Where there is Smoke

Jonathan Smoke looks far too young to be the father of two kids. He looks like a kid, even in a business suit, way too young to have been in the home building business for 16 years. But he says he has, and you have to take him at his word for it.

Jonathan Smoke, Senior VP at Hanley Wood Market Intelligence

But then, when you hear him talk about home building and home builders, and home building markets, and home buyers, it’s a whole other story. When Jonathan talks about the home building business, he goes into this Jesse Eisenberg-as-Mark Zuckerberg trance mode, and out of his mouth come data points, variants, observations about mythical assumptions, facts, conclusions, ramifications, and high-beam brilliant insights. All in about a minute, starting from scratch. It’s beyond his years kind of insight, and it’s always well worth listening to.

Jonathan is of a rare breed in home building. He loves operators, deal junkies, land sharks, project managers, specifiers, superintendents, and putting on his boots. But his brain is also fluent in the algorithms and code that meld land, nails, tradesmen, cycle time, and spec to bottom line balance sheet performance. He’s tamed his mind to co-exist with dumber types, such as us. But sometimes, he can’t help flashes of thought and intelligence that leave us smoldering with envy.

Jonathan is also a pleasure to work with. He’s give-a-busy-person-more-to-do incarnate. He’s the head of product development and innovation at Hanley Wood Market Intelligence, and among other things, we have the pleasure of working with him annually on an insight piece for our Big Builder Virtual 2010 event.

Starting Monday, you can hear Jonathan Smoke at his “Jesse Eisenberg-est” best, minus, of course, the snitty condescension that so-well conjured Facebook’s founder. All you have to do is register–for free–for the seminars we’ve created as part of our Virtual Event. There’s a green button on that landing page that says “Register.” You press it. It won’t ask you for your status or what you like, but it will offer you the chance to hear people like Jonathan talk about what they know is going on in the home building market right now, and what to look forward to in the year ahead.

Interesting that today, NVR releases Q3 earnings that show a $44 million profit, despite a drop year-on-year of 17% in revenue for the period. Would somebody please tell those folks in Reston they’re supposed to be sucking wind like the rest of the home building business?

Jonathan Smoke, in his presentation entitled Home Builder Concentration: Tomorrow’s Landscape, has an entirely contrarian theory that helps illuminate why NVR is so successful right now, when other public home builders are struggling to keep out of red ink territory.

Over-simplistically, Jonathan believes the fundamental drivers are at work right now to make the next couple of years a tipping point for home builder concentration among the largest players.

Here’s what he notes about the implications of the biggest builders finally reaching the level of dominance in the new-home market that they’ve long been expected to by some analysts.

But it would be a grave injustice not to listen to Jonathan do his Jesse Eisenberg impersonating Mark Zuckerberg impersonation.

To hear him do that, all you have to do is to click here, and then click on that green button in the upper right hand corner of the screen that says REGISTER.

October 21, 2010 | Filed Under Green Home Building, Home Builders | Leave a Comment 

Opportunity Waits

A housing market expert speaker on a panel we hosted recently put it this way: “We’re in the throes of a recovery.”

A former boss, whose sadistic glee seemed to soar off the charts the more stressed his staff was, would say, “you’re in the throes of an opportunity.”

Steve Preston, who served for a cup of coffee as HUD secretary under George W. Bush, said yesterday during a roundtable of housing VIPs at the Urban Land Institute conference in Washington that what government policy on housing has done to the market is create uncertainty, and that what government housing policy needs to do is to remove that uncertainty.

I don’t think so, for two reasons.

If there’s anything we learn from the last two decades is that government housing policy is not that at all. It’s as some architects we know in home building would say, a “lick and stick” hodgepodge of ideas, pet projects, accommodations, and reactions to consequences, intended and unintended.

The other thing, we’ve learned that we haven’t set up government to be so good at what many of us ask them to be good at in this day and age. Of course, government’s competence matters little to some few, and it would appear to be the envy of many to be among those few.

What we’re beginning to understand, in a general way, is that, contrary to what Preston and many others would have us believe right now, government is not the source of the uncertainty that pervades our national mentality right now.

Uncertainty, after all, is a tactic, not just a condition.

Businesses use uncertainty to gain competitive advantage. The uncertainty of an injured athlete’s appearance in the next game increases the difficulty opponents have in preparing for the game.  The secret sauce a company puts into its plan, or its product, or its process, or its platform makes it a more potent opponent.

However, Preston argues that uncertainty over government’s intentions and executions hinders private sector engagement in the markets, which stifles healthy business and commerce.

But many times, the reason there’s this pervasive sense of uncertainty about what government will do next is that businesses’ motivation is not to care about anything except making money for stakeholders–senior executives being some of the key stakeholders. So, part of why no one can predict what government’s going to do next is that no one can predict what businesses are going to do next that crosses the lines of propriety, legality, fairness, etc.

Free market folks want nothing more than for homes that we’re “bought” by people who should never have bought them to flow back through the markets, exert whatever effect that has on house pricing, and restore equilibrium to housing.

Now, we–i.e. Main Street–need the offending banks to pay an appropriate price for the damage they’ve created and do it fast. We have the same sense of foreboding about all that we had about the prospect of BP digging a relief well really fast, but safely, and with precision to arrive within nanometers of its appointed destination.

That’s what we, as a nation, need for supply and demand to make any sense when it comes to used, new, for-sale, for-rent, etc. So, we’re left holding the bag on that, as housing corrects or doesn’t correct taking its own sweet time.

The greatest unfunded strategic imperative of all time–that all American’s should have a safe and decent place to live–informs most of what we call housing policy today.

Still, big financial players, the big mortgage servicers, put their promise to stakeholders of more money before everything else. Whether it was corporate venality or idiocy is almost irrelevant. Are those who at first were TBTF now TBTFW (your imagination can serve to fill in the words)?

If uncertainty is the problem, then in this case, it was the private sector, not government that introduced it in a big way. As we mention above, we haven’t set up a government that’s been competent at dealing with this sort of thing, so Main Street takes the hit again.

In all of this, the throes of the opportunity that we appear to be in is this. Whoever figures out first how to be trusted is going to have quite a leg up on what passes for power and influence these days.

The “missing sense of urgency” is the talk of many of the home builders and developers we spoke with around and about the ULI in Washington the past couple of days.

Importantly, if where the United States is headed homeownership-wise, is back toward 65% and beyond, the new-home market can still be a strong business over the next decade as soon as jobs, household formations, and ultimately, trust return to form in the economy.

We don’t agree with Steve Preston. It’s not the government’s role to remove uncertainty. It’s the government’s role, perhaps like the rest of us, to do less with less, but to be really good at that.

But whoever in home building actually becomes and/or sustains being trusted will have a competitive advantage, and should be able to secure the sense of urgency that’s been missing as consumers remain uncertain of both big business and the government.

October 14, 2010 | Filed Under Home Builders | Leave a Comment 

NAHB’s David Crowe: Housing is the Cafe Car of the Economy

We had the opportunity to ask Dr. David Crowe, chief economist for the National Association of Home Builders, a question yesterday during a conversation we had with a few housing economists and research analysts in Las Vegas.

After all, we asked him, is housing the engine of the economy or the caboose?

We asked him that mostly because of the Steven Gjerstad and Vernon Smith paper that came to our attention about a month ago, which more or less says that just three out of the 14 recessions dating from the time of The Great Depression have occurred without housing’s leading the way in and the way out, i.e. the engine.

Our own Hanley Wood Market Intelligence’s brain trust asserts that The Great Recession of 2007 to 2009 has turned the train of recovery around on itself, stating,  ”If employment is the locomotive, housing has become the caboose; the days of home building being a primary economic driver are behind us, and for housing to recover, job growth must lead the way.”

Still, you don’t get to be chief economist of anything, let alone the home builders association, without having some clever tricks up your sleeve when somebody asks you an unfairly unsophisticated question.

Without missing a beat, Dave Crowe responded that housing is probably neither end of the train right now, given that its bit of stimulus induced oomph in 2009 and early 2010 failed to do the job of pumping life into the broader economy. Nor, however, would he say that jobs, employment, and GDP growth could entirely get back on track without housing playing a pretty significant role in the rebound.

With a classic economist’s hedge, his reply was this: “it’s probably the cafe car, not in the front and not in the back.”

What a good answer to this trick question.

Dave’s point is that at this given moment, the orbit of every business assumption and wager is around jobs, specifically, the cadenced monthly Bureau of Labor Statistics employment report that comes to us tomorrow morning. In that one neat package come the inputs for countless models of fundamentals, technicals, cyclical, structural, quantitative, psychological, etc., etc. all the ways of predicting what will happen next, based on where the latest figures park themselves into the trends.

Fact is, nobody still knows whether housing will wind up being more like the 11 of 14 recessionary economic cycles that Gjerstad and Smith looked at, or more like the three exceptions, or an anomalous exception to both patterns.

It’s all a guess, but after all this duress, unless you start to see something positive take hold on the jobs front, it’s going to be impossible modeling much of anything at all.

When you cut through all of  the ideology based noise, what appears to going on is that the economic pendulum is shifting – at least from a lay person’s stand point. In late 2008, and for the first part of 2009, there seemed to be nothing so much as a prevailing sense of dread and doubt. Everything that had been working in its house-of-cards way had been destabilized, unhinged.

Then, gradually, collective sentiment seems to have shifted from utter doubt to uncertainty, a period where signals were mixed, signs were choppy, fragile evidence of things being okay started to crop up, and behavior seemed to move cautiously sideways amid few transactions, and lots of volatility. 

Then we got almost giddy from markets moving so strongly off their lows last year, and at the beginning of this year, it seemed for a bit as if we could zoom back into the lives and expectations we once knew. But something was different–there was all that stimulus money working in the markets, and who knew what was what as far as what was real and what was fueled by Uncle Sam’s intervention?

Now, every time we have a piece of good news on the economics front, there seems to be a counter punch of bad news – just yesterday morning, we get a good number on the housing side, with purchase applications jumping up a bit, but we have that offset by private payroll declines of 39,000. Today, we had a positive number on the jobless claims front, but the market is reacting poorly to resurgent worries about inflation linked to a likelihood the Fed will resume monetary stimulus.

Look at all the polarities, the opposing forces we’re dealing with as we try to understand what’s happening now, what’s going to happen, and what to do about it.

We have cyclical vs. structural issues, we have risk aversion vs. urgency for better investment returns, we have fundamentals vs. technicals, expectations vs. inspiration vs. harsh realities, we have stimulus vs. austerity, we have arguments for policy vs. free enterprise dynamics; we have the for-sale vs. for-rent debate, and on and on.

In pre-mid-term election limbo, we seem to be a adrift, hypersensitive to every reading from every nook and cranny of the global economy, and still waiting for that inflection point of fundamentals to make themselves known. The ones who say they’re certain of doom or certain of imminent recovery are using the same predictive models that led to the catastrophe that the economy has begun to extract itself from.

We’ve still got basic questions about the two grails of economic insight 1) what is the consumer going to do, especially vis a vis household formations? And 2) what level will real estate asset values settle in at to start trading again with some pace and conviction? How can we act sensibly without visibility into these two critical forces?

We’ve gradually begun to shift from talking about the depth and duration of the downturn to the timing and trajectory of the rebound, but until there’s some sound insight into these areas, the path from uncertainty to prosperity can be treacherous. Fortunes will no doubt be made or lost as the nature of the game is all about timing, negotiation, playing the margins, and opportunism.

Which is probably why we’re all taking a moment in the cafe car.

October 7, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Home building’s hat trick—2011 budget tactics for making it through another tough year

A first wave of public home building company third quarter financial releases tells us this: KB Home and Lennar show they’ve adapted to “stress test” conditions, and have proven that they can tolerate marketplace adversity with agility. This is no mean feat, and every company—public, private, national, regional, local, single-market or otherwise—that continues to turn the lights on every morning deserves credit (in all ways) for holding up so far under the stress.

We’re thinking we’ll hear roughly the same story as KB’s and Lennar’s from the dozen or so other publics who’ll be reporting quarterly performance in the weeks ahead.

These companies shrunk themselves by 60%, re-charted their infrastructure, ridded themselves of asphyxiating assets, re-tooled product offerings, hammered their supply network of materials and labor to a dazed submission, and have begun telling investors their new selves work just fine for the moment.

Private companies—especially the ones who don’t have an all-in investor-benefactor like Shea or MDK or some few others—have done the equivalent, and they’ve needed to. Many have transformed into virtual-office-based building incubators from the grandiose marble-tabled, tinted-glass, corporate park enterprises they’d briefly been until 36 months ago.

Arguably, the timing and trajectory of recovery—which has been the obsessive focus of this industry at least since the 2008 failure of Lehman Brothers marked The Great Recession’s scariest moment—appears to be both distant and ever-so-gradual.

We think this scenario means that in their way, companies likely will need to undergo change almost as dramatic as they have in shrinking by 60% or more. Only this time, shrinking and other cost initiatives won’t be the option they were in 2007, 2008, and last year.

Particularly now, as companies reach the finish line on budgets for 2011, leadership needs to look hard at what his or her organization needs to be to make it down the next stretch. 

The change—or improvement—will occur in the next six to 12 months, and will be as radical as downsizing for survival to end the past decade. But clearly, there isn’t another 60% to cut from payrolls, and an already-pulverized supply chain of trades and materials suppliers can scarcely be counted on as the sole opportunity area to capture costs. 

The Harvard Business Review’s October issue features one of its classically torturous analyses of what “leading companies” do so that their talent base and culture sustain themselves at a high level. Fact is, many home building companies don’t have the luxury to pull in sophisticated human resources analytics to recruit, retain, and grow people.

 Still, beneath the academic and consulting company jargon, there’s something to this “Competing on Talent Analytics” story that home building organizations can learn from.

The HBR piece focuses on six applications for data and metrics in H.R.: to understand how to properly populate a workforce, match up retention to performance, size the company, measure impacts of staff engagement and satisfaction, become aware of structural deficiencies, and get a sense of the overall health of the business culture.

Actually, though, you can throw away all the data and metrics, but still identify that the same challenge remains—home builders very likely won’t have the luxury to ride the coattails of a cycle toward viability and profitability in the next couple of years. They’re going to have to get there some other way.

 Being a good builder is just part of what home building organizations will have to do to weather the next and probably final stretch of the slump.  

 In some ways, the talent mix, head count, the commitment and enthusiasm factor, the growth and opportunity trajectory, the sustainability of the culture—these matters will have more bearing on whether your company’s still around to offer well-constructed new homes than the construction process itself.

 Bob Toll tells a story of his early days as a “builder,” when Toll Brothers was a Philadelphia-area private home building company.

The story dates from when he was courting his wife to be, Jane, and showed up one evening after work to spend some time with her. A practical type, she’d gone out and bought interior half-shudders for all of the windows of her single story bungalow. Jane figured that, considering his livelihood, it would be a snap to install the accordion-style shudders on the dozen or so windows around the house.

Jane points to the tool box and says to him, “you start with this window, and I’ll start over here, and we’ll each work our way around the room and meet half-way on the other side.”

The smart thinking divide-and-conquer approach.

The two of them set to their respective tasks, and after a few hours, Bob’s fiancée reaches the point where she’s worked her way entirely around the house, and gets to the window where he’d started several hours earlier.

She says to him, “hey, what’s going on here?!?”

He gives her the Bob Toll shrug, and says, “You don’t understand, honey. You see, I don’t build with tools from a tool box. I build with the telephone.”

Mergers, morphings, failures, rescues, redemptions, resurrections, and resignations will characterize this rapidly changing business landscape for the next couple of years.

There may not be a lot of home building to do for a while, but that doesn’t mean there isn’t a lot to do.

The best trick will be to get folks who’ve adapted to wearing two or three hats to add one or two more.

October 4, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment