2011–The Year of Market Share
From what we’re hearing among a select group of home building company leaders, they’ll take “we’re doing better than the others” in 2011.
Face it, in an under 300,000-unit, single-family new-home sales environment, 200 home building companies average about 1,500 homes apiece among them. Share, as in not sharing market share, is life. Depriving others of share, including the banks that may be on pace to take back one in every five borrower’s homes in the next couple of years, is the way to keep a home building company’s lights on.
And so we hear, that the model homes are either set or in their final stages, ready for the weekend the market’s National Football League team falls totally out of contention for a playoff spot in January (which has already happened in several markets, probably accounting for higher than average traffic to new-home communities in at least the Carolinas, Dallas, and maybe Denver).
The associates are going through their paces on sales, still trying to grasp how to capture prospective buyers in the online research loop and work them through mortgage loan approvals in a moving-target credit standards environment.
All that’s left now is to sell.
To sell, just a few years ago, was a passive matter, basically completing an order form from a line of people that appeared to be longer than the number of homes that were going up. Until it wasn’t.
Now, to sell is an active, hard-nosed, creative, persistent, mine-field of buyer trepidation and lender bait-and-switch. To sell is to achieve. To sell today is to win.
And not to sell–starting with those hundreds of new communities that public and private home building companies will grand open into the teeth of a maybe-maybe not recovery–will mean to go away, at least for a while. Disappear for at least long enough for people to forget who wasn’t paid, who got left holding the bag, who went down with you, who’s still trying to dig out of the hole with you.
This is a difficult moment for the companies we call big builders. As Jamie Pirrello’s column today notes, few builders have a choice but to ante up. They can’t keep sitting out hands and expect to be in the game. That pile of chips in front of each one of them is what it is. It’s tiny in the case of many private home builders, and it’s several stacks of every denomination for a few of the publics.
More adversity isn’t an option, and unfortunately, it’s usually just before things really start to improve that they’re at their worst for the weakest of the set.
So take the next 60 days and plot the way through the following 52 weeks to around this time next year. For good measure, make it another year of assuming the lowest range range of volume, at least while companies and individuals gather their bearings in the gravitational force-field of the government’s spending vs. revenue crisis.
Remember, there’s enough health in the money math, even of housing, to heal what ails us. Four out of five home loans are not under water and not in danger of distress. Another 26% of the 75 million owner-occupied homes doesn’t even have a mortgage on it. Between 80% and 90% of workers who can earn a living are doing so.
Recovery is happening. Even a couple of those housing analysts who have sounded most bearish during the past five years, The Big Picture and Calculated Risk, have begun to reflect a litany of ways they’re tracking traction across the board. Still, they’re careful to conclude, the improvement is modest and there’s a big hole to dig out of.
Even if you call it gloom without the doom, it’s vastly better than where things got to in 2008.
What’s more, things were very bad before those Armageddon moments in the Fall of 2008. They were rotten in 2005 and 2006; it’s just that some of us failed to grasp that.
More than likely, 2010 will serve in hindsight as the beginning of the end of the worst of times for home builders, and the mind-set this time next year for Spring selling 2012 will be a great deal more positive.
From Big Builder to Big Builders–Happy Thanksgiving!
We’re here, we’re grateful to be here, and we can’t help but wonder, with all of those Thanksgiving recipes around, does anyone have one for a perfect herb-roasted lame duck?
Oddly, what 75 million Nov. 2 midterm election voters appeared not to clamor for as they teamed in and out of the election polls a few weeks ago is clarity.
We say oddly, because we believe one would have thought that as events and perpetrations wove themselves into a knot of epic uncertainty and doubt, a kind of collective coping mechanism would have kicked in and opted for simplicity, conviction, and straightforward intention.
Instead, by swapping a bunch of new lawmakers into Capitol Hill’s daytime reality show for those who were the incumbents, voters seem to have bet that the inertial force of ambivalence would be better for the nation than a clear direction and an assertive action toward one objective or its counterpart.
It’s as if the admonishment to our now imperfectly roasted lame-duck Congress is, “Don’t just sit there, do nothing!”
We’re sure that Americans will feel much better about their elected officialdom after two more years of contentious, truth-averse, paralysis.
Still, we’re grateful. We may not have voted in clarity, but we vote with our feet every minute of everyday, and it seems that while Capitol Hill denizens may lock themselves in multi-layers of stalemates, society is ready to move on.
We’re grateful that the laws of people, needs, and values don’t necessarily obey either economic theory nor political expedience. We see local economies improve as people work to strengthen the fiber of their communities. When they do that, things happen, workers get hired, household income goes up, and there’s demand for homes.
We’re especially grateful at the abundant evidence of three very powerful forces in home building that have, if anything, intensified as adverse times stretched across the months: resilience, discipline, and ideas.
Now, we’ve heard of home building–in Ara Hovnanian’s apt borrowing of an old axiom–as 200 years of tradition unimpeded by progress.
Clearly, though, what the past four years have led us to, as industry observers, is awareness that progress has now impeded. The tradition no longer works if the tradition is either too expensive, too generic, or too energy-wasting from a cost of operation standpoint.
What you new-home builders have begun bringing in force to the table is the sense that you are part of the answer to the necessary transformation of the American Dream to an affordable, sustainable community that brings incomes, ages, occupations, interests, education, and health into a proximate balance, built on financial structures we may or may not even know about right now.
We know that this transformation is not an overnight process. While flash crashes and financial implosions can occur in hours, spreading harm and pain internationally, most of the healing and restoration needs to take time, time to emerge, and time to take hold.
Expectations management will be one of the vaunted skill sets of the next couple of years, and we’ll see it in all its colors, both in business and policy.
But we’re most grateful today because of the character we get to see at work in the home building business community. There’s no quit, there’s no quarter spared, and, to the best of our knowledge, there’s no recipe for the perfect roasted lame-duck.
From us to you, Happy Thanksgiving! We’ll talk to you next week.
We Don’t Care About Washington. Repeat. We Don’t Care About Washington
Two significant reports on factory and manufacturing demand have come out this week, one from New York and one from Philadelphia. They’re closely watched as previews to a national barometer of demand–the Institute of Supply Management report on manufacturing, which comes to light next month.
Thing is, the New York report tanked and the Philadelphia report soared off the charts. Emphatically different directions, which you’d hardly imagine especially given the geographical proximity of the regions.
Since the Philadelphia release is more recent, the market seems to be buying its indication about the direction of the economy rather than looking back to the NY Fed’s gloomier-and-doomier prognostication.
Why do we care? Well, we’re looking–like you are–to where fundamental indicators may be leading to try to understand where we are right now, and what we should prepare for.
It makes us remember vividly Yale economist Dr. Robert Shiller’s remark to home building executives at Hanley Wood’s Builder 100 event in Chicago, in May 2009. “If anyone says he knows where the economy is going to go right now,” said Shiller, “he’s lying.”
It’s still true.
Today, the stock market is up dramatically after session upon session of capitulation, and the reason for the exuberance today is either the bailout in Ireland, or the robust response to the GM IPO, or deferred support for QE2, depending on which media platform you choose to look at.
Is the stock market responding or reacting? Are we heading toward inflation, or deflation, or stagflation? Is it a flight to safety or a toe-dip into higher-return investment land? Will global growth pull domestic activity out of the doldrums? Are consumers waking up from a two year torpor of financial restraint?
Depending on how good a debator you are, you could argue either side of all these questions–and many are doing just that–and win.
We care about these economics releases for good reason. Demand for factory output may pre-indicate jobs, which may pre-indicate income, which may pre-indicate household formation, and may pre-indicate absorption of new homes in any given market. That would be a virtuous cycle, no?
But other than to vote politicos in or out of office who may have the industry’s interests at heart, and who may work to relieve the industry of onerous regulations or taxation and finally make some sense of the nation’s housing finance policy, that sphere of activity is out of most home builders’ control.
What’s in a home building enterprise’s control still ranks as the most important set of skills to be both thankful for in this season of thanks and intent on improvement.
We’ve seen the latest financial reports from the publics and we’ve talked with a number of the mind-bogglingly resilient private company executives.
The teeth-clenching drama of the past several months–within the broader context of fits and starts economic traction–is that orders fell off, backlog is down and that puts operational capacity a risk of being excessive, money-losing, and a drag on the enterprise.
In a below-500,000 new-home sales environment, agility alone won’t count for enough for another go-round through the capital reserves.
Thrashing for market share; trench gains against distressed sales; a pristine, manicured model home and streetscape; shell games with lots; getting a buyer over the 640 hurdle; any precision tactic that can get you just enough of an edge in a submarket will be how 2011 will work for some home builders and won’t work for others.
One of the mid-Atlantic region’s leading home building executives, Dan Ryan, puts it to us this way.
“John, they can have all the meetings they want in D.C. to tell us what’s going to happen with housing, and I think they’re very smart, and know what they’re talking about. But, damn it, I don’t care about Washington, and I’m not going to go to those meetings. I care about Martinsburg, for God’s sake. I have to know what’s going on in Martinsburg, West Virginia, if I’m going to be around next year. I have to know who’s moving, what people are doing and thinking, what’s happening with the jobs there, who’s building what, and what else is for sale. That’s my world.”
So let the economics and manufacturing and currency and IPO market reports flow as they may, home building on home building’s terms will be a Darwinian story, and the ones who are adapting fastest to reality probably have that mantra in mind: We don’t Care About Washington.
If Hope Can’t be a Home Builder’s Strategy, What Can?
With GDP hanging around between 2% and 3% for the next couple of years, unemployment stubbornly notched between 8% and 9% for foreseeable future, and one in five extant home mortgages in early or advanced peril, it’s not hard to grasp what D.R. Horton CEO Don Tomnitz means when he says, “I don’t see a lot of hope for the Spring [2011] market.”
Thing is, if you’re Horton’s Tomnitz–and, face it, there’s only one of those–it’s practically the only thing to say a year after the only thing going for your home building sales velocity was a re-upped and juiced up home buyer tax credit, and that’s one for the history books.
Saying, “hey, our sole tail wind for spurring sales in a significant way is bye-bye, and now we’re left with an absolutely hostile lending environment for our kind of home buyer, an economy stuck in park, and a hemmorhage of supply spurting into the market,” is probably about the only way to put it.
The only thing between now and Tomnitz’s being absolutely correct that 2011 will make 2010 look slightly better than one would imagine is possible is psychology.
Whether or not the recent positive retail numbers signal buoyancy among consumers, and that that spending will continue through the holidays is questionable. Most analysts would say that consumer spending behavior could go either way.
Home buying “Animal Spirits” are, of course, a horse of a different color. Tomnitz can’t predict exactly how “fundamentals,” “technicals,” and “psychology” will weave themselves into the narrative for 2011 any better than he could predict with certainty that D.R. Horton would double in sales unit volume between 2005 and 2010.
[It shrank by about half during that time period, which could be said to be an enormous accomplishment given the circumstances.]
So, clearly, for 2011, the smart thing to say is, it’s going to be harder, slightly slower, etc.
And the smart thing to do?
You see, now it’s time to ice budgets and sign off on business plans for 2011. We don’t imagine there are too many executive leadership teams tolerating a sandbag strategy from unit chiefs. In other words, operations have a lot at stake, and giving up volume compared with 2010 is not going to make for a persuasive story among stakeholders who are invested in home builders.
So home builders will need to continue to fight the laws of submarket gravity and take share not only from one another but conduct guerilla warfare against sudden foreclosure syndrome on their respective turfs.
Private builders, if they’re blessed with another 12 months of fight in them, need to take a chance right now with some hard dollars placed on just enough lots to get them through another 12 or 14 months. They can’t sit out, and they can’t get their cash commitment wrong.
That’s why intelligence–any little extra help a builder can get to match up the budget, the product, the competitive arena, the home buyer target, and the program–is not an option.
Right now, two streams of money ache to make their way into land purchases. They’re symbiotic insofar as each depends on end-user transactions–home sales–to make senses. Strategic lot buyers are looking to wring a few more cents off the dollar to get what they need to start communities with products and prices that mesh with their new retooled portfolios; and financial players in the “buy and hold” mode are leveraging desperation for tomorrow’s profits.
This is why it’s more important than ever to put intelligence tools into action, whether the program is a tactical survival plan to build through 2011, or its a strategic master play that puts 2011 into the context of a five year cycle that will ultimately favor builders.
Hanley Wood Market Intelligence has recently introduced a its Housing Intelligence Pro, which can help home builders match up opportunity with resources in most U.S. markets.
Also, in a couple of weeks, Land Advisors Organization will be hosting a conference aimed at deciphering what’s next for one of America’s most enigmatic markets, Phoenix. For the second year running, will convene the Metro Phoenix Land and Housing Forecast conference Dec. 1, a one-day symposium featuring Tim Sullivan, principal at John Burns Real Estate Consulting; Jim Belfiore, president of Belfiore Real Estate Consulting; and Mike Orr, a principal of the Cromford Report. The venue is the Sheraton Downtown Phoenix. All net proceeds will benefit Friends of ASU Real Estate Programs.
Don Tomnitz is not holding out a lot of hope for 2011, but home builders and developers learned in bygone cycles that hope is not a strategy. Being smarter is. See you at the Sheraton Downtown Phoenix on December 1.
Lesser Expectations, More Expectations Management for Home Builders
As the data added up a year ago this time, it called for a different narrative, drew upon a different set of adversity management skills, and created a vastly different predicament for home builders.
Remember a year ago, home builders both private and public were feverishly trying to calculate how much spec to put out there in the first half of 2010? In October and the first couple of weeks of November 2009, if you asked a community sales manager how many specs he or she could sell a month, the response often enough at that time would have been, “how many can you give me?”
Everyone knew that momentum would end. Everyone knew that after the tax credit for home buyers–extended and expanded one year ago this week–things would slow down.
But as a home building executive we talk to from time to time told us, the anticipated slow down was for the summer months following the April 30th sunset of the credit. Not too many builders would have done a business plan to account for the depth of the fall-off in sales from a year ago–25% to 35% in many markets–and not too many of them would have signed off on a budget to assume that fall-off would extend through September and October, well into November.
So, private builders, practically locked out of the ability to obtain project financing, scrambled to cobble together capital to go vertical, while publics accessed their treasure troves of resources to ramp up their spec building production to accommodate the great pull-forward that they anticipated would occur in the Spring of 2010.
Psychologically, moods rose as earth movers got busy in the dirt and houses started going up in the neighborhoods again. It was kind of like getting back up on a bicycle, as operations snapped into action with shrunken square footage, streamlined materials and product sourcing, reduced building cycle times, and strict trade timelines.
Every unit had to pencil to contribute what it needed to in “new normal” financial management disciplines, and all was beginning to be well as organizations discovered their leaner inner selves.
Now, the adversity management challenge has changed.
What it going to happen next includes this inevitability. Since lower house prices, low, low interest rates, and low new-home supply levels thus far have not succeeded in drumming demand out of the land, and can’t turn off the gusher of distressed supply on the existing homes side, it means simply that there’s still too much home building capacity.
Even when money was funny, and anybody who could fog a mirror could get a loan, scarcity played a part in the climb to the mid-2000s peak. People camped out at grand openings spoke of scarcity. People counteroffering 15% above asking prices spoke of scarcity.
Scarcity is gone. Exactly nobody is afraid they’re going to miss the opportunity of a lifetime to buy a home–at least nobody who can qualify for a loan these days.
No scarcity, no visibility.
That makes it hard to budget for 2011. One senior level executive from a large regional private home builder said to us, “it’s just very hard to model what we’re going to do next year.”
Post tax credit for home buyers, a political, social, business, and cultural reckoning flash point has surfaced as the government tourniquet is removed from the nation’s financial system.
After all the work households and businesses have done to clean up their balance sheets and begin to deleverage, people are looking up and seeing that towns, counties, states, and the country are the last ones to have to bring their outlays and revenues into a saner balance.
So, supports for housing, the ones that stand for outlays that give home buying or home owning a tax advantage are going to be at risk. Assumptions that have been the bedrock of government finance–who pays for what services and how–are under a politicized microscope.
For the moment, many people who would have qualified to obtain a home loan a year ago under their current financial circumstances now no longer qualify.
A home building executive said to us that almost every one of the company’s cancellations these days are the result of buyers not being able to obtain financing.
In one such instance, a builder lost deal because the prospective buyer lost his 640 FICO score in the final month before settlement because of missing a less-than $20 monthly credit card payment.
It seems that scarcity will only rear its head again when Animal Spirits take a positive turn–when people realize they’ve weathered yet another wave of layoffs and start to see and hear that companies are hiring again.
Practically the only good news is that any surprise in 2011 would probably be to the positive, as opposed to the deflating, dismaying, shocks to the system that the past couple of years have provided.
Right now, leaders face a 2011 that has adversity management written all over it, yet again. The thing to learn and remember from 2010 is not to exhale too soon. In adversity, the temptation is strong is to allow expectations that have been battered down for so long to start to elevate.
Don’t let expectations begin to get grander until you’re looking back at a multi-seasonal cycle and seeing the campers at your grand openings. Then maybe you can exhale.
For-Sale Home Builders Can Take a Page on Resilience from Affordable Housing Developers
A few thoughts occur as we spend time among developer, owner, and investor leaders in the affordable housing community at the AHF Live Affordable Housing Developers Summit in Chicago.
True, important supply and demand dynamics that are playing havoc with the for-sale, single family home building world differ dramatically from those of a business community whose focus is a sustainable mix of market-rate and below-market rate rental and ownership housing.
Still, there are more similarities and shared interests in the respective areas of housing than is given much credit these days. The tide of events that has rocked the world of political and economic assumptions over the past few days can either leave us all reeling, or redouble the determination with which our organizations face adversity.
Whether it’s single-family, multifamily for-rent, or housing for lower-income households, there are two fundamentals underwhich the ground continues to shift unsteadily. One is jobs. The other is property value. They’re linked, each exerting force on the other.
As is clear in all spheres of housing and every dimension of the economy, dollars are just different everywhere these days. They’re real. They’re harder to come by. They’re more expensive to borrow. This is what getting rid of debt piled on as collective conviction played the consumption-trumps-production game of getting rich and spreading it around for two decade.
How to pay for affordable housing for lower-income populations is as big a question today as how anyone pays for anything. Still, as Richard Baron, CEO of McCormack Baron Salazar, states in all seriousness, after all the ado and self-absorption playing out on Capitol Hill this week, “Washington is irrelevant.” This is true, Baron asserts, at least insofar as, through many economic cycles, and several sweeping changes in political party majority control of the various branches of Federal government, it’s “always come down to our knitting together various interests at a local level to develop projects and communities, and we’ll continue to do that,” no matter what the sensibility of the new regime is.
- the need for education of a new crop of Congressional representatives who may not be as familiar with the contribution to economic soundness and sustainability that you and your work represents
- the need for focus on viabilities—the intricate balance between housing need and business’s role and place as at least a partial, rational solution to that need; this is as much true for organizations in the for-sale single-family arena as in the affordable business community; housing–quantified economically as residential investment–is both a cause and an effect of GDP growth or decline
- the need for clarity as to what’s next in the massive deleveraging of the economy that’s going on or still needs to go on at the household, the business, and the government level … how that translates into spending cuts, revenue increases at the national, regional, state, and local level… Smaller government is not no policy. It’s smarter, more competent, strategically sound and courageous policy.
- The need for capacity for ever more complex partnerships, collaborations, alliances… to spread risk, cost, benefit, reward, etc. among people and organizations with skin in this game and a commitment to its new rules
- finally, the need perhaps most importantly of all, to transform thought, discipline, and practice about housing toward the sense that it is neither the engine nor the caboose nor the cafe car, but a critical, fluid part of every car on the train… as is employment, education, health, nutrition. A failing, and a hugely expensive one at that, of housing economics is to see it as discrete and uncoupled from other expense and revenue areas of the economy.
This notion changes the meaning of the term “Sustaining Residents & Neighborhoods.” Sustainability should no longer be looked at as an extravagant add-on, but an essential, pragmatic piece of the way to capture costs, tame uncontrollable expenses, and spread accountability, or “skin in the game” for wider purchase in each community, urban, suburban, or rural.
We’ll hear a perspective for a near- and projected look at what this term means, and where the affordable housing development community connects with the need for “sustaining communities.”
In the affordable housing development community, they’re well beyond talking about green as an altruistic, planet-friendly, set of practices to throw a lot of easy money at. Green is pure business. It’s the business of making homes, their residents, their support structures, and their part in localities cost less and generate more value.
This is how home builders can learn from their colleagues in other parts of the housing spectrum.
And since jobs are the nucleus around which anything of value orbits, including real estate asset values, it should be that the focus for any of housing’s business communities stay on how to solve the structural issue of making more jobs worth more to more workers so that every part of the housing continuum can start its way back to a normal.
Believe We’re on the Eve of Construction
For some, today may be midterm election eve, for others, it’s QE2 eve eve, and for others still, it’s the eve eve eve eve of an October employment report that likely will lend support to both bulls’ and bears’ rants and claims.
But today’s also the bona fide first day of the second month of the fourth quarter of this year, which means recovery’s arrival will be sooner than later, at least in comparison to this date last year. For real estate deal junkies, though, this date last year may have felt like recovery was coming sooner than later (more so than now), but that was perhaps a stimulus head fake.
Which goes to show you that a bunch of metrics and indicators such as demand for existing home inventory that exceeds the supply added by foreclosures, as well as pricing stability, and steadying of job losses, etc. aren’t necessarily a ticket to go off to the races.
Scores of home builders did go off to the races, though, and in their Q3 earnings stories, we’re starting to hear signs of strain between expectation and actuality. In Spring 2009, as a matter of fact, “the lights went on” on land deals, after a cold, transaction-less darkness sat o’er the land for two-plus years earlier. Until mid-year of this year, a land-rush the likes of the middle part of the past decade occurred. The builders tripped over one another to put cash dibs on finished building lots, bidding up the price against one another.
The one thing missing was a “true north” of demand. Minus tax credits for home buyers, and against a many-month crescendo in new supply coming into the market via bank repossessions, and in light of a higher and tinier hoop to jump through to get a home loan, you just couldn’t tell who’s a buyer out there these days.
One high level home building and development operator cum card-carrying, certifiable deal junkie told us today, “ask me if I can sell this condo or that piece or this house in a given amount of time, and I’ll probably tell you I can do it. But if you say, ‘can you sell 80 or 100 of these units in a year?’ I swear I just don’t know. There’s just no visibility out there.”
Builders public and private have put loads of work into reducing direct costs and overheads to a newly scoped lean-and-mean, and their wager a year ago this time was that the cost-base they were paying for good lots, together with the direct costs reductions they’d achieved would make it so that they could compete with distressed sales in markets like Phoenix, according to Greg Vogel, CEO and founder of Land Advisors Organization.
Greg was in the thick of it when land-buyers moved aggressively into land positions starting last Spring. Now, public home builder earnings come in with proof that the companies have cleaned up and reduced their balance sheets and have become mini-me’s of their former selves, and they’ve bought land at reset prices, and they’re ready to rip.
Still, buyers aren’t biting reliably, or with the kind of contagion that tells you there’s a trend in the making.
So, as a consequence of the hundreds of millions of dollars home builders committed to lots between the Spring of 2009 and the middle part of 2010, a question Vogel says still needs answering is, “Will home builders need to start impairing their freshly acquired lots if they’re not getting the absorption rates pencilled into the business, or if they’re not getting the appreciation that builders needed to factor in to validate what they’d paid to win the bids for hotly contested lots?”
Other important questions, Vogel says, include, “where are the people?” This one encompasses both the enigma of the demographics of foreclosure–do you know where borrowers who have left their repossessed homes wind up living?–and the mystery of shrunken household formations. Both of these have a bad news-good news edge to them, suggesting that suppressed demand now could make for snap-back pent-up demand at some unknowable moment in the future.
Visibility may be wishful thinking on this first day of the second month of the fourth quarter, especially as it is the eve of so important a tide of political and economic events.
What’s clear is that disciplined market analysis, building block by building block, is likely to be what it will take to isolate submarket opportunities, to land the one-off deal that could make the next quarter, to understand what population sidelined by numbed desire or challenged access to a loan might be susceptible to a “once in a lifetime opportunity” for homeownership.
Greg Vogel, for the second year running, on Dec. 1, will convene the Metro Phoenix Land and Housing Forecast conference, a one-day symposium featuring Greg, Tim Sullivan, principal at John Burns Real Estate Consulting; Jim Belfiore, president of Belfiore Real Estate Consulting, and Mike Orr, a principal of the Cromford Report. The venue is the Sheraton Downtown Phoenix. All net proceeds will benefit Friends of ASU Real Estate Programs.