Phoenix’s Joseph Carl Homes Gets a Strong Starts

We’re staying focused on a very positive story in home building right now. It’s not a big story. On the contrary, it’s rather a small one. Ten new-home sales small.

Still, those 10 homes sales are in four weeks. Multiply by 12 months–if the housing gods smile–and we’ve got ourselves another big builder. That’s the way it’s going to add up, if it does all add up.

Make no mistake, we’re not predicting a rising tide here that will lift all boats. We’re probably more in the camp of those who think like Meritage Homes CEO Steve Hilton, who believes that 2005 to 2015 may go down as new-home building’s “Lost Decade.”  We’ll accentuate the positive even knowing there’s plenty of negatives.

The next couple of years may feel like a Red Queen period. You run as fast as you can to stay where you are. All the ingenuity, resilience, and know-how you can muster barely neutralize the headwinds.

But if a start-up builder can record 10 new-home sales in the first four weeks of opening up a brand new-normal community in the Estrella master plan in Phoenix it says something.

Ask Carl Mulac, who’s running the start-up Joseph Carl Homes with a big arm-around-the-shoulder deal with JEN Partners, what it says about the market, and he’ll tell you.

“When Steve Jobs was introducing the iPad, he said there are three things that had to be in place for any product he’s ever brought out: innovation, value, and demand. I figure we’ve had to have those three characteristics to get anything done in this environment,” says Mulac.

Mulac opened the CantaMia neighborhood the week after Super Bowl, and is still doing 490 or so traffic units a weekend. He says that each of his 10 sales associates in CantaMia, selling against 14 models and a lot of pressure, have four or five strong active adult prospects on the line, and they’ve had their first closing.

“We had the perfect combination this past weekend,” says Mulac. “A beautiful Saturday followed by a rainy Sunday. Those are the ones that set you up for great traffic.”

Mulac’s secrets? Well, as we’ve noted, the land-base came out of the wreckage of TOUSA’s Engle division, so the price out of the banks was cents-on-the-dollar for the 643 lots on 215 acres, plus 14 completed sales models.

So, the land-cost base gives him an opportunity to price a solar-and-thermal standard product in a fully “amenitized” community at a price that gives great value vs. a Pulte Del Webb and Shea Trilogy offering.

Still, even with the great jumpstart and the JEN Partners backing, nothing’s a cake-walk. A $2 million vertical construction line from National Bank of Arizona is a start, but not enough to ramp up and become a formidable player in the marketplace. So Mulac’s out shaking the regional and community bank bushes for more, and he’s finding that even with JEN’s guarantee, a sales backlog, and all the terms in the world about pre-sales, it’s not easy to come up with more lending.

Which may or may not account for one of the ingredients of Mulac’s “secret sauce” right now. Practically no overhead.  Apart from the sales center at CantaMia, there’s exactly zero office expense for Joseph Carl Homes right now. The whole shebang happens out of his own home, and those of his controller and CFO, who work “mobile.”

“It helps that everybody on the team has worked together in the past, and we know each other through the years,” says Mulac. “So with technology, we can stay in touch on every detail we need to address.”

Even with Phoenix commercial office space offering historically attractive deals for potential tenants, Mulac says that saving $10,000 to $15,000 a month on corporate offices is no small potatoes, given his budget right now.

Still, you don’t pull off virtual overhead by doing everything virtually.

“One day a week, we have ‘no-email day,’” says Mulac. “That means anything you’re going to communicate that day, it has to be with a phone call. Emails sometimes have that unintended emotional tone to them that can distort their meaning. We have to be able to talk straight to one another on some issues.”

We’ll give you that secret for free.

March 8, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Behind the Dire New-Home Sales Headlines: The Stimulus Factor

Yesterday’s new-home sales headlines, complete with their indication that they’d hit a half-century lowpoint, cry for perspective. So let’s take a look, clear up a few issues, and move on to focus on an operational/financial matter of interest.

Here’s a key data point, thoroughly lost in the noise and negativity from yesterday’s reports about new home sales. Absolute new-home inventory rose by 1,000 homes to 234,000 new homes, a .4% nudge upward. JP Morgan home building equity analyst Michael Rehaut notes that, on an absolute basis, 234,000 new homes of inventory is down 31% from the year-ago level, and down virtually 60% from its peak.

So, yes, with all the volatility and noise in the month to month, self-reported, small sample data, the 309,000 new-home sales number for January 2010 does extend the months’ supply number beyond where it was in December. We’re back up over 9 months’ supply, up from 8 months in the month earlier, thanks to the fall-off in pace.

Remember, seasonally, we’re talking about January, and we’re talking about a month where at least in some places like the Northeast, the weather was pretty inhospitable.

So yesterday we have everyone’s asking “how can this be?” Many of the public home builder CEOs just paraded through weeks of earnings seasons calls, reporting that they’re seeing better sales in January. Now these data points come in, and we’re seeing that they dove off an 11.2% cliff from December 2009, down 6% from January 2009, amounting to a 13% miss from what Wall Street analysts were expecting.

Were the CEOS incorrect in their sunnier reports from their business units, or perhaps gilding the lily for the benefit of their Wall Street investors? If they said things had picked up momentum in January 2010, how is it that the Census Bureau number could so sharply belie that encouragement?

Let’s think about this.

First off, who was it that was saying things were better in January? Public home building company executives, right?

The first point of insight is this. We look at the national or public home builders as a group that should mirror or stand for new-home building at large, but it doesn’t. The dozen-plus public players represent a variation on the 80-20 rule, where a few players produce the most output.

Clearly, shrinkage in the national new-home sales number can occur at the same time expansion in the new-home sales number of the public home builder players. The universe can be getting smaller, and at the same time this dozen-plus companies’ share of it can be getting larger faster.

So, one of the important take-aways from the January new-home sales figure by itself is an acceleration of the market share shift to the 15 to 20 largest, best-capitalized players.

For other important take-aways in the numbers, let’s trail back in to 2009 a bit to get our insight. If the expected sunset of the $8,000 home buyer tax credit was initially Nov. 30, 2009, let’s ask what would have happened to spec building right around Sept. 1. If you could start and finish a spec after Sept. 1 and deliver it to a home buyer before Nov. 30, then you might have done that, but how many home builders have a less than 90-day construction cycle-time?

So, we’re guessing this–from Sept. 1 through the first week in November, a lot less specs were started, which means there were fewer specs ready for January 2010, which accounts for some of the reason new-home sales were lower. There were fewer ready-to-deliver homes at that more affordable, more-readily finance-able level in January, so sales shrunk.

Also, what else occurred as Congress and the President enacted legislation that extended and expanded the home buyer tax credits to April 30, 2010, for sales, and June 30, for closings?

You got it, the extension of the NOL tax carry back period up to five years. Now, how might that figure into the new-home sales data? Well, if you had a sell-at-any-price push, particularly among public home builders, which would clear inventory out as long as it occurred by the new deadlines set up by the five-year carry back  period, then you might have generated quite a few sales right at the end of 2009. This is what happened.

This is why there’s such a contrast between the December number and the January 2010 number.

So, to review:

The situation: 15 national home builder powers report solid order data for January 2010, while the Census Bureau reports record low new home sales on a national basis for the same period.

So what happens next? Well, we think February may suffer a bit from the same issue, since, again, in October 2009, many companies may have been very reluctant to start a lot of specs until they got assurance that the home buyer tax credit extension was a go.

But once the credit extension and expansion got passed, spec building got back underway in a big way, so that may show up in February sales, and certainly, will be in full force by March.

The big question (enough mentions of 800-lb. gorillas, already) is what happens when home buyer tax credit and highly supportive interest rate policy support goes by the boards.

With stimulus out of the picture, do the markets begin to clear and correct on both a homeowner and a commercial real estate level?

Even as 15 home builders accelerate their gains in market share, leveraging their ability to access construction capital to meet what need continues in the market, less well-heeled private home builders need a plan.

We think that product value engineering and redesigning to make homes more affordable and finance-able has gotten the lion’s share of the attention. But there’s another approach to value engineering, which is to focus on where the waste and dislocations are in the development layout.

For instance, if you’ve got to build a street and infrastructure into a project that involves upfront costs, you’ve got to figure out how to move revenue generation–going vertical–into the equation much sooner, so that you’re not left holding the bag with all the pre-vertical costs.

In terms of cost management on the project, and better management of the timing of your return on capital invested, we believe that land value engineering could be as important an opportunity area as stripping costs out of the home that customers today just don’t want to pay for.

Where does land value engineering (or re-engineering) fit into your plans to better manage your capital and risk exposure over the next six to nine months?

February 25, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

For Woodside’s New CEO, Joel Shine, the Job is Simple to Say, Hard to Do

As he puts it, Joel Shine has two jobs. One is to generate as much net cash return as possible for newco Woodside Homes’ justifiably high-maintenance, anxiety-prone creditor-owners as possible–starting yesterday.

The other is to instill his recently sucker-punched operational team of business unit leaders and associates as well as Woodside’s puzzled base of customers with pride, motivation, confidence and trust.

“It’s simple,” Shine says. In that easier-said-than-done way, it is simple. It’s the same two jobs home building company CEOs and presidents have everywhere, irrespective of their capital structure or submarket network. The difference between simple and easy is glaring. Simple to say, hard to do.

Collectively, several insurance companies and a 15-memeber lender syndicate had lost patience with Woodside in late 2008, and pressed to recover $800 million in monies they regarded as their stake. Shine worked with them toward one end: take stock of what you’ve got, put it to work, and get back as much of your money as you can.

Getting dozens of creditors to agree to take a haircut is no mean feat, but it may have been the easy part. Now comes dealing with an obstinate, inhospitable home buying and selling marketplace, with more pain to come.

This is what Joel Shine signed up for. “I like a good challenge. I bore quickly. Probably, like many of my more successful friends, if they had such a diagnosis back in my day, I’d have been diagnosed as A-D-D.”

Associative disorders and compulsive attention to detail do not apparently, however, rule one another out. What associative disorders likely do help is the ability to multi-task like there’s no get out, and to see problems and solutions from a prism of perspectives. Which describes Shine’s chameleon capacity to tune in, focus, address, and move on amid converging urgencies.

This is interesting because Shine, the son of a home builder who’s the son of a home builder, is fascinated with convergence and time. So much so that, although he’s a voracious reader, one of his memorable favorites is Robert Grudin’s “Time and the Art of Living.”

Here’s a quote from that:

“The future is like a friendly stranger, polite and patient, forever trying to get acquainted with us, forever being rebuffed.”

Time and timelines go with risk and reward. One of Shine’s life’s passions–apart from his family and winning in business–is skiing. One year at the end of January he dared the daunting Streif downhill course at Kitzbuhel (Austria), where the course was iced up nicely for the annual Hahnenkamm race takes place each year.

“That was the scariest ride ever,” says Shine. “I dug my edges in to try to slow my speed, but I couldn’t cut into it, it was so icy.” In contrast, he’s helicopter-skiied in Canada in waist-high dry powder so preternaturally pure that after the third turn, it felt like floating. “It’s the closest I’ve ever felt, not only to weightlessness, but timelessness.”

Home building, Shine says, “is the battle of the timeline.” As a kid on a job site, his father would give him something to do and give him time to figure it out. “I liked learning that way,” and evidently, he still does.

Home building’s timelines are full of risk. “You get all excited about a piece of dirt and you go after it because you have the right product for it, but if it takes any time at all to entitle and develop, you might be into a different market by the time you’re ready to open there.”

Any home builder must recognize who it is and what it does based on its capacity to thrive with two distinct timelines, Shine asserts.

“If you’re in the land business, your timelines are going to run you in to no-trade cycles, and you need a different, much more accommodating capital stack and hold most of the equity and no debt,” Shine says. “If you’re a merchant builder, you’re managing short-term debt and short-term return expectations, and shorter horizons.”

So simple.

February 22, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Colorado’s Village Homes Resurfaces from Bankrupty with New Ownership

Another one doesn’t bite the dust. Another one does the opposite. Village Homes, a 25-year stalwart in home building in Colorado’s Denver and Front Range markets, has emerged from bankruptcy as a NewCo.–with new owners but the same name.

Amid the financial and credit crisis of late 2008, Village Homes filed for bankruptcy in Denver in December, with assets of $103.9 million and debt of $138.4 million. After almost a year of negotiations, primarily with Guaranty Bank, the biggest secured creditor and agent for a four-member lending syndicate–and eventually with BBVA Compass which assumed the Austin, Tx.-based parent Guaranty Financial’s deposits after the FDIC shut it down in July 2009–the new ownership venture got sign-off from the creditors to buy most of Village Homes assets out of bankruptcy.

“We got word that we could breathe easy on the plan on December 23, two days before Christmas,” said Matt Osborn, president of Village Homes (NVH), and son of founder John Osborn.

The new ownership is a venture between Homebuilder Capital Solutions (an affiliate of Colorado & Santa Fe Real Estate) and Lowe Enterprises. Rather than take the old company through a re-org and recapitalization, the new entity purchased most of the assets of the “old” Village Homes–57 completed or partially completed homes, 506 finished lots, 444 unfinished lots, and 3.7 acres of undeveloped land out of the bankruptcy estate.

“With the already-vertical homes to finish and sell, we’re a start up, but we have revenue coming in from day one,” said Osborn, who expects to move the 57 homes in various stages of completion and do another 15 to 20 deliveries on new construction in 2010. “We’ll have an operating platform with capacity for about a hundred homes a year in the next couple of years.”

He adds that the assets were purchased well below the basis and loan value, which allows the company a much more competitive pricing for its homes, from the mid-$200s to the mid-$300s, down from prices in 2007 of low $500s to the $400s.

Osborn notes that’s not what Village Homes was–it did 210 homes in 2008, and just over 400 in each of ‘06 and ‘07. It is, however, heartening.

“We’ve been seeing a few of the other stories about home builders emerging out of the ashes of bankruptcy or new companies starting up, and we understood how nice it was to get that breakthrough, so we wanted to get the word out,” Osborn said.

The management team consists of key players from the “old” Village Homes operation. In addition to Matt Osborn, the brain trust includes Terry Kyger as senior vice president and CFO, Peter Benson as senior vice president of community development, Mark Osborn as vice president of asset management, Ron Hettinger as vice president of land development, Scott Sinelli as vice president of construction, and Jennifer Pingrey as vice president of sales and marketing, and the elder Osborn as a consultant.

According to company press materials, “Lowe will serve as the managing operating partner with Homebuilder Capital Solutions as the primary capital source and a strategic partner.

“The NVH team will be responsible for operating the new Village Homes venture, completing and selling the inventory of 57 homes and consolidating home building operations to the five most desirable and best located village communities, including Castle Pines North (Douglas County), Granby Ranch (Granby), Observatory Village (Ft. Collins), Idyllwilde (Parker), and Heathstead (Parker).

Asked whether the business plan and capital investment structure allows the management team to build back equity ownership in the company, Osborn said, “We’ve talked about that, but the focus now is on making this work the way it is.”

February 18, 2010 | Filed Under Financial Crisis, Home Builders | 2 Comments 

Lennar F.D.I.C. and Pulte Centex Game-Changer Plays: Opposite Routes to the Same Goal?

Recently, Housing Crisis got wind that there were as many as four large “entity acquisition deals” in the home building landscape in various stages on a path to lift-off. Whether we get news of them soon that any of them makes it to fruition is not guaranteed.

However, M&A or no, we  feel that consolidation of home building capacity — Simply it is this: greater share of a smaller market for fewer players — is one of the lightning rod issues of 2010. It will underscore who gets to be in or near the black and who must malinger in the red, or worse, fail to make it beyond the doorway of this new decade.

Whether Lennar’s deal for an FDIC $3.05 billion real estate portfolio was one of the ones we’d been hearing about has not been confirmed. We did hear that at least two other public home building companies were in the running for the FDIC portfolio, but that Lennar-Rialto’s legacy strength in land work-outs clearly won the day.

Carl Reichardt, Wells Fargo managing director and senior research analyst for the home building sector, provides perspective on the magnitude and significance of the deal by saying it’s a “skeleton key,” a template for more transactions that look and act like this one. This particular plunge, he says, is less important in itself than the “philosophical notics that an historically successful and well-known distressed ‘player’ is back in the market.”

Lennar’s dead of winter coup highlights a fact sometimes forgotten or at least under-appreciated among observers of the housing market on a macro basis–not all public home builders are created equal in skill sets, profit models, even core businesses.

Fact is, we see a “fearful symmetry” when you look from a high-level at what Pulte Homes did last year in acquiring Centex Homes vs. what Lennar is doing with its distressed real estate portfolio play this year.

Both deals are “talk of the town” transactions, costing in the billions, ranking as “game-changers.” 

They’re so different on the surface from one another, but we see the two as almost diametrically opposite routes to the identical place, the most important place for any new-home builder that expects to have its doors remain open into and beyond 2011: business unit profitability. For Pulte, adding Centex could provide faster and more scaled entree into the price-value sensitive entry-level and first-time buyer market.

For Lennar, it has decided that making more money amid the limbo of wide-scale deleveraging and marking assets down in price is the way to keep both its senior management talent and its construction operations infrastructure preoccupied as more of the dust settles on what anything of value is worth in dollars or cents right now.

One company’s master plan affirms a strategic combination with an operator whose geographical footprint and construction system add up to huge cost-out opportunities, the elimination of a key competitor in many of the same sub-markets, and a turn-key entry-level new-home brand platform. 

The other company embraces a balance-sheet management play that suggests by its nature and scope that Lennar’s bandwidth and strategic ballast had best focus less on opportunistic home building operations and more on the margins of land asset re-pricing expected to flow through the financial system over the next two to three years.

That’s not entirely the case, of course. Lennar, like every builder, public, private, national, regional, or local, is working on managing it’s assets, shooting for first-time and value buyer opportunities, re-negotiating trade deals and materials contracts, and trying to remove non-value added steps from both SG&A and construction operations at every turn.

The making-money-by-losing-money days are done.

As one trusted divisional president from a top-10 public home building company told us, the fire-sale, sell at any cost period of the downturn cycle largely has run its course. “I told a customer who was in one of our new communities that I’d practically had to give away houses for three years, but I’m not doing that any more. There are real buyers at our price levels, so we’re going to keep at them. So he paid our full price.”

This division president went on to say that sales absorption rate projections for his communities come from the most conservative, reality based demand analyses imaginable, and that pro formas factor in zero price appreciation for the whole life-span of each community, whether it’s one year or four. “They’re penciled in as profitable no matter what comes next. If recovery is interrupted for any reason, we take a hit on margins, but our unit profitability is solid. We just have to get all our operating and business units there.”

Another insight from this division president flashes back to the question of similarities and differences in the Pulte-Centex merger vs. the Lennar echo-RTC asset work-out deal.

He says that today’s buyers are gravitating to communities they know have surfaced out of broken and repriced deals, now offering an altogether new package of values in this wary, toe-in consumer environment.

“You have to feel for those communities that got started toward a goal of 350 homes in 2005, and got 100 homes or more in before hitting a wall in late 2006,” he says.  “Those communities are hanging out there with very little appeal because nothing’s been happening at them for more than two years. Whereas if you open a new community now at a newly reset land cost-base, then you can have the fresh appeal to buyers and the product and pricing they’re looking for now.”

What this means is that, for all the underwater homeowners there are out there, there’s at least proportionately as many underwater new-home communities that are going to need to re-price their way toward eventual sell-out.

So maybe Lennar’s FDIC portfolio acquisition is the company’s sequal to Net Operating Loss claw-backs of 2007,  ‘08, and ‘09. The strategy may say: we can’t count on getting to business unit profitability on home building operations alone, because it’s still too full of uncertainties and possible set backs. But we can get to balance sheet improvement and a greater cash position if we jump into the Big Two-Thousand Teens Work-Out game and figure out how to play the margins well there.

Pulte, meanwhile, means to get to its corporate next step by continuing to flash its operational plan forward–driving down costs, rationalizing every land holding for its three- to four-tier brand platforms, and pulling home buyers–we know they’re there if we can get them “financeable” new home opportunities–from off the fences.

Questions for you:

February 18, 2010 | Filed Under Financial Crisis, Home Builders, Uncategorized | Leave a Comment 

Grand Opening Green Shoots for New Phoenix Home Builder

So far so good on the up-from-the-ashes story unfolding in Phoenix. For a first-blush report on what the home building industry community can only hope is a real thing Spring selling season, we tapped into the trenches in Sun City, where Carl Mulac’s Joseph Carl Homes went live this past week with a grand opening for its CantaMia active adult community in Newland’s Estrella master plan.

Mulac hopes to sell about 643 homes in phase one of the CantaMia program, which boasts 14 already-completed model homes along CantaMia Parkway.

Filled with if-you-build-it, will-they-come dread after two “soft-opening” receptions for Realtors and city and other VIP officials on Wednesday and Thursday evenings last week, Mulac spent Friday, Feb. 12, like most home builders, down on his knees, weeding the garden beds of his fledgling community.

Since the land prices were written down after TOUSA/Engle Homes’ bankruptcy, the new land base will allow Mulac to compete to an advantage on price, a solar-thermal standard energy package, and community amenities with both Pulte’s Del Webb and Shea’s Trilogy.

Saturday morning, Feb. 13 arrived, and amid the blare and pageantry of live bands and giveaways, Carl Mulac and his small sales staff welcomed prospective buyers, window shoppers, and those simply drawn into the hooplah.

“We had 700 people on Saturday and 600 on Sunday,” says Mulac. “It was almost fortunate we didn’t have more than that, because we could touch everybody, and get their registration information, which we’ve been loading into our customer relationship management data base, and now we can follow with each one effectively. I’m very excited about the turnout.”

Home builders (minus, possibly the mid-Atlantic ones still digging out of the recent spate of snow storms): what was your Spring selling opening weekend like? Traffic? Qualified buyers?

February 16, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Housing Market’s Fate is Tied to Jobs and Mortgage Finance

Like we needed another metaphor for housing’s deep freeze here in Washington, D.C…. now intrepid (or foolish) souls who venture out–as we did this morning–into the bleak icy tundra that is the nation’s Capitol need to tromp nary a block before they encounter some car or truck stuck, tires screaming, going nowhere at full speed.

Ice and snow paralyzed city streets….Wheels spinning futilely, hmmm, now what does all this remind us of? Here, verbatim, was the comment one of our best remote workers had when he learned our D.C. offices might be closed in synchrony with the human resources dictates of the Federal Government:

Hey….if the federal government shuts down, that means they can’t spend any money… BRING ON THE SNOW!

You’d have to question the intelligence, sanity, or desperation of the people who’d actually get in a car–especially an everyday two-wheel drive sedan–and try to get around Washington’s mean streets amid the historic blast of winter that has been D.C. over the past few days. Then again, you’d be questioning lots and lots of people. There they all are, stranded atop virtual burgs of ice or rocking from forward to reverse deeper and deeper into their personal snowbanks.

Whether or not it’s a case of a low IQ, an elevated degree of madness, or same extreme measure of urgency, we think each of the paralyzed drivers must have started their vehicle with the same thought: “Not me; others might get stuck, but I won’t.”

Isn’t this just like the mess so many of us have gotten ourselves into with our household balance sheets? Isn’t it also just like the boneheaded ways many of us try to get out of the mess, which only appear to make matters worse?

If 2009’s rabbit-out-of-hat economic development–both costly and hard-earned–left us with a nascent, entirely-too-fragile housing recovery, what we’ve got now is either an affordability-and-scarcity-based continuation of that baby-steps recovery, or we’ve got a relapse into full-scale housing deflation and misery.

Housing Bulls believe right now that historical affordability–monthly payment comparisons to market rate rentals, household income levels, and comparisons to peak pricing of 2006–and the gradual vanishing point of new-home inventory will catalyze demand beyond April 30, June 30, right through and into 2011 on a modestly upward trajectory.

Housing Bears believe right now that historically high levels of absolute house unit vacancies and scary rates of delinquencies and defaults will continue to smother any green shoots of demand with a tidal wave of supply.

What those in the know fear most about the fragility of recovery is not so much the expiration of home buyer tax credits, but the host of artificial supports and supply constraints that have buoyed housing for the better part of three years now, but which have also prevented assets from finding their own supportable floor.

So, policy’s double-edged sword is that the programs that are probably masking widespread insolvency in the financial system are also keeping the private investor sector from engaging in productive bid-ask dealings. The kind of catharsis that would truly cleanse both Wall Street and Main Street of all their respective financial shennanigans, would cripple too many parties too profoundly–or so the thinking goes.

Hence, the daisy-chain of interventions, some of them mere theories and ideas thrown against the wall to see if they’ll stick. Treasury’s HAMP hasn’t.

Sheila Bair plunged head-first into trying to get her agency to lever FDIC powers among member banks to play nice and HAMP distressed homeowners with more tolerable monthly payment terms. The FDIC’s focus on enabling mortgage modification brought with it a series of consequences, one of which has been a massive stalling of the resolution of properties around newly viable bid-and-ask transactions.

Just talk to a  few veterans of the home building world, and many of them will tell you it’s still “too soon” to find opportunistic, franchise-making plays in the market place.

What residential real estate continues to deal with is a bunch of “wished fors” that we should have been more careful about wishing for in the first place.

We’re in limbo because “strategic non-foreclosures” — a term we borrow from The Big Picture financial blog — have become the banks’ answer to “strategic defaults.” If there’s little or no negative consquence to the pervasive “extend and pretend” environment, then what incentive might there be to work through the problem and concede on some portion of  each dollar at stake that one wants.

What current dynamics and actual transactions tell us with eloquent brutality is that the residential real estate dollar is no longer worth a dollar (or, rather it was never worth a dollar but everyone thought it was). 

In exchange for our 2006 dollar we get a series of difficult choices: 1) a few pennies and a lot of  righteous indignation; 2) a few more pennies and a willingness to cooperate with so-called opposing interests; 3) the most pennies, the willingness to cooperate, and a go-forward plan that viably bridges a job-loss environment to a job-creation environment of the future.

Andrew Hede, a managing director for restructuring consultancy Alvarez & Marsal, worries that smaller, lending-reliant home building and development companies hold the short end of the stick when it comes to proving their viability for the long run in this inhospitable marketplace.

“Lenders look first at where they have the most to lose, the bigger companies, and they’re beginning to be willing to renegotiate and come to new terms,” says Hede. “They’re not so willing to do that with the smaller players, which doesn’t bode well for smaller players’ viability in the long run.”

“Extend and pretend” may keep foreclosures from erupting into Armageddon, and it may actually keep some lenders from foreclosing on some nonperforming communities and AC&D loans while everybody keeps vigil on the mood of the almighty prospective home buyer.

Some estimates are that the tangible net worth of the average renter right now is about $7,500. That’s 20% of less than $38,000, which is about one-third the cost of a modest new home.

So, the tailwinds necessary for the pro formas of any new-home construction business to make viable sense right now are 1) the opposite of job losses, and 2) the opposite of excessively tight lending standards. Anything aggressive in a home builder’s sales projections will still get a big red flag from any body with money at stake.

“Until there’s beginnings of a marketplace recovery, and you see job creation and easier access to mortgage finance, companies have to focus on fundamental balance sheet issues,” says Hede. “Liquidity, cash flow, preserving core fundamental assets, possibly exiting non-core communities or markets, and everybody needs concessions everywhere with partners, lenders, and other creditors.”

In other words, 2010 is one big work out.  Or as New Yorker writer James Surowiecki phrases it in his piece, “The Populism Problem:”

“The only way out is through.”

What some drivers learn in Washington, D.C.’s ice and snow choked streets these days is that the more they gun the accelerator, the more likely it is they’re going to need more people and more time to push them out of the hole they’re in.

Too bad the government’s shut down, or some of them might learn something by walking through the Capitol’s streets on a Winter’s day that should be the start of housing’s Spring selling season.

February 11, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Small Business’ Rep Sees Little Cheer in Improved NFIB Optimism

The saying went, “as Detroit goes, so goes the economy.” But now? Actually, half the private sector Gross Domestic Product traces to small business activity, and small business is not going well.

The latest sentiment numbers, at least, are headed in the right direction, or so it would seem from the National Federation of Independent Business’s “Small Business Optimism Index” for January. The survey indicates a month over month improvement of 1.3 points in January, which is 8.3 points above the benchmark’s most recent nadir last March.

Still, William Dunkleberg, chief economist for the NFIB, is unimpressed, and he wants everybody to know that.

You see, Dunkelberg is part of the growing cake-and-eat-it crowd that James Surowiecki has described so well in the current New Yorker, in a piece called “The Populism Problem.”

On the one hand, Dunkelberg espouses a free-the-market indictment of government policy for being way too heavy-handed in its role in economic conditions.

On the other hand, he’s saying that the $30 billion tax credit stimulus package for small business hiring is a sniffling insult, “a drop in the puddle.” He compares the $30 B to the $80 billion Uncle Sam handed to Detroit in bail outs, and, well, takes offense.

This reminds us of an observation shared by a trusted source in residential real estate finance last week.

“Normally, when times are bad, you see some people horning in on opportunities that open up because times are bad,” our trusted advisor said. “That’s still not happening to the extent it might because assets have not, and perhaps can not be written to tradable values yet.”

The last line in the New Yorker piece is this: “The only way out is through.” The only way things are going to get better for small business, is for small business to do what it does, find opportunity where opportunity exists. Small business can and will identify needs among consumers even as they deleverage their household balance sheets and decide to save rather than spend.

Dunkelberg says stop giving bailout money to businesses, and give it to consumers instead. He says none of the stimulus package initiatives have aimed stimulus dollars at consumers.

That’s at least arguable. What about the home buyer tax credit? What about the tax break (Stimulus 1) that occurred in Spring 2008 under the W administration?

So the rest of Dunkelberg’s commentary on the NFIB Small Business Optimism must be taken with a large grain of salt. It’s that mix of anger and ideology that the current populism movement finds so appealing while the economic pain is general.

But as far as grains of sale, not now, because here in D.C. we need all the salt we can for the city streets, which we’ve seen no sign of since last Friday.

February 10, 2010 | Filed Under Financial Crisis | 1 Comment 

New Home Building’s Ten Most Critical Factors–And What to Do

Winter’s insufferably long days have started to relent to the point where it’s no longer necessarily pitch dark both when you arrive and go home from work. Still, whatever the geography, cold, difficult days and nights lay ahead, even if optimism attaches itself to cautiousness in an increasing number of pronouncements of publically traded home building company leaders in their quarterly and fiscal year financial reports to analysts.

This, the first formal week of what’s long been known as spring selling season, here’s how we’d oversimply characterize the 10 most critical dynamics in the higher volume new-home market:

As you can see, almost every negative factor has a neutralizer, an offsetting positive one. This is why it’s true that nobody but nobody knows for sure whether 2010’s economic and housing trajectory will go down as part of a W, a lazy U, an L, or even a V-shaped recovery. There are simply too many unpredictables.

This is why, in addition to executing flawlessly on your Spring Selling Season tactical plan of driving people into your sales centers and models, starting specs aimed at the margin of demand you can pull out of apartments and other rentals, and putting absolutely miserly discipline on all expenses beyond the first half of the year, there are other strategic building blocks to work on now …

The good news is that one of them is not simply working to lower your golf handicap this year, with faint hope that the U.S. Census population clock suddenly tolls the end of the housing depression.

Even as Capitol Hill remains all too involved in the day to day of business and finance lives and livelihoods, and even as a stubborn economy suggests that incumbent electoral officials will be pulling out the stops on economy-boosting programs, we believe we’ve seen the last of home buyer tax credits. We don’t think that even the housing lobbyists give another extension much of a chance, especially in light of what it took to get the last home buyer tax credit through.

In other words, whether or not the 10 aforementioned critical dynamics play one another to a draw, it’s going to be up to operators themselves to manage through the next stretch. The minute you succeed–as some of you will–in getting home not-buyers to become home buyers, private sector liquidity and even banks will come back into the space looking for your business again.

This is probably a 24-month process. Still, it begins now, with the 2010 Spring Selling Season. What comes next after that? Well, you can focus on that question and come away with an action plan as we gather the Housing Leadership Summit, a conference designed for both strategic leaders and operational management, in Chicago, May 10-12. It’s a must-attend event for the home building industry’s CEOs, presidents, and top operating management.

February 8, 2010 | Filed Under Financial Crisis, Home Builders | 2 Comments 

Home Building M&A in 2010? Don’t Count it Out

Just a little visibility for home builders would be so welcome right now. However, it looks as if clarity about what exactly to anticipate next among home buyers and sellers is on hold.

So, we’re looking at 2010 as another pre-visibility year. It’s another year where we see cash and balance sheet management action plans (a.k.a. savings wherever possible and sales at almost any cost) playing to greater emphasis than revenue generation. It’s not the inflection-point year we might have hoped for, but that doesn’t mean operators get more time just to practice their putting or sand saves.

That pre-visibility period, which essentially got set in motion with the collapse of the credit markets in the Fall of 2008, is not without news, drama, and the need for a plan.

High-probability and low-probability/high-impact events–ranging from China’s tapping the breaks on its economy to the dollar index rising, to domestic GDP growth losing steam, to continued question marks around a real economy that can start putting people back to work–each figure into housing economy scenarios for the next few months. It’s tough to tell them apart, let alone which ones cancel out the others.

New-home building’s economic outlook has in it what we believe to be two opposing forces at work that can make or break survival strategies for 2010. One is job and income trends tied to real economy earnings–and this is an imponderable. We may get another $100 billion stimulus package aimed at jumpstarting a tide-turn from negative to positive job formation.

What home builders place great stock in–perhaps even more than in any headwind they face right now–is scarcity. In many markets, the new-home supply has shrunk to a level where many feel that they’re one good gust away from a “shortage” of homes. Is that gust likely in 2010?

Well, if the burst of home buying activity expected this month and in March and April leading up to the end of the latest tax credit for home buyers runs seasonally true to form on a historical basis, the months’ supply of new homes should close to within a whisper of  five to six months’ supply on a run-rate basis. This could be an X factor, and it’s one that many private home building company executives are counting on as a market tipping point.

Meanwhile, it looks as if one drama for the year will be the question of whether we’ll hit that point of a shortage in new-home supply or a shortage of new home builders first. Unquestionably, given the credit and savings environment for both consumers and businesses, the pre-visibility year will be a year of consolidation of greater home building resources among fewer players.

Will we see mergers along the lines of last year’s Pulte-Centex combination? Some say yes, sooner than later.

Although high finance powers that be tell us that 2010 offers little if any greater likelihood of mergers and acquisitions than any other year, it’s not unreasonable to speculate on deals that may get done. Word is that Taylor Wimpey, the United Kingdom-based parent of Taylor Morrison, is exploring either a sale or an IPO for the North American home building operations.

A number of other entities have been the subject of acquisition talk among public companies replete with cash. Woodside Homes, which just emerged from bankruptcy, has a national footprint that matches many of the publics and could represent a valuable land-asset pipeline with operational capacity where needed and efficiencies to capture.

Some mention Standard Pacific as a platform for a company to jumpstart solid volume activity primarily in California, and the just-purchased Florida land assets of TOUSA as a similar opportunity to catalyze cash generation opportunity in the Sunshine State.

Public builders, save Orleans Homebuilders, have all mostly been able to kick their debt-burden can down the road. So the question of distress as a motivator for M&A looms large.

One-off motivators, such as the age and financial disposition of current chief executivies, are also hard to predict. But in an environment where taxation–particularly tax rates on the wealthy and capital gains taxes–will be a force to contend with, don’t count out conversations on succession plans and even mergers that have tax implications as a role player.

February 1, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

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