Housing’s 2010 Megatrends — It’s About Talent

We’re prone to shameless sentimentality every day of the year, every year of a decade, so why would today be any different?

In our series of 2010 single-family housing megatrends that trace to genuine achievement among leading home builders in 2009, we start with this thought. Getting through this is hard, and finding solutions to survive is hard.

Sometimes, cliche though it might be to say it, the solutions sit right next to you, literally. For instance:

They’re our peeps. They’re literally the answer to how we survived 2009, and they’re who we’re fully banking on to get us fully on our program for 2010.

So, how does this apply to an achievement in 2009, and what that portends as a 2010 Single Family Housing Megatrend? Well, we feel that the biggest, most luminous story of 2009 had to do with organizations coming out of Chapter 11. In particular, we feel the folks that engineered the Landsource emergence, and the new-lease on life of smaller organizations like Raleigh, N.C.-based St. Lawrence Homes are the stories that bear the profoundest implications for the year ahead in home building.

It’s only the surface of these stories that focuses on finance. Behind and beneath the numbers, there is a truer tale of who home builders are and what they do. Here’s St. Lawrence Homes’  Rich Ohmann describing his firm’s announcement of its imminent return from the clutches of bankruptcy.

The day that the news broke I received a call from Dave Hausfeld, the local Division President from Drees Homes.   He said that he had to meet with us and that what he had to talk to us about wouldn’t/couldn’t wait for another day. He claimed that he could only meet us at 4 that afternoon and insisted that he come to our offices.    Dave arrived carrying a washtub filled with chilled beer, soda, a bottle of sparkling cider along with some snacks emplazoned with a Drees Homes logo.   He presented my brother with a card of congratulations signed by his whole staff in commemoration of the approval of our plan.   On Dave’s orders we summoned our team together.   We were touched and honored that Dave toasted the first day of the future of the company.    To have a tough competitor celebrate your survival exemplifies the familial relationships we all have in our chosen industry.   We cheer for each other, we help when we can.

Happy New Year! No doubt, you know and appreciate the value of your team. This team salutes your continued success.

December 31, 2009 | Filed Under Financial Crisis, Home Builders, MultiFamily | Leave a Comment 

Single Family Housing 2010 Megatrends — Branding Finally Gets Traction

Quarterly, the Federal Reserve releases a Flow of Funds report that rolls up household, business, financial institution, and government money movement. This is a glimpse at whether our debt levels increased or decreased in the previous quarter. It has been a harrowing year for the Flow of Funds.

Here’s a sum-up from Calculated Risk when the last report came out on Dec. 10.

According to the Fed, household net worth is now off $11.9 Trillion from the peak in 2007, but up $4.9 trillion from the trough earlier this year.

“Off $11.9 Trillion” means wealth destruction beyond imagining, but as we see the velocity of recovery–$4.9 Trillion to the better–can be almost equally mind-boggling.

How does the Flow of Funds’ tale of wealth destruction tie to one of 2009’s noteworthy achievements in the business of single family home building which, in turn, points to a megatrend for 2010?

What else has the vortex of the Great Recession subsumed as it expanded its havoc? Companies, trust marks, trade names, credibility. The New York Times today notes that the Bureau of Labor Statistics reported that 400,000 small to medium sized companies (100 employees or less) went out of business in the first quarter of 2009 alone.

As hard hit as home building and its pantheon of companies who’d built a name for themselves in the prior two decades or more have been, the casualties in every sector of the economy remind us this thing has been indiscriminate in claiming its victims, and not just from small to medium sized companies.

The Flow of Funds report may measure lost wealth, but what’s the measure of lost trust? More importantly, while a hyperbolic equities market since March of 2009 may have gone fast and far to restore a chunk of the dollars that had vaporized from households’ financial holdings, Joe American has scarcely seen an equivalent restoration of trust, credibility, or dependability… not among policy makers, Wall Street moguls, local government officials. Who to believe?

This is why we’re going to revisit the Pulte-Centex combination strategy as high achievement in 2009–perhaps in the sense that President Obama was considered a worthy selection by the Nobel committee–in home building, if only for the strength of its conviction that branding’s moment has come to home building once and for all.

Branding derives from the trademarking of pottery, wine, and livestock back in the 16th century, and it normally involved burning an identifier into the surface of the item so that all would know its origin.

For home builders branding is a way to forge trust, not just among potential home buyers, but where you need it most, among your overworked associates, among your underpaid subs, among your overly anxious investors, and among your most faithful supporters.

Just as household wealth evaporated amid a flock of Black Swan moments starting in the Spring of 2008, trust in anyone or anything vaporized in a flash as well.

Home building companies’ relationship to branding has been ambivalent. A reputation for quality, for value, for delight has long been part of their DNA, while the trappings of branding in the Madison Avenue sense seemed to run counter to the skill set required to be a successful home building company–especially since a home was different in magnitude, frequency, and nature from any other consumer good or service for sale.

What the Pulte-Centex strategy suggests is that the company will begin to discipline itself around being the best at less and align its value offerings with greater proficiency and belief.  The way the Pulte will burn its names into the hide of its communities, its lot positions, its homes, will work to streamline the organization around doing fewer things better, with the result that buyers will gain greater value.

Interestingly, what home buyers want, especially in the wake of all the wealth and trust destruction of the past few years, is not to feel ripped off. (To hear this directly, tune into “What’s Selling & Who’s Buying?” in the Big Builder Virtual program).

If home prices continue to decline in 2010, as is indicated in the latest Case-Shiller Home Price index and other analyses (such as this one from Calculated Risk’s blog), how will your company recover some of the trust that has fallen by the wayside amid the financial crisis?

First, figure out who and what you are, minimally. Introduce scarcity into your own system.  Pack belief and commitment into fewer plans. Match them in a disciplined way to lot positions. Allow the notion of your brand to get under your skin and that of everyone wh0’s hands are on your product offerings. Make a story 0f what you’re offering–stories give value to everything. Look at this experiment in Significant Objects for proof.

The BLS is not going to stop reporting hundreds of thousands of small to medium sized business failures by the quarter any time soon. Credit’s not going to work normally for months, so rekindling trust–at every turn–may be the only way to get across the barron stretch still ahead.

So props to Pulte for its affirmation of branding as a home building strategy. We’ll see more of less brand names in 2010.

December 30, 2009 | Filed Under Financial Crisis, Home Builders | 4 Comments 

Harvard Joint Center’s Belsky: 1.75 million Annual New Home Units Average in Decade Ahead

Eric Belsky, executive director of Harvard’s Joint Center for Housing Studies, offers this outlook as part of the exclusive series of Web learning sessions at Big Builder Virtual, which is all still available on-demand at your convenience.

JCHSs Eric Belsky

JCHS's Eric Belsky

To support a conservative-scenario outlook of demand for 17.5 million new housing unit starts (including single family, multifamily, and manufactured housing placements) between 2010 and 2020, Belsky delves into three principle drivers of demand and stress tests each to derive upper and lower projection assumptions.

Whether housing’s bottom was January and February of the year just ending, or whether we have another leg down to endure, household formation’s next tidal direction will impact residential real estate property values and residential investment right out of the gate of the new decade.

You can access all of Belsky’s visualized data on the Big Builder Virtual event site, but we also wanted to provide a transcript of his forecast so that you can follow the script and draw your own conclusions about what it means for your business.

Here below are Eric’s remarks verbatim:

What happens after the home building storm, the downturn, fully departs? What’s coming next? With things having gotten so bad over the last three or four years, a lot of  people are reconsidering what the future may look like and whether what we’re looking at now might be thought of as something approaching a new normal.

Or is where we are now at a really abnormally low point of a very severe cycle?

I’m going to address my comments to that question about what happens to housing demand after this downturn is convincingly behind us.

But I’ll start by talking about where we’re headed in the medium term, and then what will happen when we know that the all-clear sign has been called and the market is moving forward.

As you know this is the worst market downturn that we’ve had in the United States in more than 60 years. You have to go back to the Second World War–when many of the nation’s assets were being redeployed to fight a world war–to find a period of time where housing production was driven as low as it has been in recent years.

Where we are is at or near the bottom of the worst housing downturn that the country’s seen in decades. There’s a lot of sentiment and a lot of reporting that the worst of the home building downturn may be over. There are reasons to believe that the market may have found a bottom. There are indications that the market has begun to turn up from a very low point that we reached in the winter of (January/February) 2009.

The question now is, is this recovery going to be sustainable and will it be vigorous?

While the worst may be over, it’s not 100 percent clear that it is, and there are many downside risks. What we do know is that new home sales and starts are still at their 60 year lows. The September number for new home sales was a very low number of 402,000, which took new home sales back down to June levels.

While these are up from 330,000 approximate new home sales low that was reached over the Winter of 2009, and on a percentage basis is a significant increase, new home sales at a level of 402,000 is an extremely low level. You might say that what we did is we went from being in the basement, and now we’re back into a sub-basement. These new home sales numbers not only are still quite low, but they retreated over the past couple of months back down to a level that we hadn’t seen since June.

So there are signs for hope there, but what we have done is gone back from an extremely low level to just a very low level of new home sales.

One of the brighter spots over the past few months is what’s been going on with home prices.  They appear to be stabilizing, or moving up in many or most metropolitan areas. This is that case whether you look at it from the perspective of the Case-Shiller Home Price Index–a broad measure of what’s going on in markets, and includes foreclosure sales–or you focus only on the Federal Housing Finance Agency, which has a number that only affects loans that Fannie Mae or Freddie Mac [underwrite] and the homes that are associated with those, and that’s a much narrower gauge of the market. Both of those are showing signs of stabilizing and improvement over the last several months. This is a very positive sign, because it may indicate that the price correction in many places is starting to run its course.

However, most people feel it’s still too early to call a bottom. Part of the reason is that there’s reason to believe that perhaps there was some relief on home prices falling further as a result of foreclosure and other moratoria that slowed the rate of distressed sales on the market.

Nevertheless, this is clearly a positive signal, and it clearly suggests more likely a real bottoming in housing. Should this begin to unwind over the coming months, it’ll be the beginning of a signal that the recovery is very fragile and may in fact sink back down to some degree.

Housing starts have been rising fairly smartly. They’re up from a low on the single family side of about 360,000, again on an annual run-rate basis in the Winter of 2009. And by September they were up closer to 500,000 annual run rate. This is clearly a substantial improvement, but again, we’re near or at 60 year lows.

So we’re at a very low number overall… although a significant improvement over what many people viewed as a dismal winter, where we got as close to producing no single family housing as many people think we would ever get. That occurred, as you may recall, during a period where all the news was about people not just 200,000 or 300,000 jobs lost but 500,000, 600,000, 700,000 jobs being lost a month. So we had a very frightening set of circumstances in the credit markets that blew up in September of 2008, but were still present with significant effects at that time.

Multifamily housing hasn’t seen the kind of bounce that single family has, and that is another reason for concern. Multifamily housing starts have dropped to extremely low levels, again almost approaching nearly no construction. This is for reasons having to do with rising rental vacancy rates.

So housing starts are rising overall, driven by the single family increase, and there’s some suggestion that the quantity correction may have run its course.

If new home sales don’t show greater strength, and don’t make up for some of the ground that they have lost over the last couple of months, then there will likely be a response on the home builders side, which is to slow production, which is a prudent thing to do but will result in more stress on the broader economy.

But with new home prices still falling, what’s really going on in terms of getting some of home sales is that builders in many places are buying starts. In other words, they are dropping their prices and, in many markets competing with a significant amount of  foreclosed property in order to be able to sell their homes. So you have a situation where the median new home price has now fallen to about $200,000 and that’s down from highs of close to $270,000 not long ago.

Until you start seeing signs of the stabilization of new home prices, it’s a little early to call the recovery a done deal.

A final element of where we are is that vacant for-sale housing may have turned the corner. As many will know, one of the hallmarks of this downturn is the extreme levels that homeowner vacancy rates reached. That was associated with a very large increase in the number of units that were vacant and for sale. We’ve started to see modest declines in those homeowner vacancy rates in the South, and the West, and the Mid-West, and to some degree in the Northeast as well.

What’s really behind the recovery at this point appears to be the fact that housing affordability has rebounded in many – you might say most – metropolitan areas. This improvement in housing affordability of course is important because it brings people back into the market. Clearly, even though the increase in new-home sales has been modest, the increase in existing home sales has been significantly stronger, and the share of those sales going to first-time buyers has been higher. And this is because a growing number of people in the United States are recognizing that this is a buying opportunity when prices fall to these levels and interest rates are at these levels.

How affordable metro areas have become, when you factor in both the decline in home prices and the reduction in interest rates over a typical mortgage rate period. When you factor in both interest rates and house prices, in nearly seven out of 10 of the markets we’re looking at here, which are 80 metropolitan areas that the National Association of Realtors has consistent data on from 1989 forward, is that where affordability is is that it’s 10 percent over an average level over 1989 to 2000, which is kind of considered an era in which the markets weren’t overheated.

These are places that are experiencing very strong affordability, and it is bringing buyers back into the market. Then there are still some markets that are above that long term average, but very small shares of metropolitan areas. 

What we observe is the importance of interest rates to the reduction in real monthly mortgage costs when someone goes to buy a home. If you instead form a ratio of the median house price to the metro average income of a household what you see is the share that looks very affordable is significantly less.

What this really tells us is that the low interest rates, which have been in and around 5 percent now for a considerable period of time–and these numbers show the situation as of the 2nd quarter–which is about where interest rates are now. These interest rates are critical to making this be a particularly good time to buy in people’s perspectives, even if they believe that prices may fall further if they expect to be in the house for some period of time. This looks like a good time to buy.

Where are we headed then? 

There are a number of things that point to the start of a recovery. But there are a number of other factors that suggest that while we’re in a recovery it may not be a particularly robust one. What really underscores how fragile the recovery may be is how heavily dependent the housing market has been on federal intervention. Not just on efforts to stimulate the broader economy but specifically steps taken to try to support the housing market. While a great deal of attention has been on the first-time home buyer tax credit.  and the degree to which it’s been an important stimulus to the market, and what will happen when it is no longer available to buyers, … and it has by most estimates, pulled demand forward at a minimum and increased sales in the recent period, the larger, more important factor is the role the federal government has played in insuring that there’s a flow of mortgage credit, and that the mortgage interest rates at which that credit flows is at a low level that creates the kind of affordability conditions we spoke of above.

Also, very significant efforts to modify millions of loans of people who are seriously behind on their mortgages. While those efforts to make loan modifications have fallen short of expectations, and have not been enough to stave off a growing number of foreclosures, they have helped many homeowners and will continue to help in the months ahead.

The real meaningful role is around access to mortgages and mortgage interest rates. This has to do with taking Fannie Mae and Freddie Mac into conservator-ship and increasing FHA loan volume, and also the Federal Reserve buying mortgage backed securities and the corporate debt of Fannie Mae and Freddie Mac to keep mortgage interest rates down.

It’s clear that when you have that level of activity of purchases and they’ve been very significant, that they are very critical to keeping mortgage interest rates low.

Another fact of where we are is that underwriting standards are clearly back. They’re tight, and a number of constraints to people buying homes that people talked about continuously throughout the 1990s are back. Those are things like wealth and income constraints. These are the kind of constraints that are caused by having limits on the amount of your income that you can allocate to debt, and having to come up with money for a down payment. Now you have to have that money for a down payment, and you have to make sure that your income payments for your housing are manageable.

On top of that, and very substantially, low credit score borrowers, borrowers with impaired credit histories are having a very difficult time getting credit. This is at a time when the number of those people who have those problems is up significantly.

Another fact is that multifamily rent is starting to soften in some markets, and multi-family property values are falling. What recovery we’ve seen in the single-family, for-sale market doesn’t appear to be occurring in the multifamily and the rental market.

All this adds up to a potentially muted and very fragile rebound. Not only might there not be a strong rebound, but there’s also a possibility of back-pedaling. We have on top of this very serious delinquencies, and they are causing—as of the 2nd Quarter of 2009—roughly one-and-a-half million homes and slightly more than that to be in foreclosure.

We’re seeing interesting developments in the marketplace that mirror a number of developments that we’ve seen in previous downturns. New homes available for sale always are declining at least two quarters before there’s a peak in months’ supply.

If there are fewer new homes for sale, why isn’t there a concurrent peak in the months’ supply earlier than when it actually peaks. What really drives the peak in the months’ supply is a return—the quarter after it–to an increasing number of new home sales.

So, as is typical, we’re seeing that the inventory of new homes for sale has started to come down, well before there was a peak in months’ supply–and what really caused the peak in months’ supply, therefore, wasn’t an ongoing reduction in the number of new homes for sale, it was an increase in the number of new homes sold. The real dividing line in the peak in months’ supply—before and after—is what is actually going on with new home sales. In every case, you’ve seen new home sales not only turn in the quarter after the peak in the new home months’ supply, but to continue to head higher although not always linearly… sometimes there’s back-pedaling.

New home sales have been on the rise. What you see happening to housing starts is what you see typically when you start to see an increase in new home sales, which is that starts start to increase as well.

All this says that we may very well be in the beginning of a real recovery. But what makes this one more difficult to call is what role the federal government may play moving forward. Also the question that comes up when starts were driven to such a low level, is: is the increase we’re seeing just the market coming back from the brink of the most unfavorable circumstances that hopefully any of us will ever see in our lifetime for new home sales and housing starts at the beginning of 2009, or is this a real bottoming?

The consensus forecast now is for about 700,000 total housing starts in 2010, or higher, but there’s lots of downside risk to that.

Part of the reason for these downside risks still have to do with the issues with the mortgages, and the serious delinquencies and the problems they’re creating.

On the adjustable rate subprime mortgage side, which is the lion’s share of ARMs, serious delinquencies had reached a remarkable 39 percent in the 2nd quarter of 2009, which is coming close to half of all those people who took out those mortgages.

Equally troubling is that fixed-rate mortgages, even prime fixed-rate mortgages have reached a level of about 3.5 percent, which is dramatically higher than the level they typically reach, even in the depths of a recession. And the FHA insurance program, which is very critical now to first-time buyers and to new-home buyers, is up at a level of more than 7.5 percent seriously delinquent.

These are very troubling signs.

What are the keys to the outlook?

Probably the most important key is federal support of mortgage interest rates. Interest rates are about 5 percent now, and would certainly be higher if the Federal Reserve were not purchasing the amount of mortgage back securities from Fannie and Freddie that they have been purchasing.

The success of federal, state, and local efforts to slow foreclosures…. The longer that there’s a steady stream of foreclosures into the market, the more pricing will come under pressure. While prices appear to be moving higher, a significant increase in the number of foreclosures and an inability of government programs to slow them will be a significant drag.

What becomes very critical is whether or not the federal government does more to support housing, whether it extends or expands the tax credit for first-time buyers as long as necessary; what it does after March of 2010, when the theory is the support of purchases of mortgage backed securities will end, and what will happen with FHA? Will it continue to offer the same kind of underwriting terms and standards that it did during the summer and the fall of  2009?

Or will these higher foreclosure and serious delinquency rates cause the federal government to tighten underwriting, requiring buyers to come up with a larger down payment? This could have a very significant negative effect because the wealth constraint is back. The reason FHA volume has increased so much is in part because of the federal guarantee, but the reason it’s increased so much relative to Fannie Mae and Freddie Mac more typical prime loans is that FHA will accept lower down payments than Fannie and Freddie.

Another key to the outlook… when consumer confidence and spending come back and come back convincingly. Consumer confidence fell to remarkably low levels came back off the floor, but are still at levels that would be considered typical for still being at the very bottom of a recession and the bottom of a housing market. You really need to see them spending again to be convinced that this turning into behavior that will keep the economy growing—the key to the economy growing again is for consumer spending to come back.

Another key to the outlook: The speed with which demographic pressures to form households reassert themselves. When you think about what’s going on in the marketplace today many people are delaying forming a household; they’re staying longer with their parents, staying longer living with their roommates, and a non-trivial fraction of households, as a result of foreclosure, have had to make a decision to as to whether they’re going to go immediately back into the rental market, or spend some time getting back on their feet by living with friends and family.

But those kinds of situations, where people are delaying forming households or returning to households while they get back on their feet or they look for work tend to be temporary kinds of situations, and the pressures for people to want to be able to move out, form their own households, and not stay with friends and family through a difficult time as they had hoped to….

When they begin to exert itself you’ll see resurgence of demand for new construction and housing overall.

Another key one will be when immigration comes back into the picture. Immigration is very important to the longer term outlook, and it’s clearly taken a hit as a result of significant job loss in the United States. There are just fewer jobs and so some immigrants who come to the US in anticipation of getting a job, or who know immigrants who are here who are without jobs.

The final key to the outlook: should the broader federal stimulus keep the economy from falling  back into recession, it will be very hard for housing not to have a difficult time sustaining its recovery.

What’s going to happen after the storm?

We hope that the recovery that we’re seeing is real, and will be lasting and will be sustainable. Perhaps it will be even more robust than people expect.

At some point, we believe that fundamental factors will take hold in the market. The economy will improve. Mortgage credit will continue to flow. At that point, we’ll move into a period that is not abnormal, but is really the ‘new normal.’

We see that as a much brighter future unless the economy sinks into a deep recession that alters how people form their households and their behavior for doing so over the long run. That’s because demographics very clearly favor very solid levels of production. The amount of production that that will translate into depends not only on assumptions about the level of household growth, but also on the amount of oversupply that we may have entering 2010, the level of immigration we can expect over the next 10 years. Second home, which clearly has been depressed by the current set of circumstances, and the level of losses from the housing stock. Remember for every unit of housing that is lost from the housing stock that had been occupied, a new home has to be built in order to accommodate the household that had been living there.

All these require assumptions as to what they’ll look like moving forward.

It’s important to point out again that today is really abnormal, it’s not the new normal. We’re at or near the bottom and we’re looking up.

Why are we positive still on the demographics despite the fact that we are at or near a bottom, and we do need to look up and look forward to what the future will hold.

The big headship rate changes – the share of people in an age group that form a household, and the higher the number of the headship rate, the more households you get from the same amount of population – really mostly occurred during the period from 1960 to 1980. There have been some changes since then. They were really driven by the increase in female labor force participation which fundamentally changed people’s behavior in forming households in ways that lifted household demand, because you’ve got more households from the same population.

This was women delaying marriage longer; married couples getting divorced and forming two households where there had been one; this was people who’d gotten divorced choosing whether or not to remarry and the rate at which they remarried.

But since roughly 1980, most of those key factors began to subside and the way that people began and continued to form households stayed the same. The key difference was that the foreign born formed households that tended to be larger overall than the native born and minority households forming households differently than majority white households.

If you look at a period from 2003 to 2008, and these are numbers that begin in March of 2008, so you are picking up at least the beginning of the recession… you can see that headship rates by age really barely budged over this period. So when we projected households moving forward, we felt the most sound assumption was for no change in headship rates by age. Although you can see quite clearly here that we do need to make different assumptions about headship rates by age because they vary so dramatically with younger people tending to form fewer households and older people forming far more… what you didn’t need to do was assume that there was going to be some big change in the rate at which people marry and age at which they marry, and the rate at which they divorce, over the next 10 year period.

That’s a fundamental assumption but one that we feel is the proper assumption to be making.

If headship rates aren’t something that we think are going to be a key driver beyond what we would expect, and have some degree of certainty to them, and the age of the adult population that’s already living in the US are already known, so we can project what’ll happen over the next 10 years just by assuming how the population ages and birth and death rates, the really key wild card is immigration.

Why is immigration so critical to what household growth will be moving forward. Over time, and over the last 25 years, the foreign born have been an increasingly large share of total household growth. Were it not be for the increase in the foreign born in the US, household growth would have been much slower.

The challenge around this is that the immigration projections have varied widely. A whole range of different projections have been put out by the Census Bureau over a variety of times, and the JCHS in 2006, which had assumed 1.2 million.

We’re revised those to reflect the Census Bureau’s 2008 projections, and what we did because we are concerned about how robust immigration might be over the next 10 years, especially given the fact that at least some portion of immigration is coming here because of jobs that they anticipate or they have a good reason to believe jobs exist, and there’s going to be a long period of time before we get back to a more full employment situation, you could make the argument that immigration will slow from its recent pace.

So we took both the number that the Census Bureau projects now in 2008, and we took half that number, which is a fairly conservative assumption. For immigration to fall in half would be very unusual absent a significant change in law, but we do think that the economic environment makes it worthwhile running a scenario that would be a low immigration scenario.

What we find when we try using two different immigration assumptions is this: One, that illustrates the 2008 immigration assumptions of the Census Bureau, and the other that assumes half that. What you can see is that, under the half assumption, household growth will come in at about what it did from 2000-to-2008, and above what it came in at an annual average rate from 1995 to 2000.

So even with a fairly dramatic assumption about a significant cut in immigration, which by the way, would mean that immigration would continue at about the pace it seems to have come close to falling to in the last year, when we’re in the depths of this recession, you’ll end up at a number that’s still, by historical standards, a healthy number.

Should immigration rebound and come back to about the level that it was over the last 5, 6, 7 years, you’d end up with household growth that would be just under 1.5 million, as opposed to 1.25 million if you assume immigration falls.

So immigration assumptions really matter. But even under a low immigration assumption you’d still see a significant amount of household growth.

Part of the reason that we expect to see household growth accelerate is that the Echo Baby Boom generation is now reaching adulthood. It’s a very wide and deep generation, and it goes back already more than 20 years. It is a larger generation than even the Baby Boom generation. We expect this to be a clear plus for growth in households; not as large a plus as the Baby Boom generation was in the 1970s even though they were a somewhat smaller generation. Back in the 1970s, a much smaller generation was in the older age group, so you had fewer dissolutions of households, but we do expect it to be a clear plus for household growth.

What this will do is reverse decline in younger households over the next 10 year period. Over the period 1998 to 2008, we actually saw a thinning in the number of households in the prime household-forming and first-time buying age groups. The reason that we saw this decline is that this was the Baby Bust generation, much smaller than the Baby Boom generation it was following. Now, the Echo Boom generation is following behind them, which is a much larger generation than the Baby Bust generation, and as they move into these age groups, they are going to drive increases where we have seen declines.

While the Baby Boomers will drive growth in older households, and the Echo Baby Boom will give life to younger age groups, it really from the perspective of changes in age distribution of the households, the Baby Boomers are still going to be very significant just because of how big they are relative to the generation that was ahead of them.

So you’re going to see really dramatic growth under both our low and high projections in the number of households who are over the age of 65. Obviously, this will have significant consequences for the types of homes that will get built. Although, you will still see an increase in the demand for starter homes because of this reversal from a decline in younger households, to growth.

I want to bring all of this together. What will the future in demand for new housing hold once we get past this stormy weather?

There are three pieces of this demand: One is projected household growth, which is by far the most important component of the demand for new homes; second, is the demand for housing that will come from “net-removals,” and, third is vacant unit demand—the growth in the demand for vacant housing as second-home ownership rates begin to come back, and there’s also a normal vacancy rate in housing stock, as people move in and out of their housing, it isn’t occupied right away, and that creates a certain amount of demand for vacant units. The larger the number of households, the more that are renter households because renter households move more often, the more vacant units that are needed.

We’ve done a lot of work thinking about how to make those assumptions and we’ve put them all together to show that—even under conservative immigration assumptions—long run demand for new housing units should exceed 1.7 million per year in the 2010 to 2020 period. It’s important to point out that this 1.7 million units includes single-family housing completions, multifamily housing completions, and manufactured housing placements; it’s a complete measure of all the new housing that would be placed in the United States.

You can see that under the high immigration assumption, those numbers start to push 20 million over the period.

Now, this assumes that we are going to enter 2010 in a market that’s in balance. But many people believe that the market is still oversupplied. There’s a great deal of disagreement over how much the market may be oversupplied if it’s oversupplied at all. But to sort out how that would affect these projections over the 10 year period, you simply have to subtract from these numbers those numbers that you think are oversupplied.

For example, if you think that the market is a half a million units oversupplied, instead of getting about 1.7 million in units per year or closer to 17 and a half million over the entire period, it’ll come in closer to 17 million. If it’s a million oversupplied, it’ll come in closer to 1.65 million and or 16.5 million over the 10 year period. So people can choose to make the assumptions they want.

In all this, we try to underscore and illustrate that, once we do get past what is clearly a crippling downturn, and we move back into a period that is more normal than what we’ve seen in the past, demographic factors, even if immigration takes a significant hit to where it had been over the last 5 to 10 years, will still be a strong period for housing construction and housing starts.

December 30, 2009 | Filed Under Financial Crisis, Home Builders, MultiFamily | Leave a Comment 

Housing Megatrends 2010: Pulte-Centex May Lead Way to Less Confirmation Bias

In the previous post, we stated our goal for the next week or so: To offer a preview of 10 megatrends residential real estate and construction companies can bank on in 2010 that happen to trace from 10 leading achievements in 2009.

Yesterday we looked at a number of home building companies’ introduction of foreclosure-fighter entry-level home offerings in 2009. On the surface, lower price-tag new homes may look like a tactical adjustment to a huge and chronic price-point challenge posed by the transfer of millions of homes’ deeds to new homeowners via distressed or foreclosure deals.

That’s not incorrect, but it’s also only part of the picture.  Shrinking materials costs and stripping out square footage and labor-intensive details and finishes would only get a home builder part of the way to where a home buyer spots a value advantage over existing homes sold under a white flag of capitulation.

It took a mentality make-over not only to extract materials costs and find construction-time short-cuts to reduce a home’s pricetag, but to create a new operational template that speeds up construction, gets it right the first time, and iterates the process consistently across communities, divisions, and regions so that indirect fixed costs can get focus and come out of the equation as well.

So “good enough” is the badge for a home builder strategy that began to emerge in 2009, as companies traded off what people opted for back when money was funny for what they really want when money is deadly serious and much harder to get. Good enough is what a home builder minimally needs to do to get a home buyer excited about buying new. It’s not necessarily lower quality, because new still needs to quicken the pulse compared with what a buyer might get in a buyers’ resale market, but good enough dispenses with whatever doesn’t strike the buyer as bottom line valuable to the whole.

A separate but related strategic issue with origins in a terrific achievement in 2009–Pulte’s “combination” with Centex–has ramifications as one of our 2010 Megatrends: “The End of Confirmation Bias.”  We see in the previous example that for a design innovation–the foreclosure-fighter or price-winner new home–to work, a structural, operational change needed to support the new product rollout to gain financial viability.

The line in the sand we see with Pulte’s acquisition of Centex has to do with a disruptive approach to centralizing process and production that entrepreneurial-souled home building enterprises have resisted up to now.  As the newly merged company Pultifies Centex, a whole new relationship will tie divisions and regions to the Bloomfield Hills, Mich., mother ship.

This new tie will test one of home building’s most sacrosanct assumptions that all of home building, like all of real estate, is local. This assumption, fed over the past 100 years or more by heaps of  confirmation bias, accounts for errors and excess masquerading as local entrepreneurial cultures in multi-divisional home building companies. This is not to say that location is a less powerful factor in real estate value than it has ever been.

Home builders, however, must do better in 2010 at balancing location with process to their advantage in a marketplace that everyone knows will be riddled with foreclosure sales for the next 24 months or more.

In the Pulte-Centex strategy we see the most dramatic example yet of a top-out reorganization aimed at making what goes on under the hood of a national home building company easier to understand and manage. In our Big Builder Virtual event program, financial consultant Rob Held points to variability as one of home building’s fiercest foes. If you have a look at his seminar, he’s not saying that home building is not local; he is saying that if home builders can reduce production variability, they’ll be more profitable, and better at supplying the market what it demands.

Many national companies’ divisional structures grew out of acquisition and roll-up binges of yesteryear. The cathartic months from 2007 through now should have done nothing so much as create an opportunity to re-draw every organizational chart from a blank sheet of paper. An initiative and its champion(s) are only worth pursuing insofar as they account for and serve the interests of the whole.

When the world is stripped away of all of the excess that could be had when money cost nothing, what’s left is what makes a new home more desirable than a resale, and the process that can deliver that.

So, the 2009 achievement that is the Pulte-Centex coup has major ramifications for further consolidation in the home building landscape. Yes, we may see that the $1 billion plus in cost out could be gotten from several other big “combinations” of home builders that share market footprints and could re-rationalize land positions around respective product lines and price tiers.

But what we’ll really see more of in 2010 is headquarters power and accountability up, down, and outward of the home office. Division presidents will get to “do what they’re good at,” which is to leverage local knowledge and relationships for smart land buying. At that point, corporate comes in with the operational process and the marketing support to drive sales at a manageable, measurable level.

 Hopefully, we’ll see the emergence of talented skeptics. It’s they who’ll give teeth to the ”lessons learned” bullet point in so many powerpoint presentations we’ll see in the upcoming months. Confirmation bias, clearly, kills value and decimates companies that fall prey to it.

The widely held belief that the industry had beaten the housing cycle at its own game was confirmation bias at its most harmful.

Accountability, less variability, and greater measurability can offset the instinct to get caught up in one’s own hype. That’s what’s at work in the Pulte-Centex combination, and what we’ll see lots of variants of in 2010.

December 29, 2009 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Single-family Housing 2010 Megatrends: Good Enough is the New Good, Better, Best

We’re going to give you a list as they say at the craps table–the hard way. One by one.

Per our list of 10 predictions for 2009 this time last year, we can’t be counted on for a great amount of precision in hindsight. Nevertheless, our guiding principle still holds that more of our forecasts will come true than not, but the timing of their totally vindicating our prescience may be off a bit. A decade or two in some cases, maybe.

At any rate, over the next 10 to 12 days, we’ll cobble together a series of observations that meld together what people in the home building business landscape have achieved in 2009 with what those accomplishments foretell about 2010. We figure, maybe if we slow our thought process down just a bit, the cycle of housing and business events may have a chance to keep pace.

One thing”s for sure. If “hang in there” was 2009’s mantra, 2010’s most repeated claims–true or not–may more likely fall evenly into the “I’m still here” bucket, or the “I’m back” one.

One of the stunning dawnings we had by the end of 2008 came with all the gentleness of one’s 9-year-old brother or sister waking us to get ready for school each day. This realization–compliments of one of our friends in the bankruptcy reorganization business–was that after the marathon land dance of 2003 through 2007, nary a real estate project in the nation, commercial, for-rent, or for-sale couldn’t get classified fairly as “in distress.”

Companies themselves, mind you, may not have been operating “in distress,” but their real estate projects on lots acquired during that land dance period were all hanging in loan-to-value limbo, where the loan represented a snapshot of insanity and value was doing its best imitation of a polar ice cap.

The achievement, then for 2009, was not a single product like KB Home’s Open Series, but rather a wave of initiatives across dozens of home building companies that succeeded in braking bad habits, wasteful processes, and uncoordinated operations to bring entry-level new home direct construction costs down to where monthly-payment sensitive buyers would again consider new versus a foreclosure bid and purchase.

Tim Eller, formerly CEO of the now-engulfed Centex and still a board member of Centex purchaser Pulte, talks of housing downturns as all having the same plot line. The differences from one downturn to another–from one who said he’d gone through at least four of them–are a matter of duration and severity. The story line, he’s said, is identical.

Eller said that what large volume home builders do when times are difficult is to scale back their pricing far enough and fast enough to reconnect with home buyers’ needs. With this advantage of price elasticity over sellers of existing homes, new home builders would restrike a balance in their businesses and pick up market share coming out of the lowest depths of the housing recession.

This time, with absolute housing unit vacancies so high, a consumer economy facing grave uncertainty, and a jobs picture that may slip, slide, gain, and fall choppily through the next several earnings seasons, the plot line Eller says is so consistant may get its real stress test.

High volume builders, particularly those whose capital structures allow them to use public credit and debt markets for operational financing, typically come out of downturns with more market share and greater clout, not just among buyers, but among subcontractors, distributors, and manufacturers of materials that go into building homes.

That part of the narrative plays out in the Great Recession only if companies can keep their excesses in the land dance of ‘03 to ‘07 from haunting them to death.

The achievement of KB Home and others who’ve borrowed liberally from the Rayco model of the S&L crisis-prompted downturn of yore (KB bought Rayco in 1996) right up through the Shea Spaces model we’ve remarked on in the past month is that they’ve neutralized the smothering effect of what a company agreed to pay for land with funny money that everyone knows is not around anymore.

Home builders need 2009 and 2010 to do two main things strategically. One is to leverage U.S. policy support for housing for all it’s worth. Second is to restore “new” as a focal point of desire among buyers of homes.

This is why the Open Series, Spaces, and all of the other monthly-payment sensitive offerings are significant looking ahead to 2010 as well as back to the past 12 months. They leverage policy in a minimum of two ways: both on the demand side with the tax credit and on the corporate tax side with a transaction that could turn into a Net Operating Loss refund.

They also turn inventory, generate cash, rid the operation of cost, and create need for a company’s operational fixed-cost structure.

Importantly, moreover, these products are essential initiatives around which companies can make themselves over. They’re a learn-by-doing tool, and the most important lesson to come out of being able to produce homes at a price and with a design customers want is the reframing of the “good, better, best” approach to positioning.

Even when it comes to the American Dream, “good enough” is where capability, cost, and aspirations meet. That buyer is not necessarily thinking of her home as a quick-return investment, but more of a buy and hold one, to grow into, enjoy, and then trade for value later.

“Good enough” may strike some as a come down from “you can have it all.” But it’s at the heart of the new normal, and good enough may just be good enough to ensure we’ll be hearing “I’m still here,” or “I’m back” from all of you in 2010.

Stay tuned for tomorrow’s 2010 Megatrend on the “Brief Life and Death of Confirmation Bias.”

December 28, 2009 | Filed Under Financial Crisis, Home Builders | 2 Comments 

A Big Builder Yuletide Yarn–Happy Holidays

Hark now, every home building management reader,
Tis season once more to frame out some lieder,
‘Pon what’s come and gone and o’er what lay ahead,
In good holiday’s spirit, none too gently we’ll tread.
How else, pray ye tell, could mere maker of poems
Distract, divert, and amuse titan builders of homes
As the Dons Tomnitz and Horton, Lennar’s sagest Miller
StanPac’s knighted Kenneth (no Wall Street empty suit filler);
Ara, ever noble scion of KHov’s still-solid stock,
Nary even needs wear his Guccis with socks;
Ryland’s well-apparent heir Lawrence of purse-strings so tight
As Counts Saville, Mandarich, and Mizel, who play asset-light
Like Amatis and Strads, not so R.I. Toll, maestro of go long and hold
For the years it oft takes well-placed dirt to morph into gold?
And how, we beseech ye, dare we snip bits of attention
From KB’s Next, Mezger J, whose ‘09 O-S invention
Caught the industry’s ear, and bred me-toos galore
As product and process each pry open a door
To directs rivals guess near $35 a foot square,
(Never mind counting windows–just don’t go there)?
What of Sir Steven Hilton, Lady Palmer, kindest Duc Orleans;
Two accented Lords Ian (Cockwell & McCarthy), and Baron Schottenstein;
N’oubliez pas le roi Richard Dugas, wearer of Pultex’s dazzling crown?
Each royal by nature, each took his or her knocks; but nobody’s down.
Down to the wire each pushed for lot transaction
As sell what-the-hell gave great satisfaction.
And the only thing that could stop their roll,
Was a 60-month limit on carry-back NOL.
Check most of their balance sheets, you’ll see what’s in store.
Dry powder is one thing that e’er proves to make less into more.
A note of regret, perhaps, and it’s only an if,
Is that none of their firms seems to rate T-B-T-F.
So as the global econ’ plunged from dire to worse,
Home builders mounted a clarion cry across industry sectors, fix housing first.
In spite of dogged efforts from Senator Johnny I,
Stimulus’ gains were scant on that first try.
At a moment the economy needed action most urgent,
The $8k tax credit extended only to home buying virgins.
When the President’s signature dried on that $789 bil,
The industry knew more diligent work might win over the Hill,
So they kept up the lobby and expanded the net
To propose a new bigger credit by November’s sunset.
As TARP dollars poured billions into the tubs of the banks,
Cash drained at twice the speed as CRE values sank.
Long loyal AC&D customers threw up their hands
As special services bureaucrats wrote down their land
And gave the privates tidings of a new world order
Where every stinking loan lay deep ‘neath the water.
From vertical to vertigo, privates pushed to drive  cash,
Only to find appraisers HVCC away  in a flash.
Bare consolation can be got late Friday aft-noon,
As Sheila Bair’s agents swarm bank presos’ room.
Meanwhile, in fits and starts, and Starts and permits,
News wasn’t all bad, even doomsayers had to admit,
You could tune them all in each day on CNBC,
Crowe, Lawler, and Yun, and ever Moody’s Zandi.
For gallows humor it’s Roubini, for sound bites it’s Zelman,
For thrills we’d take Shiller, for riposte Paul Krugman.
Each metric confirms what each expert affirms,
Things may be a bit better in some uncertain terms,
With potential for worse, but not nearly as steep
As the rate of decline year on year, or some such heap.
Where things were going was anyone’s guess,
Up, down, all around—so bounced NHS.
The spin doctors prone to red herrings absolute,
Concocted one for the moment, the famed green shoot.
What happened late Spring is what happens next,
When word of the bottom follows case study’s text.
There’s a rush to reload and land’s new reset price,
Even builders stressed for cash must roll the dice.
They clamor and claw with what resources they’ve got;
Not for Danish, nor Swedish, but for finished Lots.
Thronging to buy for cents on a dollar,
Bubble behavior grabs anew by the collar.
And back in the trenches, we blanched to report
The demise of big name builders the sort
You’d hardly believe bound for builder heaven,
But there they were in droves filing Chapter 11.
Down went Mercedes, Caruso, St. Lawrence, Fulton,
Kirk, McStain, Pasquinelli, Choice and Morgan.
Some of them would go the way of Kimball-Hill,
Others would fight the fight, by dint of their will.
They’d work with the trades, and work with the lenders,
They’d work overtime, 24/7 weekenders.
Others yet would emerge from out of the ash,
Refinanced and fit for a new dash for the cash.
And what of the buyer, the paralyzed, pulverized buyer,
Whose job might be at risk and whose debt’s never been higher?
One of the housing crisis’s most brutal pranks
Is to make so many home sellers the same banks
Who say they can’t fulfill the terms of construction loans
Because, you see, they utter in solicitous whispered tones,
Each project’s value has declined beyond repair,
In fact, they say, there is no there there.

So what will we see happen come 2010?
Will ‘09’s ups and downs play out all over again?
Will all that great talent we’ve had to let go
Get stuck floor managing Lowes and Depot?
Will Bernanke blink on his MBS plan?
Will inflation flair its ugly force again?
Will 3.5 be history in the FHA?
Will the econ trace a double-vay?
As the night before night before night before falls
We wish warmth, resolve, and resilience to you all.
No business compares, no folks so salt of the earth,
We want you to beat this thing and show what you’re worth.
Take an instant and remember what is sometimes unclear:
Good people are with you, behind you, here.

December 21, 2009 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Housing Sentiment, Starts & Permits: We’ll Take Sideways for Now

All of confidence is divided into three parts: Consumer confidence, CEO confidence, and home builder confidence.

We talked with some home building executives this week. A fall in home builder confidence–reported Tuesday by the NAHB–is not a surprise. A public home builder CEO told us, after several months of surge in sales on the margin at the entry level, “There’s not much good to say about sales out there right now. But we’re about to do some things.” New product. New deals. More focus on monthly payments than ever.

Another home builder friend–from the private sector–describes the plight of many private companies ever eloquently:

“There’s no money to be borrowed to finance a dirt deal and certainly no money to finance the improvement of any dirt one might own.  

  • Banks are trying to sell what they have foreclosed on at 70% of what they loaned
  • Investors are willing to pay 30% (or less).   
  • Appraisers are setting values for raw ground based upon absorption levels using today’s sales volume and not accounting for the fact that if we don’t see a better market in future years then all hope is lost and the end is near. 
    • As an example a recent Metro Study report set vacant developed lot absorption at  10 years in Charlotte.   They based their numbers on annualized permit numbers of 4,800 permits.   That’s the pace estimated for end 2009.   Their math is correct and the methodology is too.   It deals with current state only.  We all know that in a market with more than 1.4M people that at some point there will be more new homes constructed than 4,800.   When the lot pickups increase supply will dwindle and builders will need lots. 

We know that the government poured printed cash money into the coffers of the banks, but very little of this cash money is making its way into the real economy because the banks own so much real estate that has lost value, the mountain of cash is still not sufficient. So there’s printed currency, but there’s very tight credit both for consumers and companies.

So more small companies will disappear, and the nation’s most significant employment source for the past decade–small to medium sized companies–will continue to weaken in numbers and strength.

Strategic planning, therefore, for private home building enterprises consists of don’t make mistakes yesterday, do something fast now, and it better be internally funded and very smart.

The latest starts and permits numbers  reflect stimulus’ double-edge: less urgency to buy, but more urgency to speculatively build in anticipation of another hoped-for mini-frenzy in February and March. The thing to say about starts and permits moving sideways consistent with expectations is that, if this were last year, that would have been tremendous news.

Thing about sideways is that it’s still going to eat home building companies alive. The best leading indicator for new residential investment momentum will be greater demand for hourly wage earners, which is showing signs of flickering life. After that, it’s that switch-flip from reducing inventories to growing them.

 Then we’ll see consumer confidence resurface, and all the brilliant survivors around then will have demand for their newly designed housing products engineered through entirely new manufacturing and operational processes.

December 16, 2009 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

HUD’s Donovan Addresses FHA, HAMP Challenges

Housing and Urban Development Secretary Shaun Donovan spoke yesterday with National Public Radio news anchor Liane Hansen.

The focus was FHA and HAMP.

On a scenario for tougher standards of qualification for borrowers, here’s Donovan’s now-familiar refrain:

[Borrowers] 

they would need to bring more cash to the closing table upfront. We’re looking at exactly the way to do that and, again, to try to ensure that we’re limiting the riskiest borrowers in our programs. So we’ll announce by the end of January exactly how we’re going to do that.But we’re looking at things like larger down payments, looking at, for example, we just lowered the percentage of what we call seller concessions. So, effectively, discounts to build into their loan upfront, which can make the loan somewhat riskier. So there’s a set of things that we’re looking at that combined together we think will help make FHA loans safer.

As for the oft-maligned Making Homes Affordable mortgage loan modification program, Donovan comes out swinging at the banks.

So those trial modifications, even though they’re not permanent, are lowering payments, are helping to avoid foreclosure. And the vast majority of those we didn’t expect to be permanent modifications at this point, because the end of the trial period hasn’t come up yet.

What we said, though, is that we are very concerned about the low number that have converted at this point. We are concerned that the servicers, frankly, aren’t doing a good enough job.

So, we need to watch closely and see what happens over the next month and beyond to see that banks are doing a better job. And if they’re not, there are going to be some serious consequences in terms of the way that we oversee the program. And we’re going to look at others ways to try to get these modifications to the permanent stage.

December 14, 2009 | Filed Under Finance, Financial Crisis | 4 Comments 

Life Just Ain’t Fairfield: Apartment Giant Goes BK

The bankruptcy story for Fairfield Residential highlights several issues troubling housing, both single-family for sale and multi-family for sale and for rent:

December 13, 2009 | Filed Under Financial Crisis, MultiFamily | Leave a Comment 

Shea Homes’ Spaces Has Got the Home Building Industry’s Attention

Among 2010 New Year’s resolutions, perhaps consider this. Note to self if you’re a leading home building company senior-management executive spying floor plans, elevations, marketing, and sales efforts at what could be an inflection point new product strategy for American new home building in the 21st Century.

Don’t get caught by the CEO of the company whose homes you’re snooping around in.

But if you do get nabbed–as one top 100 home builder’s VP of sales and marketing did one pristine early December afternoon in the heart of California’s Inland Empire home building war zone–you might hope that it’s Shea Homes CEO Bert Selva who busts you, and that it’s in one of Shea’s just unveiled Spaces communities.

Said perpetrator’s name shall go unreported. It’s actually not that important. Espionage of this nature is part and parcel of the high volume home building game, and Bert Selva knows that. He took it all in stride and let his prisoner off gently when the fellow said, “Bert, you’re doing an amazing thing here. I’ve been here  four times now. I should probably buy one of these houses.”

“In what other manufacturing business do you have the ability to walk into your competition and pick up their trade secrets (i.e. floor plans and elevations) in their marketing materials? If it’s innovative, it doesn’t stay secret for long,” says Selva.

In fact, Selva’s pleased with the stir Shea’s introduction of Spaces homes has created. He’s had dozens of calls about Spaces, including a number from the CEOs of several public home building companies, and there’s a reason. Sleek, simple, functional, flexible, sustainable design. And, to boot, you can use those same descriptives for the operational process, which makes it low in variability, high in scaleability, and therefore affordable.

Affordable, cool, energy-efficient. That’s the thinking behind the Spaces homes. Take the process engineering revolution Jeff Mezger and his team at KB Home pulled off to make KB’s Open Series the talk of 2009 and give that whole initiative a demographic and psychographic pitch toward that generation of 77 million we’ve long referred to as “tomorrow’s home buyer.”

Think iPod or iPhone. Think W hotel. Think different.

“What did Apple do with the iPod that made it a great product?” says architect Mike Woodley, who entered the top-secret creative development of the Spaces project in late 2008. “They made it work really well at several functions; they streamlined the design, and they got rid of all the knobs. That’s what we’ve done with the Spaces homes. It’s flexible, clean, and it’s all about how people live in and use a house. We got rid of all the knobs.”

Woodley notes an important phenomenon that’s held from the time he was running charrettes on the project late last fall through the present, when he presents Spaces to everyone from Shea division presidents to local planning commissions. Not everybody likes it, and not everybody gets it.

“We actually know we’re onto something when we have the older school guys talking about how this or that doesn’t line up, or this is too thin, or that’s not enough,” says Woodley. “This really is new, and it’s got to appeal to buyers who don’t want what we’ve been doing for so long now.”

In doing so, Shea captured efficiencies enough to build profitably with a price tag to customers up to 15% below equivalent homes in the 2,000 sq. ft. range and below, whose prices are already 15% to 20% less than they were at their 2006 peak.

So Shea, which up to now could only compete by out-wowing its rivals with location, architectural panache, amenity, and quality, now can compete on price. Amid estimates that foreclosures and distressed sales will remain part of the fabric of real estate like an unwelcome visitor with no plans to leave, competing on price is not an option. This is especially true for private home builders whose capital structure won’t allow them to simply impair lot values and dump them on the cash-for-acres net operating loss tax carry back market.

So private home builders in particular face a 2010 that like the past 24 months or more means surviving on their wits. And that means gaining a desirability advantage over both foreclosures and competitors. The simplest equation here is winning on both price and design/engineering.

To do that, home building strategy must change both product and process. Spaces does that for Shea.

December 11, 2009 | Filed Under Financial Crisis, Legislation | 3 Comments 

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