Housing Cycle Gets a Makeover

Around mid-Spring last year, “the lights went on” in the residential land acquisition game. Right now, the best that can be said for those lights is that they’re flickering and, well, dimmer.

“We’re looking at some new land offerings, and you’re definitely not seeing the bidders you were a few months ago,” says the CEO of one of the national public home builders. “For someone who’s an aggressive player looking for land, it’s defnitely a different game than it had been.”

Word out in the residential heartlands is that as many land deals have builders “backing out” as wanting in to the dance. The back outs–even in California, and even among a couple of the most aggressive home builders–D.R. Horton and KB Home–who’d been somewhat ravenous bidders until say, around April 30–leave the bidding to fewer, more careful players, which means prices don’t go soaring. Sometimes they even soften.

Some big players’ appetite for land is yet unsatisfied. There continues to be pressure among a number of big public builders to reduce conspicuous SG&A costs by opening new communities in a number of markets, and they’ve still got a passel of cash from Net Operating Loss tax carryback refunds to plow into lots for these new stores. Justifying a geographical footprint is motivation enough for continued interest in strong land positions in selected markets. But not every finished lot in kingdom come.

Others have slowed or halted their lot binge, and need to focus now on working through the speculative inventory they brought online in hopes of huge sales success during the waning days of the home buyer tax credits. That didn’t happen.

In the 12 months from April 2009 forward, big builders committed hundreds of millions of cash to acquire new lots in a massive re-load of their pipeline. The math of the amounts they paid comes down to two bets, one on price and the other on timing. With the recent acquisitions, builders are banking on order rate increases at higher gross margins based on lowered costs, including on lots.

With the incipient recovery in limbo, some of those price and sales pace assumptions will get a stress test in the months ahead.

Attention of the mainstream press still focuses on a froth in the land demand market that may or may not be history, depending on whether or how much traction comes back into the new-home market at the end of summer and early fall.

Now, as some of the more vaunted land parcels are due soon to come in to the market pipeline, momentum in demand for land may be tricky indeed. Specifically, the veritable goldmine of Lehman Asset Management Company parcels in California, the Southwest and Florida that have been tied up in bankruptcy since Lehman’s Sept. 2008 Chapter 11 filing are said to be of critical interest among buyers.

With the new-home market in federal government support cold turkey, questions remain on both the price tag builders paid (i.e. did they pay low enough), and the predicted absorption rates to drive past breakeven to profitability. While builders’ troves of cash are impressive following a couple of years of not spending on land as well as their NOL refunds, at least a few of them have to balance the risk of spending too much of their cash and a couple more years of negative cash flow.

The notion of burn rates–which gained widespread attention during the dot com bust–may also apply to home building if housing’s cycle remains relatively feeble.

Residential land pricing, one of new-home building’s leading economic indicators, is now going sideways thanks to the growing ranks of builders who’ve exited the fray. Equity market analysts have their “head and shoulders” rally theory, so why not consider a similar land demand pattern emerging pre-recovery in housing?

For those who are still in the land-buying market, this is a positive, because with less counter-bidding for preferred locations, winners of the auction will likely be able to build and sell their strongest product lines faster and more profitably.

The narrative we’ve heard repeatedly that plots typical housing cycles goes like this. As housing reaches a trough in its cycle, evidence of an inflection inevitably occurs in the equity markets first. Equity stocks investors‘ behavior is regarded as predictive, factoring in whatever headwinds remain, and pointing ahead toward a fundamentals recovery, usually down the road by four calendar quarters or so.

Then emerges an increase sales volume, which, when transactions sustainably pick up, leads to an increase in housing starts. Then, later into the upward trajectory of the parabola, comes pricing power, which crescendos at some inevitable point, and that’s when equities predict the next downward cycle.

Fact is, this narrative has shaped itself around several variables and a single constant–you guessed it, home prices. They just didn’t ever fall, at least not nationally.

The housing cycle, as several generations of home builder developers have known it, may be getting its own extreme makeover.

June 30, 2010 | Filed Under Financial Crisis, Home Builders | 1 Comment 

Private Home Builder Plight–No Way to Bank on a Bank

Private home builders are taking it hard, coming and going. Distress, the somewhat sordid means to unwind several years of financial insanity to figure out who owes what to whom, keeps bringing builders’ interests smack up against those of commercial banks that plunged headlong into commercial residential real estate, and now want out of the risk.

Even as fee builders, home building organizations can’t seem to get a fair shake. They take on costs to help banks unload some of their REO holdings with as much value as possible, and then, sometimes, wind up in a tug of war to get paid. So, not only is it nigh impossible to take down new loans to go vertical on one’s own lots, it’s getting harder to get what’s deserved in resolving payments for fee building.

Here’s what we hear from one of our beleagured correspondents fighting the fight “in the trenches,” hoping that fee building might offer a narrow path to recovery.

Here’s a great one: One of the banks that took a bunch of TARP money owes us some money. I’m having a heck of time getting it. Why? The accounts payable function of the bank seems to have been sent overseas, way overseas. I find myself attempting to provide the ‘right’ forms to someone who doesn’t live in this country and I find it maddening. Jingoism or prejudice? Hard to keep your feelings in check when an outsourced expert starts explaining  how a W-9 that passes muster in all of our transactions seems to somehow be inadequate for one of the minions from an outsourced department.

Oh, what’s it matter? Other banker buds have told me that only the dumb banks put TARP money out as loans. The rest stuck it on a shelf to bolster balance sheets and waited patiently for the day that the Fed allowed them to pay it back (and stuff some big, pirogie-like bonus dollars down their throats as a reward for a job well done).

You could hardly fault the cynacism here.

On a slightly more positive note, we hear there are players who are close to assembling fairly significant investment funds that will set up to debt-finance home builders’ construction initiatives. The money will trigger only if a builder brings a slew of equity into the equation, and agrees to some pretty aggressive returns to the investors.

Still, the thought is, if there’s a real and serious alternative to capital access playing in the market, it may bring traditional commercial lenders back into the game. Fear of losing too much business might just jog them into starting back in with acquisition, development and construction lending.

Stay tuned.

June 29, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Learning to Live with a Lower-Volume New-Home Marketplace

It’s the last Monday of June, the last week of a calendar year quarter, and the logic of technical trends seems to have seized control of Wall Street’s equity markets, generally abiding by the principle, “sell in May and go away.”

Investors’ advisors have temporarily quit obsessiveness over credit issues in the Eurozone, and settled back into fretting over the mixed signals emitting from the broader domestic economy’s “Little Recovery that Could, or Perhaps, Tried Really Hard, But Couldn’t.”

We cover new residential construction here, and let’s just say we were looking for a silver lining to take out of the housing data stream, particularly since the April 30th expiration (on orders) of tax credits for home buyers.

There are at least two big good news items, and a third that may or may not tie to the ever mysterious workings of Animal Spirits, in the George Akerlof and Robert Shiller sense.

Let’s start with the third, which it turns out, owes itself more to chance and potential than the other two positives, which are more real and palpable today.

Still, if you believe, as many home building executives do, that the market is due to recover a bit of bygone momentum by early to mid-Fall (take our two-question survey here), you may take good news from the thought that home buyers might be reluctant to get back into the market before they’re damned sure the government is not going to be back with another prop up for demand. That means May, June, July, they’ll sit back and wait to hear of whether Congress will come up with another one of these programs to stimulate demand for homes.

People who buy expensive things these days–especially homes–don’t like to be thought of as stupid. In an environment where political interests are sharply polarized over whether to cut deficits or keep supporting spending, people have learned not to jump too soon on one side or another. Congress says, “No more housing stimulus programs,” but it only means that insofar as it improves odds of incumbents keeping their seats in office come the November elections.

So, if people get a few months’ proof of Capitol Hill clarity and decision, where we don’t have new home buyer tax incentives crossing the president’s desk, they’ll begin to behave with a market-driven mentality as opposed to an unsustainably elevated government-propped environment. After the extension and expansion that took place last November, there may be reason to believe many Americans imagined the punchbowl would be left in place even longer.

So when potential home buyers become fully aware and resigned to the fact that the credit spigot is off, they’ll resume going equally aggressively at negotiating their purchase from the driver’s seat of market dynamics. The 213,000 new homes in the 8.5 months’ inventory of new homes will sell into a buyers’ market like never before.

As a CEO of one of the national public home building companies put it to us this morning, “We have already projected fewer sales in 2010 than in 2009. 2010 is the bad year.” 

He adds that the sales volume side of things is as bad as it has ever been, but stable. Read in that an opinion that it’s not going to get worse than when it was worst (in early 2008). He also says that in the unlikely event that jobs numbers start telling a positive story, things could beat his expectations this year.

Here’s where the two silver linings are.

The first is that home builders have taken their medicine. They’ve cut people, communities, and carrying costs of land so drastically, that they’ve now become capable of making money at a significantly lower volume of sales. “We’re better at dealing with less,” says the CEO, who spoke on condition of anonymity. “You’ll see that most of us made money in the 2nd quarter, even at these low levels of sales.”

One of the important things to look at in the reported earnings calls, is what each public builder’s breakeven point is. In some cases, including interest payments, home builders with larger debt loads, higher SG&A costs, and lower gross margins need to sell something along the order of 5.3 homes per community per month to break even. Best of class builders like NVR and Toll Brothers need to sell around one per month per neighborhood to break even. Many of the others are clustered in the low 2s.

If you know what a company’s breakeven point is, and what their cash flow is, you can look beyond the troves of cash most of them have piled up and see where they may be burning down their cash toward an eventual end game with the market recovery.

The second real silver lining in the market now is this. The current leg down is where real give will take place on land pricing. Our CEO tells us that the days of gang-bids on every land parcel that comes up for sale are over. “We’re starting to see builders actually back out of some deals they’d locked up because they’d overpaid and it wasn’t going to work for them,” says our source.

So genuinely opportunistic land deals are now occuring for those who are still or recently cranking up their land acquisition resources.

So, even in a state of limbo, while consumers begin to realize the government is not going to step back into the housing market for another round, home building operators have a choice to model profitability around a 600,000 or 700,000 starts landscape for a few more years, and figure out what slice of that number they can own. Also, it’s getting to be the best time in years to go into the market for residential real estate because lot prices are getting less sticky.

Starwood and Paulson are well aware of that too.

June 28, 2010 | Filed Under Financial Crisis, Home Builders | 1 Comment 

Home Building’s Rebalancing Act–The Second Half of 2010

We don’t imagine many will look at yesterday’s new-home sales tidings quite as we do. But the raw, noisy, unseasonally adjusted number for new-home sales in May 2010 was 28,000, according to the U.S. Commerce Department, which will likely revise its May figure by double-digit percentage points a month from now just because it does.

That 31-day total of 28,000 compares with a previous month-of-May record low of 34,000 in 2009. Point No. 1 about this is that that 17% monthly decline year-on-year compares with tax-credit-stimulated sales totals from May ’09.

For each of the months May through November this year, comps will compare to artificially buoyed sales figures that negative headline writers will conveniently omit from their analyses.

Among home building operations executives, May’s feeble-pulsed SAAR of 300,000 new-home sales did not come as a shock, as economists, TV networks, and consumer business press would suggest.

More importantly about the May 2010 number, point No. 2 is this.

Whoever the home building company sales associates are that actually recorded one of those 28K sales in May 2010 should get a big cigar, a shout out, a nice happy hour toast, a nice bonus, or all of the above. If you have somebody who was able to sell a new-home into the post-tax-credit market that way, chances are you might want to take very good care of that associate, because they’re probably among the best in the business.

Whatever anyone says about home buyers who ”have to buy” at a particular moment because of life events, etc., there’s hardly anyone who couldn’t find some way to stay on the sidelines for months more if they think the moment is still inopportune right now. “Everybody’s a discretionary buyer in today’s market,” says the CEO of one top 5 private home building company.

So, real live sales folks who sold 28,000 new homes to real live home buyers within days or weeks of the government pulling back its punchbowl is something to celebrate at a time there appears to be little to celebrate.

Celebrating successes like sales against all odds, holding the deal through settlement, a highly productive construction cycle time, closing on time with few-to-no causes for complaint, and an overall positive customer experience,

Based on some of the conversations we’ve been having with home building executives this week, here’s what we see happening over the next couple of months into the latter half of a year that home builders collectively would be grateful to see a most modest 12-month improvement over 2009 on a volume basis.

Starting today with Lennar and KB tomorrow, public home builder earnings for the current quarter will show varying strides of gross margin improvement in their respective big bids for profitability in 2010 or 2011. Across the board, home building’s 15 or so public home building companies have managed their businesses responsibly, and are due to push off a bottom of two or more years of losses toward black ink.

Almost all of them have visited the debt market’s open window in the recent past, and have been able to extend the payment maturity dates on much of their debt well into the future at favorable, low-percentage rates.

Importantly, some of the publics have been more aggressive in taking impairments on their owned lot supply than others. Impairing lots is an apples, oranges, and peaches process as subjective as can be given that it’s all about local real estate valuations. 

Still, one can assume that builders who were more aggressive with impairments may have taken a greater hit on their book net worth, but may also be in a position to take off faster than companies who’ve been guarding their net worth at the expense of a slower, more painstaking recovery.

Still, the push for the public companies through the balance of 2010 will be to swap out last year’s Net Operating Loss carry back story with solid net home building operations stories in 2010. Positive gross margins that owe to appropriately pencilled lots, respectable absorption rates, well-managed SG&A, and prices that show a flicker of stabilizing at a new-home premium level–this is the public home builder story, and they’ll stick to it for the balance of 2010.

If they need to juice sales to work through a lot of spec left from pre-tax-credit-deadline production–as we hear D.R. Horton is doing in Texas–they’ll do what it takes to turn those assets.

In the latter days of the Summer into September, October, and November the public national builders will be on an all-out mission to drive volume and leverage market share gains to pull profitability from every one of their respective divisional business units even at lower than historic absorption rates.

Remember, what each public home builder wants, at a minimum by the end of December 2010, is a story for Wall Street that looks forward and up rather than backward at two of the worst years in their collective existence.

Meanwhile, private companies who can and do pull through the downturn’s most brutal home stretch, will do so with every trick in their survival manuals.

Some, will have the benefit of working with revalued land stock and investors who are willing to ride out the rest of the down cycle with a bet that a strike point and exit will emerge within a reasonable horizon.

Other, older school survivors, are tapping into “The National Bank of Friends, Family, You & Me,” they say.

One builder with a long track record says that, to get construction project financing, he’s offering friends and family a 6% return on their investment, putting together an LLC on a project, and paying back investors on the sale of each new home. “It beats Treasuries and just about anything else you can put your money into right now, and their exposure’s limited because the asset flips over to them if the home sale deal breaks.”

Although bank financing and credit remain in the stubbornly unaccessible realm, other finance sources may finally show some urgency to go to work, as this New York Times article suggests.

One way or another, even as the press’ and many economists’ forecast is for a housing–namely, home builder–double-dip downturn, we believe we’re going to see 2010 nudge to a slightly better performance mark than 2009.

There’s still much more work to do to reprice land and work scale, process improvement, and cycle time into further reduced new-home prices. That’s what this Summer into the Fall of 2010 should be about.

Meanwhile, how about those sales people who sold one of those 28,000 new homes in May of 2010!

June 24, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Before Recovery, Home Builders Do What it Takes to Recover

Good thing the news media have been around. Otherwise, maybe you wouldn’t have noticed yourself that traffic and sales are down this month, and houses and lots are getting smaller this year.

Last week housing starts data for May got the bears roaring, and this week existing and new home sales numbers will lend statistical affirmation to those who theorize that housing’s nascent recovery is gonzo.

Lest anyone need reminding, “recovery” was the news media’s word for it, not that of those who make a living developing, building, and selling new homes.

Similarly, tell somebody who’s lost one of the 8 million jobs the U.S. has shed since the peak of employment that there’s a broad recovery from recession going on these days. Same difference. A GDP recovery, with help from a cool $1 trillion in American Recovery and Reinvestment Act funding, is underway, but it may feel like more of a media phenomenon than a leg to stand on for those looking for a job.

Housing’s “nascent recovery” was an all-too-temporary time-out from housing’s downturn, which has more to do with trying to deleverage historically high household debt than it does a lost appetite for the American Dream.

What’s over now is the effect of a 15-month adrenaline shot of free money for anyone who could cobble together a decent loan-to-value scenario for a lender.

Now the adrenaline has worn off, and it’s going to be at least 90 days before clear insight emerges about the strength of the pulse of the economy without stimulus.

What has been happening that’s different now is that the good and bad of banks beginning to clear their toxic assets has begun to occur.  This pushes distressed properties that have been blocked up in an extend and pretend impasse out into the market. Private investment can get to work, and sellers will have to take their lumps and move on. They’ll be free of the encumbrance of debt-laden ownership and can work on repairing their credit worthiness.

If the absence of an $8,000 inducement teaches new home builders anything, it’s that an $8,000 inducement has the ability to attract some but not all potential home buyers off the sidelines right now. Many companies have already approximated this $8,000 inducement in they way they’ve packaged upgrades, options, and discounts. Others will.

If 4% to 6% of the asking price of a home is enough to pull buyers in, high volume new home builders will quickly make up for what Uncle Sam is no longer offering.

More likely, though, 6% to 10% of current asking prices, even with good interest rates, is going to be what it takes to re-ignite the feeling that a home purchase is not just a solid shelter investment, but a strong forced-savings plan, and a longer-term financial planning tool (especially in a future where inflation comes back into play as a motivator).

Mid-June through mid-September, the work should be on deals that force land prices down, not up. To do this, home builders need to break ranks with one another on one level, and align with one anothers’ interests on another.

They need to break ranks to avoid herd-behavior bidding up of lot prices, and they need to align creatively to position themselves for profits in their selected lot strategy.

Even as end user demand remains on an unclear horizon, deal making will heat up. What’ll be interesting will be to see how important a factor trust is in the deals that get done and undone.

June 21, 2010 | Filed Under Financial Crisis, Home Builders | 1 Comment 

If Home Builders Can’t Get Bank Loans, They’re Turning to ‘The Bank of You and Me’

Production home builders, as we suggested in yesterday’s post here, , can’t totally ignore the media headline frenzy about the post-home buyer tax credit market.

During a downturn, the media and home buyer sentiment synchronize into a sustaining cause and effect, a self-perptuating negative feedback loop. If the press headlines are inaccurate, or lack context or perspective, it often doesn’t matter. Audiences still regard headlines as the truth, and their behavior affirms the headline writers’ assertion.

Remember, media companies’ business model is to sell the value of audience engagement with their content, which is a real-time popularity meter. The more eyeballs, the more ad dollars. Frequency of updates trumps validity of the reporting. If something’s biased or flat-out wrong, chances are there will be a 180-degree opposite story out in the next half-day that will offset the first one. That’s how the money is made in today’s media world.

What gets to us is that you have otherwise competent real estate reporters writing some of the silliest stories:

David Neithercut, chief executive of Equity Residential, the nation’s largest landlord, has noticed this “psychology change” in consumers.

There is “a change in one’s thought process about the benefits or wisdom of owning a single-family home,” he said at a recent industry conference. “There is no one in this room who doesn’t know someone who is upside down in a house or whose parents can’t sell the home to move to Florida or … know someone who can’t sell their house and move to another community to take a new job opportunity.”

No one can doubt the journalistic skills that go into these reports. It’s just that the conclusions they reach are incredible in their offering of the inane.

Still in all, in spite of the dire data releases and doomsaying prognostications of the double-dippers, we’re picking up snippets here and there from the for-sale side of housing that offer a sharply contrasting sense of what is going on in the new-home market since the federal tax credits (for orders) expired April 30.

This is not to say that home builders are feeling warm and fuzzy about their prospects over the next six months. It is to say, that just as the stock market tends to be a leading indicator of what investors believe will be at work in the nine-to-12 month ahead period, home building organizations have discounted already for the current lull in activity, and they’re still building toward slightly improved volume performances, including profitability in some cases, in 2010.

Simply put, home prices and unit sales volumes are still captives, not of a double-dip housing recession, but of the first housing recession that originated in the third quarter of 2006. It is that deep downturn that still plays havoc with demand, with credit availability, and with buyer psychology.

So, end user demand for housing is unclear — check this astute analysis from the Angry Bear economics blog on the decoupling of household formations and housing starts.  

But home building company operators are only partly beholden to macroeconomics. They’re also involved in a market share clash of the titans.

Even as national housing figures limp along, operators are in a submarket by submarket battle to be the outlier, the outperformer, in every arena. That means aggressive tactics, deals, and getting what can be gotten on a daily basis.

One executive tells us that although entry-level home buyers were the buyer universe who gravitated most to the just concluded tax credit programs, move-up buyer traffic has actually kept better pace with seasonal trends. It would make sense that some of the move-up buyers of new homes may have been able to sell their resale homes during the tax credit period, and are now in the market.

Also, a lot of the work that will make or break 2010 full-year performance needs to be done now to avail of stronger seasonal demand during the months of September through November. Projections for 10% to 20% sales volume increases for the calendar year mostly factor in a slow June through August selling period.

A lot of the expansion in new neighborhoods among the nationals will occur in the latter part of the 3rd quarter and into the 4th. This is where  the ultimate key to 2010 lies, work that’s getting done in preparation now.

But the newspapers and TV channels can’t cover that now because that coverage wouldn’t have the shock value that this week’s headlines have.

Although national home builders, mostly the public ones, get the limelight in today’s market because they have most of the capital to bring to bear even when end-user demand is still in the clouds, private home builders have been no less active, trying to make up for what they lack in access to cash with cleverness, customer service, and canny deal structures.

One player in the private arena says that in these desperate times, while bank credit has been so hard to get and so expensive, private enterprises have resorted to age-old practices of barter deals, borrowing from partners and friends, etc. to make it through to the next leg of the market.

“We call it ‘the Bank of You and Me,’ which means that if I need money to get something done, I call somebody up and ask them to front me on the cash and pay them back when the return comes through down the road,” says this player. “It takes a lot of trust, but that’s what it’s come down to.”

June 17, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Behind this Week’s Housing Headlines–Big Home Builders Cobble Year on Year Gains

Alas, negative real estate headlines on housing starts and permits. They follow the prior day’s downer, the NAHB/Wells Fargo Housing Market Index, which reported a plunge in home builder sentiment. So what else is new? Is it news that the press and analysts mostly don’t get it?

Who said, “We don’t need a weatherman to tell which way the wind blows?”

There’s no time like now to get behind the headlines, and understand what is really going on in home building’s trenches. 

As the saying goes, the devil here is in the decoys.

These reports reflect anxiety and capture starts and permits data higher volume home builders already lived through and put behind them. There’s not a home builder still in business who didn’t expect what’s going on now to occur, practically from the moment last November Congress passed  legislation that extended and expanded home buyer tax credits.

Starting late last year, then, home builders prepared for a crescendo of demand for new homes between February and April, increased their starts, including spec counts accordingly, to accommodate the bulge in buyers that would come in to beat the April 30 deadline. Then they focused on completions, deliveries, settlements, which is what they’re feverishly doing now to comply with the June 30th settlement D-Day.

It’s what they do. Fact is, a multi-billion dollar stimulus program set up to pull home buyers into the arena from the sidelines did just that, and now it’s time to stop it, pay for it, and move on.

Many of the analysts, and most of the media are reading “new information and insight” and “disappointment” into the reports released in the past couple of days, but we believe the players in the industry itself are far out ahead of the headlines.

Two anecdotal remarks we heard last week at the Pacific Coast Builders Conference offer what we’d regard to be more reliable indicators of real-time home builder sentiment than the just-reported NAHB index, and today’s Commerce department report on housing starts and permits.

First, though, let’s recall two critical factors about the HMI. One, is that whether the index reading is a 22 or a 17 is only marginally significant, and more so directionally than in the score itself. Since any score below a 50 means that more home builders have a negative outlook than a positive one about the present and future, the current levels reflect that more than four out of five of the NAHB survey respondents are not sanguine about the demand environment for what they do for a living. A few points this way or that don’t amount to a whole lot of difference.

The other key consideration to remember with respect to the HMI is the distortive impact of the survey sample base itself. By far, the greatest number of home builders in the sample are smaller-sized companies. The sentiment expressed in the NAHB data is sentiment consistent with the particular travails of small companies–including their struggle to access construction financing, acquisition, and development loans, etc. 

What we’ve been observing for months is that larger, especially national public home building companies, have buffered themselves from the month to month ebb and flow of confidence and capital access. They have set themselves up to make marketshare gains while their smaller, less well-capitalized brethren struggle to keep their lights on as they try to extract vertical construction financing from a hostile lending environment.

So when those folks from mostly smaller home building firms were answering the NAHB survey questions about traffic and sales outlook for the months ahead amidst a radio silent May survey period, it’s a wonder to us their confidence only slipped 30% from where it had been. It’s a wonder also that starts and permits are only down 17 and 10 or so percentage points respectively on a sequential basis, versus dropping off a cliff month on month.

Now, here are the two remarks we think help take us behind this week’s grim headlines, flying in the face of theories that the headlines have housing trundling toward a “double-dip.”

One remark is that builders’ terms for the current market range from “fragile” to “wobbly” to “choppy.” The “dip,” by the way, is the same dip that housing confronted starting in 2007, with a housing stimulus package wedged in to help stoke demand and take some of the excess supply out of the market.

The three things now going for new home builders is that most of that excess supply (of new homes) is gone out of the market, homes are comparatively more affordable than they’ve been for more than  a generation, and interest rates are largely supportive, especially on the monthly payment front.

Remove a cast from a broken leg, and what to you get? Fragile, wobbly, choppy, which is what home builders are describing in their markets. What happens next depends on whether the economy can keep making headway on the job creation front, because even if it’s lower-paying jobs that the economy adds, at least that provides a psychological lift to those who begin to believe they’ve weathered the worst and might be ready to buy a home.

The second anecdote we heard that we believe is more telling than the data releases of the past two days is this. A Phoenix area home building executive said to  us: “We were very, very quiet right through May, but the first week of June, we saw an immediate pick-up in traffic to where it had been before the end of April.”

Factor in the fall-off in both sentiment and starts and permits post-tax credit expiration, and you’re still looking at significant year-on-year improvements from 2009, which is all most larger volume home builders are trying to achieve–a ballpark 10% improvement on last year’s numbers.

That’s still not good enough to keep all the home building capacity that’s out there in business. So more players will go away, and that will probably have more to do with their inability to pry capital out out of  lenders than it has to do with the end of Federal home buyer tax credit programs.

Ignore yesterday’s and today’s headlines. Stay busy making tomorrow’s.

June 16, 2010 | Filed Under Financial Crisis, Home Builders | 1 Comment 

Journal Reaches New Low in its Bid for Eyeballs and Advertisers

Media mogul Rupert Murdoch bought the Wall Street Journal just shy of three years ago. He paid the Bancroft family and shareholders $5 billion for WSJ parent Dow Jones and the right to do as he pleases with business’s daily bible. In two years, a 20-year venture that has paired Dow Jones with CNBC cable business television news is due to sunset.

Does anyone doubt that Fox Business Network will be powered by the Wall Street Journal when the CNBC contract expires?

Our entire career, the Journal has set the bar of ambition and excellence in daily business reporting. Of late, however, that bar is dropping as the Wall Street Journal editors obsess over political ideology in favor of economic and financial reporting and analysis.

Whether or not this is Murdoch meddling or Murdoch’s competitive genius at work, it will impact the importance of a title that until three years ago regarded straight business news, thought, and analysis as its highest mission.

Yesterday’s Opinion piece, entitled “Politicizing the Fed,” is an example of what happens when ideology trumps economics reporting and analysis.

At its core, the issue the piece addresses is an important one for housing. Ultimately, the ability of people at the Federal Reserve and its system of  banks to work free of political trends and influences is critical in order to enable a truly functioning financial marketplace, which is the only way to allow home values to reach equilibrium.

However, the Journal‘s opinion piece is a thinly veiled villification of a particular Democratic representative and Democrats in general. It doesn’t persuasively argue for the autonomy of the Fed and its system, which is really not in its, or its readers’ interests.

It argues instead for the status quo political leanings of the Fed, which disenfranchise many in favor of securing the continued well-being of a few.

Look at the hate and ignorance this piece inspires.

Those few are the Wall Street Journal’s core of advertisers and subscribers, which the paper obviously will now do anything to pander to in its pursuit of viability and corporate profits. Which is too bad, because the Journal was once a trusted source of insight, and it continues to have some great business reporting.

When its editors allege that California Democratic Congresswoman Maxine Waters “and the House are hunting bigger game–to wit, the political allocation of credit,” the WSJ ventures across a line from expressing a fact-based opinion into the realm of self-preservationist political rant.

Worthier and more disciplined thought, like the reflections of our Big Builder colleague Bill Gloede in his Wall Street & Maine blog, gets blurred amidst the noise of the Journal’s agenda.

The “bigger game” the WSJ is hunting is to displace the New York Times as, arguably, the world’s newspaper of record.

We think that Congresswoman Waters should continue to work on the issues she champions. Equality of opportunity, fairness, and justice are part of what makes a free-market economic system succeed, and it’s abundantly clear that more work is needed on the imbalances of equality, fairness, and justice.

It’s less likely that the Congresswoman will succeed in “politicizing the Fed” than it is that Murdoch and his management permanently will radicalize what was once a trusted and enlightened advisor to business and economics players globally.

Sign us up for the FT.

June 15, 2010 | Filed Under Financial Crisis | Leave a Comment 

For Home Builders, The Back Half of 2010 Starts Recovery in the Real World

We’d argue that the next six months will define high-production home building for the next five years.

Even with an improving long-term prognosis, for many builders, the pain can only get sharper. For others, the opportunity will expand.

In the past 12 months, companies that could, bought land, largely with  monies they recouped from Uncle Sam on taxes paid based on bygone profits.

Also in the last 12 months or so, companies that could, sold houses on the backs of American taxpayers, who handed buyers an $8K running start, and buffered new home prices from the worst of the foreclosure tsunami, at least through the end of April.

Help on the buy side and the sell side is now diminished. For the first time since the Fall 2008 meltdown, home building companies will no longer be able to work the margins of taxation and stimulus policy. They’ll have to tap their own talent and skills to both buy what they buy smarter, and sell what they sell smarter.

They’ll be operating in an environment where lending and credit continue to be tight, where the U.S. home buyer tax credit is now U.S. history, where household debt remains at record levels, where consumer confidence is unstable, where foreclosure gravity keeps tugging at comparable prices almost everywhere, where appraisers seem to play a conspiratorial role in moving-target property valuations, and where sellers vastly outnumber buyers.

By the same token, they’ll continue to have interest rates and a remarkable level of pricing affordability on their side. Qualified buyers can get more for their new-home dollar than they’ve been able to in memory, and lock in interest rates and energy savings that can make monthly payments even beat the cost of renting in a good number of markets.

Plus, the under-appreciated sleeper factor of the now concluded tax credit program is that it tightened new-home supply sooner than an unstimulated housing market would have done.

For the first time since 2006 or early 2007, scarcity of new-home availability will play a role in people’s sense of urgency in the market.

“Today, everybody’s a discretionary buyer,” says Joel Shine, CEO of Salt Lake City-based, Woodside Homes. Many of the usual-suspect life events and household formation patterns that fed demand for new homes in other eras have gone into limbo, contends Shine. Nobody has to buy new right now, which means the skill it takes to sell them is different and greater than if circumstances helped stoke the demand pool.

Still, if you run a home building company and you’ve got sales associates who actually were able to write new business–particularly on entry level priced homes–in May and early June, you might want to sit those people down as soon as you can and find out how they did it, and figure out a way to reward them right away.

They’re heroes. Anybody who sold a new home in the weeks following the April 30 tax credit expiration deadline knows something the rest of us don’t know about what can motivate a buyer.

What’s more, anybody who actually made the decision to buy a home during that same period has a multiplier effect of insight to offer home builders.

What made them pull the trigger now? If the tax credit didn’t pull them off the sidelines, what happened since then that could have?

Importantly too, what about the ones who came close but didn’t close? Learning what breaks the deal these days is as important as knowing what clinches it in another case.

What we know is that every possible way to map buyer motivation, not only among successful sales, but near misses, is every bit as important  over the next six months as knowing who’s about to list a land deal near where the public transportation system extension or beltway road system improvement is due for completion.

One of the bigger risks of failure in the next five years may trace to the fact that literally everything sold five years ago. All the fantasy money around blurred differentiation, true selectivity, compromise, and choice into a single, you-can-have-it-all package.

Unlike other economic recovery eras, this one is currently and will likely continue to increase jobs at the lower spectrum of income levels at the expense of mid-range and higher range income jobs. Have a look at this analysis in the New York Times Economix column. High-wage jobs grew fast after both the 1970s and 1980s downturns, but it’s lower end jobs that have accounted for growth more recently.

Of course, job growth among lesser skilled, lower paid employees directly impacts the demand cycle. They’ve got to save real money over a longer period of time to reach new loan-to-value hurdles.

This doesn’t mean an even greater percentage of your nearer term buyers won’t come from a higher-educated, higher-paid household. Clearly, the language home builders had best become fluent in soonest is the one spoken by women who are about 30 years old. If there’s a dialogue barrier there, then good luck.

This not only impacts when they buy, but what they chose and why. You’re getting the leading edge of those buyers in today’s market, so it’s critical to learn everything you can about what’s making them tick.

Then do it again with the next buyer too.

June 14, 2010 | Filed Under Financial Crisis, Home Builders | 1 Comment 

The Downturn Lesson Home Builders Don’t Want to Learn

You hear it repeatedly now. It’s phrased in different ways by different people. Essentially the gist is that it would be a waste of a housing crisis of exquisite proportions to come out of it behaving like you did going into the mess.

Larry Webb, who’s working with steady progress on getting his The New Home Company ramped up in Southern and Northern California, spoke about this issue during a session yesterday at the Pacific Coast Builders Conference in San Francisco.

 ”I don’t think home builders have done a very good job of learning what the downturn had to teach us about what  home buyers want.”

People who know Larry Webb know that he means that a particular, relatively finite group of home builders is guiltier than the rest of the failure to recognize the error of their prior ways so that they can avoid repeating them. His sharpest slings and arrows are reserved for those who’ve grown to regard them with relatively minor discomfort if not as a source of amusement.

Still, in the literal sense, he’s being fair, inclusive, even self-inclusive in his admonishing words about industry practice, process, and product that have done little to adapt to a post-financial meltdown reality.

He’s saying, roughly, expect the cycle to restore things to how they were at your own peril. The worst thing you can do right now is to not pay more studied attention to who a home buyer in today’s market is and what makes her or him tick.

It’s an agonizingly obvious notion.

Cutting prices by taking dollars out of the cost-per-square foot matrix is a critical but not total answer to what a home buyer today wants. And that’s the good news for the symbiotic slog that goes on between large public and more-focused private home building companies. If the recovery story were all about price, there’d be no chapters in it about private companies.

A mistake home builders make collectively is that they assume too quickly that they know how to learn who their customers are and how to compel them.

Few if any of them do though. Paul Saffo, a Silicon Valley-based forecaster, had a number of intriguing nuggets in his remarks at the PCBC show, and one of them is the simple observation that it’s often not our failures that get us into the biggest trouble but our successes.

So, going back to Larry Webb’s barb, how can home builders learn something when they’re pretty well convinced they already know? The volume of business and wild successes of the first half of the decade just finished are fresh enough in remaining home builders’ minds to convince them they do know what their customers want, and the only difference between then and now is that 50% or 60% of the money around then has been hi-jacked.

Now, any public or private home building company still in business, does many things well. Most of them have strode out of the dark ages in their operational and construction processes, their manufacturing efficiencies, and are taking baby steps forward in sourcing the materials supply chain. They’re also skilled at dealing with localities and have become more sophisticated on the financial management front.

Where they have the greatest opportunity (or, put another way, where they’ve made the least progress to date) is on the customer intelligence front. Why? In some ways, it’s as Saffo says above: prior successes lay squarely in the way of recognizing the error in one’s thinking. It’s hard not to believe that if home financing were fixed whatever you could build would sell.

Still, Saffo had some other valuable thoughts about this issue of trying to understand your customer’s post-financial meltdown behavior. To grasp it requires looking back, not just to recent history, but farther. (He generally recommends that if you want to forecast a period ahead, you’ve got to look at least double the period behind).

So, briefly, the post-industrial revolution period, Saffo says, could be described as a “producer” economy. It was about the sea change from scarcity to abundance, capacity, and efficiency. The profound change that occurred post-World War II, when manufacturing reverted from arms to peace time goods, happened because there was a sudden recognition that there was more manufacturing capacity than there was need for goods.

Consumerism, which essentially meant desire for goods could be invented, propelled an expansion of business opportunity and capacity. So that post-war period Saffo calls a shift from a producer economy to a consumer economy.

Next, which Saffo plots occuring in November 2008, comes another structural shift. He describes the post-financial crisis era as one where people play the roles of both producer and consumer. He calls it the Creator economy, which means that the act of consumption and production occur simultaneously.

Consider Google. When you use it for a search, you’re also producing data that immediately enriches the engine itself. People consume and produce in many ways these days, and in more and more ways, households behave more like little company entities rather than traditional family units.

This is where there’s probably something valuable for home builders to learn what they’ll need to learn about their customers. When you X-out all of the funny business around home financing circa 2004-2007, two stark realities come clear.

One is that real money, real skin in the game, means that a buyer will necessarily be more fully invested in the home, not just as shelter but as a sound financial program for that given period of her or his life.

The other is that home builders don’t have an off-the-shelf solution for that producer-consumer type of buyer to roll out today, which means both their designs and their real estate strategies are full of risk.

Saffo has some interesting notions about what the post-financial meltdown residential built environment might look like and work like if builders don’t revert exclusively to their comfort zone.

He suggests that multifamily homes whose mortgage and ownership structure blend some middle ground between condo and timeshare for baby boomers who want to downsize out of single family houses might be one direction to explore.

Nothing like that will ever happen though if home builders ignore one of the downturn’s most glaring lessons–which is that there’s a gap separating what they build and what home buying customers really want.

You can ignore the gap if you want. Temporarily anyway.

June 10, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

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