Next Level for Energy Star for Homes May be a Reach for Production Home Builders
One of the handful of things that went right for a limited number of production home builders in 2010 was their strategic embrace of energy-efficient homes with a highly attractive price tag.
And why not? If they could build a house that materially differs from competitors’ offerings, plus make for a monthly payments come-on without some small-print hitch, then what better way to compete in a horrific transactions environment, where the enemy might be a dimes-on-a-dollar deal on the courthouse steps, or some variation of that on the spectrum of distress?
One industry observer who works closely with dozens of both public and privately held home building organizations noted just today, “the green home building story is one of the bright spots in the industry right now.”
Well, count energy efficiency as another one of those phenomena that makes 2010 look like “the good old days,” rather than one of the most inimical market environments ever. Crossing the thin green line may not just get tougher; it’s also bound to get more expensive in 2011 and 2012.
Energy Star certification, one of the ways home builders clawed for a competitive edge over the past couple of years, is raising the bar (Energy Star for Homes Update) on compliance in 2011, all in preparation for its Version 3.0 guidelines that become effective Jan. 1, 2012. Some of the builders who’ve made it a strategic linchpin are thinking again about whether they’ll be able to get over the more difficult hurdles.
To be fair, the EPA, which oversees the Energy Star brand for products, materials, and homes, has had its spec out for its transition Version 2.5 for months now, and has been getting input from raters, subcontractors, and home builders for a fair amount of time.
Fact is, however, lots of organizations have been so intent on getting whatever business they can get done in calendar 2010 done that they’re only now awakening to the effectiveness dates, new checklist requirements, and new standards in Version 2.5, which impacts what home builders will build starting next year.
Here, verbatim, is one D.C. metro area home builder’s red flag warning on his ability to continue to participate in Energy Star:
My name is Ken Malm. I am a top 100 home builder nationally, that builds primarily in Maryland and Virginia. My brands are Craftmark Homes and Craftstar Homes and we converted our homes to Energy Star a couple of years ago. In 2010 we received the Energy Star Leadership in Housing Award. My average HERS rating has been in the mid 70s. Unfortunately the version 2.5 software you are about to implement will require my single family detached homes to achieve a HERS rating of 51 to 61 versus the current 85 which I have always been able to exceed. My Energy Star Provider tells me this is primarily because the software has been changed to penalize homes with over 2800 square feet of conditioned space which includes the basement. I am not sure what the motivation is to penalize folks who build or buy homes of this size, but the result will be I will stop building Energy Star Homes. I will continue to try to build energy efficient green homes, but I cannot afford the cost increase of $10,000 to $ 20,000 per my typical single family detached home your penalties will force me to incur to be certified. I doubt I will be able to be an Energy Star Partner going forward because your new standards go too far too quick. Was it your intention to drive folks away from your program? …. Ken Malm. Owner
Ken directed his concerns to the EPA’s Energy Star program, and he got a response that indicated that enough home builders had shared his concerns about the immediacy of the implementation of the 2.5 guidelines that the effective date has been moved. Here’s the EPA’s comment on that issue:
First, EPA is delaying the implementation date for the v2.5 guidelines by three months. This change impacts the implementation timeline in several key ways
Single family homes that are permitted before April 1, 2011 can continue to be qualified under the current v2 guidelines until July 1, 2011 (previously, this applied only to single family homes permitted before January 1, 2011);
Condos and apartments in multi-family buildings that are permitted before April 1, 2011 can continue to be qualified under the current v2 guidelines until January 1, 2012 (previously, this applied only to units in multi-family buildings permitted before January 1, 2011)
As regards Malm’s concerns that the size adjustment factor equation in the new version will work punitively to the size of the homes his company builders, the EPA responded as follows:
Finally, to accommodate growing partner concerns about the impact of basement square footage on the ENERGY STAR HERS Index Target when the Size Adjustment Factor is applied, EPA has decided that basement areas, whether finished or not, shall not be counted as conditioned space for the purpose of determining a home’s Size Adjustment Factor. To quality for this exemption, basements must have at least half of the wall area from floor to underside of ceiling framing below grade. Note that this exemption is only for the purposes of determining a home’s Size Adjustment Factor. It does not affect the Conditioned Floor Area as defined by RESNET and used in the course of rating a home or determining maximum allowable duct leakage.
Net, net, we talked with Ken Malm after he received the response, and he says that the costs to achieve compliance with the new spec are still going to be higher than the D.C. market will bear.
And that might just be his tough luck.
The communications coordinator for the Energy Star for new homes program, Jonathan Passe, says that not all home builders are going to like it that the bar of compliance is heading up, and that that’s going to cost more.
“We are not unsympathetic to the companies’ concerns when it comes to the greater costs involved to meet these new standards, but that’s part of the brand’s promise to consumers, that Energy Star means significantly more energy efficient,” Passe says. “We are by definition an above-code program.”
Passe notes that 2009 building code compliance moves the needle closer to prior Energy Star standards, and that since the program has already achieved 25% market share in new home construction, it’s time to make the hurdles higher.
“We recognize that the new standards don’t represent a small change and there are just going to have to be more costs absorbed by the builders to comply with certification, and the fact is, we’re going to lose some participation as we increase the level of difficulty. We’re encouraging home builders to look beyond the ‘first cost’ involved in complying–often their learning curve involves an expense that, once raters and subs are more practiced in the program, the costs come down.”
For home builders who’ve built a committed strategy around Energy Star, it’s a moment of truth to turn up the energy level it’ll take to continue to meet the new spec. We spoke briefly with Leading Builders of America executive director Ken Gear about the new Energy Star 2.5 and 3.0 versions, and he says that it’s particularly harsh that the ramp-up period to comply with more ambitious certification hurdles is taking place as the housing market continues to suffer.
“This issue is on our radar, and the fact that the bar gets raised and costs are going to go up when we’re fighting to make energy efficiency more affordable will come as a rude awakening to some of the companies that have tried to make Energy Star a strategic anchor,” says Gear.
Will the EPA forge on with a program that may well cause participant attrition as it takes effect and winds up costing home builders more than they can retrieve from the market in 2011? Says Passe, the answer is yes.
“We are obligated to raise the bar of energy efficiency. That’s just part of what the brand needs to do,” Passe says.
Your call.
Horton Hatches a “Who’s Your Daddy?” Flourish to 2010
In a related story, D.R. Horton can claim the No. 1 ranking among home builders in our book. Horton sold almost 21,000 homes this year, a year in which the run-rate for home sales is somewhat shy of 300,000. Yes, so one home builder accounts for somewhere between 6% and 7% of the total in the nation.
Don Horton
PulteGroup, whose average selling price per home is almost 25% higher than Horton’s, booked more revenue during the period we’re talking about, so its management argues it’s still the No. 1 company in home building.
Decide for yourselves. We happen to think that Horton gets honors. You can kid yourself and say that it’s the Horton team’s ambition to be “biggest builder in the land,” but we’d say it’s more about winning.
With Horton in the game in any market, other competitors know this, that there’s a take-no-prisoners player in the arena, willing to do what it takes to sell a home at everyone else’s expense, as long as it’s good for their business. This is the way NVR competes in its more limited geographical footprint. Its people compete, literally on the same turf as everybody else, but they do everything in their power to tip the playing field in their favor when it comes to outselling everyone else.
These companies’ people arrive at work each morning knowing that they’ve got to outduel the market or they might as well not have shown up for work that day.
We’re not saying that PulteGroup people don’t come to work with that in mind, but we are saying the D.R. Horton does that more effectively with its people than any other company in the business.
Everything that’s unfair and imbalanced in the way Horton works a market–the way it builds relationships with land sources, real estate agents, trades, materials suppliers, etc.–Horton does with impunity, because culturally, its management believes that to win it must dominate, and to dominate in some cases means to demoralize its competition.
The assumptions Horton makes each day include acceptance that the universe of home buyers is smaller than its been–the pull-forward of demand, the scarcity and level of difficulty to obtain a home loan, the prevailing insecurity over employment, the paralysis in household formation–but does not include tolerance of performing at a less-than level.
This is managing adversity. Horton took its medicine like every other home builder and reduced headcount as painfully as the next guy. What Horton has not done–nor NVR–is to slack off on expectations of the people who kept their jobs.
Other public builders and private builders can say what they want about D.R. Horton but there’s an eerie correctness to what CEO Don Tomnitz promised in 2005, when he said the company would double in volume from around 50,000 units. In fact, in the context of the universe of new single-family homes sold, which has shrunk from over 2 million to under 300,000, Tomnitz’s promise that Horton would “double” more or less comes true in the sense of a percentage of the entire marketplace.
To us, Horton wins by staying true to its culture, which is to do right by its customers, help get them what they want, and also to do right by all the partners it does business with, whether that’s painful or not.
Horton–not coincidentally springing from the nature of its eponymous namesake–hard wires itself to winning. It doesn’t mind doing it the hard way either, being better at sales management, better at racing to the right deal, smarter at striking when the iron is hottest, unrelenting in understanding its potential buyers, and fearless when it comes to dominating a market.
Competition in 2011 will mean so many things as banks, desperate owners, people with job opportunities in other markets, and other new home builders crowd every potential buyer with the “once-in-a-lifetime” buying opportunity.
But anybody who needs a reminder of what competing in home building means–no matter what the market conditions are–only has to take a look at what D.R. Horton and NVR do. Writing them off as only wanting to be the “biggest builder in the land” is giving short shrift to the discipline, the financial management, the sense of timing, and the motivation of its workforce in the face of adversity. They’ve figured out how to sell the most and make a few dollars profit while they’re at it, which is more than a lot of the other builders can say right now.
Horton is as worthy a competitor as there is in home building because it puts winning right there in the middle of everything it is.
More on the Shift from Inaction to Action in 2011
Verbing. We like it. We think banks should try it, and more home builders too, not to mention others of the American public corporate pantheon that are said to have $1 trillion in cash on their balance sheets awaiting some optimal moment to put it to work to grow their businesses.
The W Hotel seemed to be first with the practice, and we liked it. “Sweat,” it exhorted via a little sign with a finger on it pointing to the gym. “Dine,” steered us to the overpriced ambiance of meals, and “Sleep,” “play,” etc. directives made their simple messages clear, and at the same time stripped the establishment of corporate hospitality’s onerous ennui and stodge.
Then, here in home building starting this time last year, we saw a wonderful use of the notion with the introduction of Shea Homes’ Spaces models. Mike Woodley’s flexplan floor diagrams go so far as to instruct potential buyers that in such and such a space, they’d work or sleep, they’d park, they’d eat, they’d cook, they’d even dream.
Hollywood, usually a setter of trends, couldn’t resist and picked up on the idea with the Julia Roberts movie “Eat, Pray, Love.” (Apologies to Elizabeth Gilbert, the author of the book of this title that inspired the movie, but once Julia Roberts deigns to star, it becomes a movie foremost.)
Let’s just say that like the Julia Roberts/Elizabeth Gilbert character in the Hollywood movie, you start out in a state of depression. Hmmm, not much of a stretch there.
The idea, then, would be to figure out what to do to get out of it, to recover and go on to have a semi-fulfilling life. This could work in the business community of home building.
Right now, to listen to home builders who offer their friendly perspective on what they’ve experienced, what’s been happening, and what to expect, two scenarios appear to be plausible.
One scenario embraced by many home builders with long experience — the multi-cyclers — is that this thing will end, and “thing will resume being more or less the way they’ve been” when recovery cycles occur. Same patterns of demand starting with entry level, same segmentation, slight variations on product preferences that follow the general fashion trends of the moment, and an unvarying true north around location–schools, job centers, shopping, etc.
Anecdotally, we hear often of an opposite scenario as well. This one presupposes that, this time, things are really different. Homeownership itself has lost its luster. Young adults aren’t going to want kids. Older people aren’t going to gravitate to warmth, physical amenity, active adult lifestyle, etc. Houses are going to be forever smaller. Suburbs will no longer exert appeal. etc., etc.
Certainly, as we’ve said, either of these scenarios is plausible to us. The uncertainties around whether our broader economic predicament is more cyclical or more structural, doubts as to whether policy will ever get sane control of the runaway irrationalities of housing finance; global ups and domestic downs conspire to convince us that nobody really know which camp is correct.
It may be the ones who say that, once the economy starts to recover, housing and the new-home construction segment of the housing industry, will crank back up and what was working before–from a discipline standpoint on marketing and sales, design, operations, purchasing, etc.–will essentially start working again. In other words, demand is demand is demand.
Or reality may take shape the way the others argue it will. Product would need to be retooled, land strategy re-envisioned, finance restructured, and operations management made over.
Which school are you from?
You think 2012 will bring a rising tide that will raise all ships once again, or will the then-36-year-old leading edge of Generation Y, and the then 67-year-old leading edge of the Baby Boom, as well as the then 46-year-old leading edge of Generation X have begun to change the core “who?” of your buyer segmentation assumptions?
Either way, whether things don’t change or change completely, the way to get from here to there–across a tricky 2012 landscape–is to verb, not noun.
One area of your offices should be labeled “study,” and that area should be all about every competitive and marketplace intelligence dimension you can imagine. Another section of the offices would best be called “break it” so that your best ideas one day can get stress-tested the next. A third would be entitled “start,” assuming a blank sheet approach to your firm’s capacity to meet a marketplace need; and, “sell,” “buy,” and “profit,” and so on.
All verbs. No lobby. No conference room. No office.
In an environment with so few transactions, money is hugely expensive, since every dollar is put out at considerable risk of its ever coming back. Since money is so expensive, the indulgence of the moment is you choosing how you spend your time.
Wall Street and Washington haven’t figured out how to commoditize, do a structured investment vehicle, regulate, or tax your time.
The thing is to use it for verbs. Eat, pray, and love if you want. But do.
Is Today’s $30 Million Land Deal California Dreaming or A 2013 Gold Mine?
Los Angeles-based Shapell Homes paid upwards of $142,000 per acre for 211 acres of the western portion of Carlsbad, Calif.’s Robertson Ranch from long-standing landowner the Robertson family, the company announced last week.
The deal will bring Shapell–which controls 8,000 to 10,000 lots, and develops and builds in masterplans such as Porter Ranch, Gale Ranch, and Rancho Conejo in both the northern and southern parts of the state–back to the San Diego area after a several year hiatus. An already-approved “specific plan” for the tract needs grading and infrastructure work after it’s lotted out for as many as 680 homes–in both single and multifamily variety–as well as 8 to 10 acres of retail commercial.
We caught up with Erik Pfahler, vp of planning and acquisitions at Shapell Homes, who talked about the buy. Why now? Why there? What’s Shapell’s plan? etc.
The original master plan approval was secured in 2006 and the eastern portion of the property is currently under development (after an original joint venture with Corky McMillin Cos., Brookfield Homes is going ahead with building the eastern master plan).
“If this parcel came up for sale next year, we would have been interested in it,” Pfahler tells us. “It happened to be available this year, and in spite of the interest that this parcel has had from other builders, we were able to buy it on very solid fundamentals, basically the existing market.”
The plan is to do the grading, infrastructure, and land-planning work by the first or second quarter of 2012, which many analysts say will finally mark the beginning of the upturn in the cycle. The models would go in later that year, with the first home deliveries by the third quarter of 2013. Shapell, which builds both single- and multifamily units as well as retail, plans to do all the building in the masterplan itself.
The location fits Shapell’s propensity for some of the more constrained land-positions receptive to its multiple product skill set.
“The Robertson Ranch western parcel is actually where the original Robertson homestead was,” says Pfahler. “We considered this an opportunistic buy because it specifically fit the type of geography our current projects do well in–coastal areas, near jobs, with fairly up-market communities. For these locations, there are not a lot of opportunities, so we were gratified we did what we said we were going to do when we went into contract, and we got the deal closed.”
GW Realty brokered the deal.
The good news, from Shapell’s standpoint, is that the company has a two-year runway before it plans to bring the new neighborhood online. What’s more, land prices in constrained, coastal areas of California have been tended to be sticky even in light of home prices’ decline of 30% to 40% since 2006 and 2007 peaks.
The big questions for developers and builders setting up this type of pipeline is how to lot out the parcels to the densities, designs, and product types that will strike the balance between predicted demand, prospective costs, and profitability–all these assumptions in a vacuum of present-day transactions that serve as guidelines.
The nearer term market “will depend on the outcome of federal government tax policy,” Pfahler believes. “Fact is,” he says, “the people who would be most affected by changes to tax liability in the ‘upper’ earning brackets would be exactly the segment either buying or interested in buying homes in Southern California right now.”
So if there’s clarity instead of uncertainty on that front, Pfahler infers, the market could either take another blow or get a lift in the short term future.
Meanwhile, he says, it’s more likely that the housing market will put down a foundation in 2011, and hopefully do the numbers it did in 2009 versus the back half of 2010.
Pfahler’s prediction is that localities are going to need to do some major adjusting to realities when it comes to their planning, because they appear all to be pushing greater densities than the market will profitably support.
An intensified collision of interests between developer builders and municipalities is imminent, particularly as local governments struggle under the weight of their own overspending and debt obligations.
Three predictions for home builders in 2011
It fascinates us to imagine looking backward at this time next year. We think the perspective of 12 months will not necessarily begin to have restored what we have lost, but we do think the passage of one more year will confirm a few hunches, positive ones.
- (1) Here at Hanley Wood, and Housing Crisis, and Big Builder, and Builder, we’re about to shift from doing most of our stories about what has been happening to doing the majority of our stories on what people and companies are doing;
- (2) Maybe we have been looking at this notion of the home as an investment incorrectly, and if we’re going to understand true demand for homeownership in future we have to look at the first two-thirds of this past decade not as an aberration but as a direction toward which people who form households and make a “family” are going; and
- (3) central to every home builder’s strategy and agenda for 2011–irrespective of size, geography, or business model–will be one principle and one principle alone, the capacity to strike opportunistically.
Let’s take each point, one by one, and think about it.
Starting in the early 2000s, our collective defective actions as a business community, marketplace, and society led to a state of synthetic hyperactivity or euphoria. Subprime and its sudden pandemic contagion leveled the universe by the end of 2008, turning even the most powerful of global business’ giants into supplicants and spectators. In days, we’d gone from a “money for nothing” world to one in which money was in a total limbo of fantasy value, worth nothing or everything.
In the relatively short order of 36 or 48 months, home builders lost 75% of their business, like limbs lopped off with each passing quarter, each time actuals came in at variance with sequential or year earlier data points. With each V came good-byes to divisions and markets, broken promises, busted deadlines, failed deliveries, and a protracted state of triage management to stop loss.
Having made hay in the sunshine of ritalin-laced demand, firms of all sizes turned inward, focusing on survival. Action plans consisted of cuts, mitigations, random flashes, occasional inspirations, and last February 2009 through April 2010, reactions to stimulative policy.
If the tax credits did nothing else, they allowed many companies to keep a pulse in the deepest freeze any home building veteran had ever weathered.
At any rate, deep freezes don’t last forever. This one may have begun to thaw. This is what we’re seeing in a number of technical data points that have inflected positive in the past several months, including private construction spending. An important component of Residential Investment, private construction spending, may preindicate a recovery that not only means more building, but means more spending, which turns into healthier profits, more hiring, and more household formation … which means more building and more work for builders to hire workers, and so on.
So, while 2008, 2009, and 2010 have been years that we industry and community observers have been reporting on the externals of macro economics and policy exerting themselves on internally-oriented home building organizations, we think 2011 is the year that changes.
You heard it here first. By this time next year, we’ll be covering a robust roster of story-lines that have to do with home builders’ external actions to strengthen their respective opportunities. Consolidation, innovation, even escalation of initiatives will be the bread and butter of our titles, rather than what Capitol Hill scrum is going on now.
So, prediction No. 1 for 2011 is that the industry community shifts full-bore by this time next year from spectators to players.
As for the second notion, we’ve all heard often that the problem with 2002 to 2008 is that people were looking at their homes as ATMs, as speculative investment vehicles, serving a range of interests, from elevating one’s financial lot in life (no pun intended) to hedging markets, and outrunning equities, etc.
We think this is an incorrect way to look at a mega-change. The house became an investment vehicle in the 2000s because of regulatory breakdown, a global liquidity miasma, and high-finance steroids, which conspired to make money too easy to steal and pour into the economy.
The mistake would be in not understanding essential ways that households are changing. They’re changing profoundly around new values about who makes a family, what and where work takes place and how much it’s worth, and the permeability of international borders, allowing for global migration as a fluid ongoing reality.
To understand demand–not in the future, but currently–is to understand that households have changed from the married-with-children iconic economic engine, but households today are no less economic engines than the mom-dad-and-two-children households that dominated the 1950s and ’60s.
Households that had a male, a female, and young kids had needs, and 25% percent or so of 110 million households today still have those needs, because that’s the number of two parents and a young child homes there are. It’s the other 75% that is causing some of the cognitive dissonance in home building.
Even as household formations spring free of the Great Recession’s financial ball and chain, the mistake would be to assume that more than 25% of them are going to funnel into that married-with-children segment. This is something volume home builders are prone to do, which is why many of them compete head to head to head to head with one another rather than to match their skills and motivations up to where there are unmet needs.
The point is, we may momentarily conclude that people want to buy a house to live in it in contrast to 2006, when they bought a house so that they could make money on it and sell it to a greater fool. But this is temporary, we think, a function of tight credit, and low transaction volume.
In fact, we feel the more prevailing trend is that households–particularly ones who do not center their present and future values around children–will continue to see their home as part of a holistic business plan. The mega trend still unfolding is the one that put multiple earners under the same roof, working for aligned goals. Whether or not this is a husband and wife is becoming less relevant than the fact that multiple earners want a maximum return on their combined financial resources, and the house may be one part of that. So, we don’t see a retro reversion to a time where the house, and homeownership go back to a bygone day when it is not an investment.
So, prediction No. 2 for 2011, is that winners in the next 12 months will be home builders who specialize in fluency and relationship with the “unmet need” in a market. This does not only mean a home buyer who plans to spend eight or more years in the place they purchase; rather it means that “new” or “alternative” or “unconventional” or “multi-generational” households are the ones who’ll budge from the sidelines first in this kind of market.
Which brings us to point 3, the operational imperative of 2011, to strike opportunistically. You all have forgotten more about this area than we’ll ever know. However, we’ve seen in a few exceptional places breakthroughs over the past year or so, and we believe they’re bellwethers of how 2011 will work. Understanding that each home building enterprise has its own tolerance for risk, we believe it still necessary for each to exploit its own horizon of opportunism. Or simply pack it in, because it’s not going to get a lot easier for at least a couple of years.
- Niche your way to scale
- Learn to do something before the rest
- Buy land before the for-sale sign goes up on it
- Imagine your sales team–whom you may love and respect–never sold a lick of anything in their lives, and challenge them to relearn everything from a blank sheet
- Describe three buyer types you can draw from your market that Claritas never even heard of, because they’re out there–Claritas’ segmentation assumptions are 20 years old.
- Align your team around a culture of yes, of trust, and, even of mistakes, as long as they’re errors of commission rather than omission.
Another 12 months, and we’re going to be all about what you’re doing versus what’s happening to you. We look forward to that.