement over the next 24 months.

Still, we think too many signals are in conflict to say we’ve turned the corner just yet. That might be because our viewpoint is the many home building enterprises still living on the vapor of their cash reserves and a few sales here and there.

September 18, 2009 | Filed Under Finance, Home Builders | 1 Comment 

Home Builders Seek Housing’s Hole in the Donut

Survey says home building executives’ confidence level is inching ever so slowly upward. From horrid in January, we’ve reached tepid now. After horrid and tepid can only come torrid, but that’s still unaccounted for in the present cycle.

Clearly, economics academics are preoccupied with algorithms and the alphabet–namely the letters ”V” or “W”. Capitol Hill is obsessed with gaining grandstands for 2010 reelection bids amid debate over decisions on healthcare, energy, and financial system oversight that will bear directly not only on the welfare of our grandparents but our grandchildren.

Everybody’s polarized by impulse, ready to tussle with anybody about anything, sometimes merely for the sport of the fight. Meanwhile, home building start-ups, reduxes, subtle shoots, resurrections, and regroupings command an ever greater degree of our attention. In some cases, what appeared lifeless is showing a pulse; in others, the DNA traces to vitality that was only in hibernation, like sleeping giants.

In the past fortnight alone, you’ve seen reports here:

What can be said, then, is that national and global economics will be what they are, and will continue to exert pressure on what bank lenders will do. What those economics won’t do, however, is stop irrepressible characters from striking at opportunity while the iron is hot, which is a moment precisely before pessimism swings to its inverse.

Here’s a closer look at one who’s been there, done that, got out, and come back, ready for another good run.

Click image to access Landon Homes Web site.

Click image to access Landon Homes Web site.

When things were really tough real estate in the 1980s, particularly in Texas, John Landon came out of Louisiana State University, Baton Rouge, with an accounting degree and a level of ignorance that set him on his road to glory.

“I was young and dumb in 1982, and they [Trammel Crow] put me in charge of lot sales–and I didn’t know any better that lots weren’t selling, so I just ran with it,” says Landon.

One-time Peoria, Ill., high school All-American swimmer John Landon knows all about going a few more laps. He left as co-CEO of Meritage Homes in May 2006, with the proverbial golden parachute: more than $60 million in severance and stock value to provide some, shall we say, oomph to his subsequent interests and efforts.

Well, he’s back in business in North Dallas’ Frisco School District with a guiding business premise that could not be simpler to think about and harder to do these days. “If we build the right product, at the right price, in the right location, we’ll do OK, even in this environment,” he says.

DEJA DO
For all of a cup of coffee, Landon thought of his post-Meritage stage as retirement, with some dabbling here and there with friends in the land banking business.

But in September 2008, as the world and its financial underpinnings seemed to come all undone, Landon jumped back in the pool for another set of laps. Lucky for him, a couple of key longtime associates like Mike Gavin plunged in with him.

“When things really started to go south on a national scale, we figured it was a pretty good time to get in, because there were entry points open to us,” says Landon. “The cost to build houses is way down-lumber, land, labor, and such-which means if you’re in a position to buy now, you’re going to get an exciting opportunity to get a lot of high quality at a very good price.”

PLUS çA CHANGE
For Landon, starting up when others are flattened out is a way to meet a need, something he learned as early as in high school, when he started his first enterprise, Crystal Clear, a swimming pool maintenance company.

Landon’s entrepreneurial DNA draws inspiration from his Irish-American dad, Lou Landon, who ran a meat-packing company near Peoria’s stock yards and had his boys working weekends and summers loading cattle onto the freight train flat cars.

Adversity, with a capital A, was literally the genesis of his first home building company, Legacy Homes, in 1987. Landon had been a vice president with Nash/Phillips Copus’ development company when it hit a wall as the late 1980s savings and loan crisis played out. Put in charge of lot sales, Landon wound up with some land and model homes, putting $60,000 of his own money into what he called Legacy Homes.

“We were profitable in five months,” says Landon; not bad for a recession. The current downturn is both deeper and longer, he adds, but there are similarities of note.

“If you go back, the similarity is there,” he says. “It’s like you’re in a card game, and the ones who are holding all the best cards [i.e., land holdings] get hit the hardest. Then the banks come in and take it all back and reshuffle. That takes the big advantage away from some of the ones who had it and re-levels the playing field in a way. That’s what makes for opportunity. The difference is that in the 1980s, the banks’ troubles were mostly confined to Texas, Arizona, California … it was more of a regional problem. This time it’s global.”

Landon’s “right product, right price, right location” conviction comes from a confidence that he can drive value into his offerings with strong controls on his operating costs. To date, Landon’s biggest investment is in, you guessed it, dirt.

“We can ultimately build out 1,000 lots, with 50 feet, 60s, 74s, and 84s,” says Landon, with flexibility for product offerings ranging from the $160s to the $300s, where the expansion of the Dallas North Tollway to Panther Creek should help drive demand for the rooftops.

Survey may say what survey may say. That doesn’t change home builder DNA.

September 17, 2009 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Capitol Hill’s Patron Saint of Housing

Dalton, Ga. is known as “Carpet Capital of the World,” home to 150-plus mills, plants, and 100 carpet outlet stores, and is the birthplace of Marla Maples.

Mohawk and Shaw Industries are among the biggest names in floor covering with headquarters operations there. When times are right, the industry employs about 30,000 people in Whitfield and Murray Counties in Georgia.

But times aren’t right. In the latest Bureau of Labor Statistics unemployment data for metro areas released last week, Dalton, Ga., stands out … in a bad way.

In the 12 months since July 2008, Dalton’s rising tide of unemployed swelled by 3,500 workers. That’s not where its real point of distinction lies, however.  It is its percentage unemployed that is an eye-catching 13.2%, which is well above the state of Georgia’s 10.4%, which itself is higher than the national average of 9.7% unemployment. 

In January, Dalton’s The Daily Citizen reported:

North Georgia is reeling from the slumping floor covering industry. The housing market, which has slowed significantly in both new construction and existing sales, has also hurt floor covering sales. Although the cost of oil has dropped recently, high raw material costs are affecting companies. Those combined factors have led to job losses and cuts in workers’ hours.

Some estimate that for every new home built, it takes 276 jobs in businesses ranging from carpets, to carpenters, to copper manufacturing, to tree nursery workers. Too, word is that for every dollar spent on direct costs of a new home, seven additional dollars go into the economy on consumer and commercial spending. The BLS notes that the economy has shed 7.4 million jobs since the start of the recession–1.4 million of them in “construction,” many more of them in “construction-related” manufacturing and services.

Click image for Isakson Web site.

Click image for Isakson Web site.

In early September–as members of both houses of the United States Congress returned from a late-summer recess to address some of the most profoundly transformative policy issues the nation has faced since the period of Reconstruction following the War Between the States–Republican Senator Johnny Isakson puts it even more bluntly than the Dalton Daily Citizen.

“The carpet mills are basically shut down,” says Isakson as he calls to mind a lurid example of the collateral damage perpetrated by a housing crisis that’s rounding the bend into its third painful year.

“No other industry has so many businesses built on top of it as housing does,” says the 64-year-old freshman senator, who was for decades prior a residential real estate maven in the Atlanta area.  Isakson since early Spring of 2008 has doggedly pursued legislation that would extend buyers of all incomes a $15,000 tax credit on the purchase of any primary residence, a program that would run 12 months from its start. “We’re 20-some months into the worst housing economy we’ve had in our lifetimes,” says the Senator. “That’s how long I’ve been working on this legislation, and i just don’t think we’re going to come out of the broader downturn without housing getting fixed.”

His most recent play came in July, as Congress put its finishing touches on the Cash for Clunkers new car stimulus program.

“We reintroduced the bill as an amendment to the CARS legislation, and it won support from both the Senate Banking Committee chairman Christopher Dodd (D-Conn.) and the chairman of the Budget Committee Kent Conrad (D-N.D.), and that was an achievement,” says Isakson. The amendment, however, didn’t get enough support to go with the clunkers program, so it’s back to the political grind, operating face-to-face with his colleagues throughout Capitol Hill out of his first-floor digs in the Russell Building there.

“They know when they see me on the second floor what I’m coming to talk to them about,” he says unabashedly. “This issue links to all of the economic and social issues on our agenda right now.”

He says he’s going to keep at the legislative pursuit for as long as it takes. He imagines plenty of opportunities between now and the end of the year to get the bill included as an amendment to other taxation, budget, or finance legislation.

“Ideally, we’d love to see the bill come out of committee and win support by itself. The last thing we need right now is for November 31 to come and go, and then you slip in to the slowest period of the year for real estate in the months of December, January, and February. Without the catalyst of the tax credit, I’m afraid to imagine how bad things could get.”

Nevertheless, with the $8,000 credit that came into effect this year with the passage of the almost $800 billion stimulus package, he contends that the measure got it only part way right.

“The $8,000 program has proven that a stimulus will work to get home buyers off the sidelines and into the market, but what I’ve been saying all along is, we don’t have a first-time buyer housing recession, we have a move-up buyer recession. It’s those people who can’t sell their current home in this environment and move into more of the home of their dreams that have unfortunately caused such a slowdown in the entire economy.”

Isakson knows whereof he speaks. Selling homes is in his DNA. He’s the grandson of Swedish immigrant Andrew Isakson who by trade was a stone-mason and plumber, and who went into home building when he arrived on this side of the pond. Senator Isakson’s father Ed went into the real estate business as well, selling homes and commercial properties after first having spent time as a butcher.

In 1967, Isakson himself joined his father’s Northside Realty company. A consummate salesman’s personality blended with basic business instinct, and as a 33-year old, Isakson became president of the company.

Before he did that, though, came the deep recession of 1974, which featured a 36 month supply of homes for sale. Congress legislated a $2,000 credit for home buyers, and the effect was legendary. Many, including Isakson, believe that jolt to housing went far toward lifting the entire economy out of recession.

“He’s run a business, made a pay roll, paid health benefits for his employees, been there and done that,” says John Wieland, a long-time friend of the senator. “I can guess that the first time we met, it was probably about a commission that he didn’t get on the sale of one of our houses. Still, from the minute you meet Johnny, you get the feeling that ‘this is your kind of guy.’ He’s very approachable.”

Isakson, like 35 other senators, and 435 members of the House of Representatives, have a lot on their minds these days as they confront the issues of a continued challenge on the jobs and economics front, as well as health care reform, a transformative cap and trade energy bill, and financial services reform. Many of them can’t help but think of one thing in the back of their minds as they consider their positions on each of these huge issues: reelection.

Senate Majority leader Harry Reid (D-Nev.), who hails from another state decimated by housing’s convulsive trajectory, is also up for a difficult bid to reclaim his seat if things don’t improve on the jobs and real estate front. Through a spokesperson, Reid says, “We believe we can extend the current credit for first-time home buyers, and we need to do it by the end of the year.”

Although Isakson may not encounter serious opposition in his bid for a second term in the senate, his friend John Wieland thinks it would send the right message for home builders, manufacturers and real estate people to show financial support for Capitol Hill’s patron saint of home builders, as well as those other members of Congress who specifically support the housing industry and are seeking another term. 

Where ever each stands philosophically on free-trade vs. government stimulus policy, every one of them will have to account for his or her constituency’s jobs picture by the time Nov. 2, 2010 rolls around. Like as not, reelection and action on behalf of getting the economy rolling toward job creation are going to have more effect than meets the eye.

September 14, 2009 | Filed Under Financial Crisis, Home Builders | 1 Comment 

Home Builders — Glass Half Full or Empty?

A daisychain of housing marketplace positives trails back to late Spring of this year. As home building companies business plan for 2010, do you think their leaders are more or less optimistic about the next stretch of real estate’s cycle?

Recently, we hear no end of the landrush for finished lots. Builder magazine senior editor John Caulfield yesterday reported on the phenomenon we caught wind of here in late May and early June.

Big Builder editor Sarah Yaussi wondered aloud about what real factors might be at work to account for such a rabid pursuit of finished lots right now, when housing demand drivers continue to be so challenging in these very markets.

Our guest guru Jamie Pirrello offered insight from a home building company executive’s viewpoint in his blog a couple of weeks ago.

Fact is, we need lots. We’ve depleted our finished lot supply in our best-selling communities. While we have access to land development financing, it is limited. Securing additional land development financing will be on terms we can’t justify. So while we can develop some lots, we need to buy finished lots to meet expected 2010 demand. If not, we will not be able to continue our year-over-year growth for a third year running. We could even see a volume decline.

Also, we’ve got lots of company, public and private. Everybody wants lots on “soft” terms with low deposits and a minimum takedown schedule. As long as buyers manage deposit and takedown risk, they’re actually willing to push prices higher. Lots that weren’t even in play are now gaining attention of multiple buyers. Yet, we have no pricing power with our customers; we can’t raise prices to cover increased lot prices. How much of our already limited margin can we afford to forfeit?

Still, even as the demand for finished lots surges, we believe it’s incorrect to conclude that home building executives believe that positive momentum is gaining much traction. It should be noted that the gold standard for measuring home builder executive sentiment, the National Association of Home Builders’ HMI last measured 17. Now 17 is high compared with where it was in January, but since any number below 50 means that the majority of executives are pessimistic about the outlook, 17 is still pretty darned negative.

On the contrary, we feel the motivation to buy land right now is the opposite. Home builders, deep in their natures, are glass-is-half-full types of people. But they’re not deluded, and they’ve lived with reality for a long enough stretch now that they’re not suddenly caving to visions of grandure about a snap-back.

Oversimplistically, we sense that the lion’s share of the action in the land market right now reflects a dash toward cash for the near term, and signals desperation on the part of more home builders than not.

As one knowledgeable industry observer put it yesterday, “the publics have been losing money [with the exception of NVR] quarter after quarter now, and they’re doing whatever they can to have a profitable earnings period, which probably won’t happen in 2010.”

So, what we believe is that as much as home building executives believe in the power of positive thinking, they’re, in fact, anticipating a really rough go of it in 2010. Cash, however it can be secured, is going to continue to mean life for death for those who drive value to stakeholders by building new homes for American Dreamers.

We linked above to Dan Ariely, whose “Predictably Irrational” remains a dependable source of sanity and insight in these challenging times. Here’s part of what he says about optimism that speaks to the plight of home builders.

It is interesting to ponder the utility of over-optimism. It’s not a simple matter, because it can both hurt and help us. Individuals often suffer because of an overly bright outlook. They wind up dead, or poor, or bankrupt because they underestimated the downside of taking a certain path. But society as a whole often benefits from behavior spurred by upbeat outlooks.

So, it’s a thin line between being upbeat and being realistic. Chief financial officers tend to demand realism foremost. So how will home builders budget for 2010, flat or up?

September 9, 2009 | Filed Under Financial Crisis | Leave a Comment 

Paul Krugman, aka CAPM Crunch

Few words carry the freight in business analysis of home building and real estate than “the fundamentals.” Cited repeatedly, even as speculative home buyers evacuated the market with the flip of a switch in 2006, fundamentals were the bedrock of the boom; and they were the basis of forecasts for a soft and bloodless landing.

Population and household growth, low unemployment, solid corporate earnings, an expanding economy, and favorable mortgage lending terms … these drivers became a chant. They wound up working as a hypnotic mantra that seduced most home building executives into committing home building’s all-too-well-known fatal error–going long on land.

The fundamentals, it turns out, led all but a few iron-fisted home building strategists down a garden path to dislocation, and for far too many, end game.

After the real estate crash, the term–the fundamentals–resurfaced, this time as those who might have acknowledged accountability pled innocence on on the grounds of having been misled. “We could not have known what was coming; the fundamentals were strong.”

In the wider world of economic crisis, home builder companies are often depicted as a somewhat malevolent band of business executives who oversee a horde of push-to-talk men with backhoes, powertools, and boom boxes, who together perpetrated at least one major portion of the crime against America–putting up too many new houses, making them too expensive for ordinary workers to buy them, and then jumping into cahoots with lenders who’d wave easy cash in people’s faces to make them believe anybody and everyone would be a homeownership lottery winner.

… And getting very rich in the process.

We read Paul Krugman’s “How Did Economists Get it So Wrong?” in the Sunday New York times magazine somewhat wistfully. Long story short, Krugman avers, economists erred in that most human of ways; they mistook beauty for truth.

Here’s why we’re dubbing the econ icon CAPM Crunch:

CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims. The elegance and apparent usefulness of the new theory led to a string of Nobel prizes for its creators, and many of the theory’s adepts also received more mundane rewards: Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.

The story shouldn’t be riveting–it’s about fairly arcane economics and finance theory, practice, assertions, and arguments–but it is. It speaks to the way the global economics disaster has become currency, what we eat and sleep and breathe, just the way a war does. Whether it’s fiscal policy or  Main Street has become fluent in Wall Street, and very well might tell Capitol Hill just what to do about credit derivatives, default swaps, and resecuritizations in a way that might make more sense than what any elected official or appointed agency head could conceive of.

Eyes might have glazed over if Krugman wrote what he wrote in this Sunday’s paper three years ago. Not now. The story has penetrated our worlds. We want to understand. We want to learn, not just what economists got wrong, but what we got wrong to allow economists, policy-makers, business strategists, etc. to steer us so astray. We’re in it big time. We’ll live with it for a long time.

Like economists, home builders fell for beauty over truth head over heels. That home builders should have known better, even than economists, is arguable. But, what home building lacks is a Krugman, or even some conservative alter-ego. We started hearing more than a year ago, “Will we learn our lesson from all this? No way.”

The reason we get this pang of envy for the likes of Krugman in the home building sector is that we lack for a crystal clear answers to anything under such critical headings as: a) accountability, b) business model deficiency, c) market intelligence breakdown, d) communications dead-ends, e) executional missteps.

Without insight into those key areas what do you get? 

One thing you get is home builders bidding up the price of finished lots in scores of submarkets in highly challenged metropolitan areas is what you get. This is as insane as building a house without knowing how much you’re going to spend on it, then adding up your costs and tacking on a 10% premium on to that. But that’s the way it’s done all too often.

Another thing you get, at best, is a massive downsizing and cost initiatives, tax clawback tactics, desparate pleading with lenders, value engineered, strip-down, course-corrections in product, and a host of other knee-jerk reactions in hopes of preserving cash for survival through another stretch of desert dry months.

Without insight into how to correct–submarket by submarket–for land risk and lot carry costs in a market where you’ve practically got to steal absorptions from the home builder down the road, home building companies can only dead reckon their way through the balance of the downturn, which could feel as tough a year from now as it does today.

This industry needs an economic and financial analysis not just of the stock valuations of the publics, but of the business model pluses and minuses of an entrepreneurial, on-the-ground operational culture vs. one that operates with strick headquarters central control over numerous satellite offices.

Isn’t there anybody out there who can look at home building without a 100% negative bias and chime in about the economics and finance of how this industry can be part of the overall economic recovery scenario?

September 8, 2009 | Filed Under Financial Crisis, Home Builders | 1 Comment 

Another Home Builder Outlook — Two Scoops with No Frills — and What to Do About it

The good news about the market that got overbought this past summer is that it suggests that if people are afraid they’re going to miss a run-up, they’ll slash a hole in their mattresses and come up with cash to invest. The bad news is that the flight to safety is prone to histrionics. In this environment, more people will err on the side of caution and leave money on the table.

Thing is, even though there’s tons and tons of money in those mattresses, lots of people will lose their shirts awaiting its return to the marketplace where it can do something useful. Here’s a Big Picture blog post that makes this point loud and clear:

This is from “News from 1930” website

“There’s a large amount of money on sidelines waiting for investment opportunities; this should be felt in market when “cheerful sentiment is more firmly intrenched.” Economists point out that banks and insurance companies “never before had so much money lying idle.”

-August 28:, 1930

The more things change . . .

Let’s cut to the chase about what an economic double-dip — two scoops with no frills — may mean for those who make a living in the home building trade, particularly for the enterprise companies that build homes for volume.

Which leaves us with the matter of competing with foreclosure sales, which is going to continue to be a fact of new home builders’ lives–perhaps even more so as unemployment rates crest and more and more home owners go deeper underwater on their mortgages.

We foresee, in the immediate offing, a first- and second-move up big push equivalent of KB Home’s Open Series, D.R. Horton’s Freedom product line, M/I Homes’ Eco series, and Meritage’s Liberty line.

Drew Holzwarth, Piedmont Realty & Construction, Charlottesville, VA

Drew Holzwarth, Piedmont Realty & Construction, Charlottesville, VA

Part of the brilliance of young Drew Holzwarth’s Piedmont Realty & Construction vision–which Sarah Yaussi touched on in her story of this Charlottesville, Va.-based Generation Next home builder–is that he’s keenly aware of what to buy, what not to buy, how to buy, and what to sell to make his business model work.

Holzwarth’s model is not “asset light” but “asset never.” He doesn’t–for at least some of his neighborhoods–need to take on one penny of burden for dirt.

The other striking part of his plan is that he makes his subs and his suppliers make money themselves in their transactions with his company. He’s leveraging the relationship with them, but in a win-win equation based on his knowledge of total costs and time costs vs. merely unit prices.

It seems to us that home builders will need to apply techniques like these if they’re going to get through the second scoop of the downturn. They need to get lot prices reset in a bigger way, and that means getting real estate developers and owners who are willing to take on the risk with softer than soft take-down structures, post-sale profit shares, and other creative deals.

And they’re going to have to put time-value processes into action like never before so that suppliers on both the trade and materials side can operate profitably and, in turn, do what they can to keep home builders going verticle by offering “more house for the money than ever before.”

That’s what it’s going to take to battle the next wave of foreclosures, which seem inevitable.

September 3, 2009 | Filed Under Financial Crisis, Home Builders | 3 Comments 

Taking on Risk

Calculated Risk wants his audience to know what the $8,000 first-time-home-buyer tax credit program costs, and why not?

There are at least four proposals and resolutions with varied amounts of support in both Houses of Congress, awaiting the return of our esteemed representatives for further consideration among the urgencies of healthcare, energy, and financial system regulation. Huge stakes. Already, it looks like our grandchildren will take the brunt of the pain for federal programs flying at the financial system’s woeful state today.

We only know the author of the Calculated Risk blog by his first name, Bill.

We know that his blend of economic analytical discipline, common sense, and a deadpan, just-the-facts-maam writing style make his observations work as insights. Often enough, Calculated Risk’s analysis leads to mind-changing, light-bulb-illuminating, calls to action.

Where CR does the math, it’s alway in English, not Numblish. A reader doesn’t need an advance degree in economics or finance to grasp the point. For instance, on the cost to American taxpayers of the $8,000 tax credit, his tally goes as follows:

Here is the math: 1.9 million buyers qualify for the credit (the NAR estimates between 1.8 and 2.0 million) = $15.2 billion.

The NAR estimates the tax credit resulted in 350 thousand additional purchases. So divide $15.2 billion by 350 thousand = $43,000 per additional home.

The conclusion we’re to draw from the analysis is that the cost of the program outweighs the benefits. CR’s own conclusion is this:

And the numbers will get worse if the program is extended.

But to be fair, we don’t think “the numbers” here are correct.

CR’s math assumes National Association of Realtors data on sales of “existing homes” and NAR estimate of the incremental boost to sales during the term of the $8,000 tax credit to first time home buyers.

NAR “existing home sales” do not include new home sales; so there’s a factor, albeit maybe only 10% of the “existing home sales” market, that has been left out of the addition.

NAR’s home builder counterpart, the National Association of Home Builders, estimates the incremental jolt from this year’s $8,000 tax credit for first time home buyers is not 350,000, but 383,000, or 33k more than the NAR estimate.

Let’s say that delta of 33,000 home sales–a little less than 10% of the 350,000 boost in existing home sales NAR says the tax credit program stimulated–represents the number of new homes sold that would not have sold during that time period without the $8k tax credit.

So, go back to the NAR estimate that 1.9 million home buyers will avail of the tax credit, get the $15.2 billion figure CR arrived at, and divide not by 350,000, but by 383,000, which includes new homes sold [that wouldn't have without the tax credit boost], as well as incremental existing home sales.

A more accurate cost of the program, using CR’s assumptions then, would be $39,686 per home, not “$43,000 per additional home.”

Also, when you factor in the almost $7 billion in revenue produced by just the 33,000 new homes in the equation, and take a look at the multiplier effect of jobs gained or saved, tax revenue generated to localities, business created, etc., the cost per additional home goes down significantly.

CR analysis argues against extending the tax credit for home buyers, which traces back to data that housing supply exceeds demand, and therefore, stimulating demand with incentives only stalls a necessary real estate price correction.

Our argument here is that demand destruction factors have overshot normalized demand, which makes supply look disproportionately excessive.

Congress needs to weigh the “cost per additional home” sold factor carefully and holistically–including the multiplier effect of new homes sold–if it is going to make a sound decision on whether to continue a tax credit or not.

September 3, 2009 | Filed Under Financial Crisis, Home Builders, Legislation | Leave a Comment 

Read it in the WSJ

SmartMoney contributing columnist James B. [don't call me Jimmy] Stewart writes this in this week’s offering for the Wall Street Journal.

In short, the data suggest that real-estate prices hit a bottom some time during the second quarter, and have now begun to rise. There’s no way to be certain that this marks the end of the long, painful correction that followed the real-estate bubble, but clearly prices are no longer in free-fall. That means if you’ve been sitting on the fence, it’s time to act.

Breathe. Breathe. Breathe.

OK, now, back to work.

September 2, 2009 | Filed Under Financial Crisis | Leave a Comment 

Some Stocks Hammered, Some Nailed

This from CNBC’s stock market reporter Bob Pisani.

Home builders this week:

On the surface, the decline may not seem logical. The housing market seems to be stabilizing, with sales improving and inventory levels declining.

If shareholders can protect any gains they achieved during the summer rallies of these stocks, it’ll be a surprise. The real rally in home building stocks that will pre-date housing’s volume and price recovery, is still ahead.

September 2, 2009 | Filed Under Home Builders | Leave a Comment 

← Previous Page — Next Page →