Perry Bigelow — The Original Voice Behind Energy Efficient Home Loan Qualification
The words, “learn now or pay later” carry a none too subtle threat, and one we believe should grab home building business executive audiences by the collar and shake forcefully. Three of every four dollars of residential energy costs in the United States come from owner-occupied, single family homes, according to a Wells Fargo white paper overview on the “Green Home Market.”
Whether it’s energy independence, climate change, fuel costs or all of the above, the biggest risk to home builders would be to take an inflexible position on the debate and wait out the outcomes. Inaction will only come back to haunt.
After mortgage principal and interest payments, energy is either the second or third largest expense item in the monthly housing cost list, depending on the local property tax bill. Even as the housing downturn drags from inertia to slow-motion progress in the months ahead, energy is a wedge factor that can swing a buyer to new versus used in a heartbeat.
And like it or not, energy and climate are on the national agenda short-list. On the heals of financial reform legislation, we’ll most likely see attention focus to immigration reform, an issue also of importance to home builders, both from an operations viewpoint and a home buyer demand perspective. After immigration reform–perhaps with a mid-term election intervening–one or more of the dozens of energy reform proposals will slog toward reconciliation and then to the President’s desk.
Not acting would be foolish.
And yet today, we still collectively support a housing finance complex that effectively rewards home buyers’ trading up for extra square footage and less energy efficiency, and punishes the purchase of a home that can save as much as 30% over what average new houses use in energy.
What’s even more scary–but understandable in light of the myth and chicanery that has grown up in and around the sustainable, high performance residential construction sector–is that we’re aware that a good percentage of our audience’s eyes glaze over at the mere mention of “green building.”
So you’ve learned this in the years since all the green talk has gradually become a global bid for survival: Most home buyers won’t pay for green. Put that together with mistrust and disillusionment with elected officials, who all seem bent on passing laws and building codes that add to the building costs, and you’d appear to have a pretty good argument for just trying to sell homes while others figure out what’s going to be law and when.
Wrong.
Two vital down-the-road issues require immediate action from a unified home building industry voice. One is the U.S. debt to GDP ratio, whose dire endgame we can see in sneak-preview mode if we take a look at Greece and the other weak Eurozone economies getting crushed under the weight of servicing what money they owe to others. Home builders must get out ahead of ways they can be a part of reducing the public debt to a more manageable level, or their businesses will be decimated further in the long run.
Also, energy and the climate. The time to hesitate is through.
Among the next steps to fix housing will be to fix housing finance. Part of the solution would be in changing how mortgages are approved by adding “E” for energy to the time-honored formula for calculating a buyer’s monthly ability to pay to operate her home.
This was an idea Bigelow Homes founder Perry Bigelow brought to Capitol Hill in March 1991, and it would introduce a free market catalyst to build and renovate homes by correcting a loan amount for the actual ongoing operating costs of the home in addition to paying the seller’s sticker price. Bigelow Homes has guaranteed energy costs for its home buyers for more than two decades.
Perry Bigelow’s 1991 idea ran afoul of Fannie Mae and Freddie Mac interests in their own energy efficient mortgage programs, which ultimately foundered. Today, remarkably, the theory, verbiage, and conviction that the Leading Homebuilders of America group has adopted as a rallying cry to alter mortgage underwriting and appraisals around energy efficiency, springs directly from Bigelow’s position on the issue.
“I don’t care about authorship on this,” Bigelow says. “I care about getting it done.”
Ken Gear, director of the Leading Homebuilders of America group that has been championing the issue in and among Congressional committees, notes that he’s amazed that several different sources who’ve looked into approaches on housing finance and energy have arrived at the same place, adding an “E” to PITI to fairly qualify buyers for a loan.
Home Builders Need One More Unifying Issue — Why Not Energy Efficient Home Loans?
Two years ago at this time of year, the new housing industry had a rallying, unifying issue, complete with its own misnomer slogan, “Fix Housing First.”
The theory went that if you stimulated the demand side of the home purchase equation, many good things would happen.
What took place during the months leading up to the February 2009 Congressional vote and enactment of the American Recovery and Reinvestment Act was a show of solidarity we’ve rarely seen at work across an industry sector–the tax credit for home buyers was in, and it would be extended and expanded in November to stay in force for contracts through less than two weeks ago.
Perhaps it was desperation that brought home builders and building materials suppliers of all sizes, shapes, and business models together behind the measure that aimed to stimulate home purchases, both to reduce the count of available homes on the market and to keep people in jobs who were building new homes.
Across two administrations and across sharp partisan differences, the initiative gained traction because it would help stanch the free-fall in home prices that was set in motion as the leverage underpinning homeownership came undone from all directions at one time.
Arguably, the stimulative tactic did what it was supposed to have done. Did it “fix” housing? No, of course it didn’t fix housing. There’s still too much on the debt side of every balance sheet you look at, and not enough coming in to pay for it all. To fix housing, you’ve got to fix jobs and household formations, which means fixing consumers’ capacity to spend money on goods and services, which means fixing debt and income, which leads back to jobs.
What the program did–especially for those who make and sell new homes–was to kick the can down the road. This sounds like a bad thing. But is it?
“Sometimes, kicking the can down the road is more than kicking the can down the road.” Joe Kernen, the CNBC Squawk Box co-anchor who would argue he’s the “real” morning Joe, said that today during his early morning program. “Sometimes it really gets something done.”
Meaning that bail-outs are not all bad if they provide time for markets to regain their legs and start working the way they should.
He was referring in this case to the European Union’s Trillion-Dollar bailout of its troubled economies in Greece, Portugal, Ireland, Italy, and Spain, which could be said to have averted a global liquidity lock-up the likes of which we’re only too familiar with in spite of our short memories.
The Euro bail-out reminds one and all of the reality of the era we’re stuck in for at least as long as it takes household balance sheets to draw back into their norms and for both private and public debt to reach equilibrium with the capacity to service it–the era of pain management.
Home builders–and remodelers–know all about pain management by now. After months of privatized profits, a ton of losses on the backs of the public, the price for fantasy-cheap capital, and the consequence of three or four years of 300,000 to 400,000 new homes a year beyond the market need.
Still, home builders and their partners need to seize on another common rallying point. What the tax credit stimulus did or didn’t do for the housing economy and the broader economy will only really be known from a future vantage point. What large and small companies who are in new-home construction need is a focal point to align and coordinate their efforts around.
And there is at least one: energy efficient mortgages. Or if you prefer another misnomer slogan: green mortgages. Plus, energy efficient appraisals.
What this could do, if home builders and their partners would seriously align behind the issue, would be to kick the can down the road in a good way.
It’s all about household check-book management. Instead of only looking at principal, interest, taxes, and insurance as the key building block of underwriting a mortgage and the ability to pay it back, energy efficient mortgages and appraisals would presume adding an “E” to the PITA, to factor in what people pay for utility costs.
Together with a pervasively accepted third-party energy efficiency ratings mechanism, homes with greater monthly utility bill efficiency would be worth a premium in appraisals, and would enable the borrower to carry a loan beyond what the current finance-ability ceiling would be.
This means a buyer could opt in at no penalty for greater levels of energy efficiency in their home, and pay off the cost of the often optional “energy package” of upgraded windows, heating and ventilation system, and hot water heater with credit that would cost the same as a less expensive home without the energy package.
This would be good for home builders, because it would give them an even greater edge over resales–and the foreclosure tsunami–in a market that will only gradually improve for several years to come.
So, home builders and their supplier partners should rally around this issue, even as the dozens of proposed energy bills gather and lose steam in the current legislative session. Once financial and immigration reform get checked off on the Obama Administration’s extraordinary agenda, energy and climate measures will get their turn in the spotlight.
We think it would be a worthwhile issue to push a unified call to action, because sooner or later, the financial ramifications of climate change and energy independence will be huge for the sector.
Consider it part of your pain management strategy for the next six to 12 months.
Pressure on Public Home Builders from Shareholder Groups Increases
Amid a host of recently-past and upcoming annual shareholder meetings, management and the boards of directors of the 15-or-so publicly traded home building companies face growing pressure from shareowners on two issues: executive compensation and climate change.
While attention among activist stakeholders gravitates mostly to “named executive” pay and bonus packages, a number of home builders, namely Lennar, Ryland, Standard Pacific, and Toll Brothers are the target of the Investor Network on Climate Risk, a group that’s pushing companies to make reducing greenhouse gas emission a more transparent strategic priority.
Shareholders of both Toll Brothers and Lennar, whose annual meetings took place on March 17, and April 14, respectively, voted down shareholder proposals that called for “quantitative goals, based on available technologies, for reducing total greenhouse gas from the Company’s products and operations.”
Ryland shareholders meet next week, on April 28, and Standard Pacific’s annual meeting is set for May 12, at company headquarters in Irvine, Calif. The INCR, whose interests in home building companies are represented by shareholder groups such as the Nathan Cummings Foundation, and the Officer of the Comptroller of New York City, have submitted shareholder proposals that aim to get home building companies to set measurable goals and account for performance on those goals to shareholders each year.
Here’s a statement from a March 5, 2010 Memorandum from The Nathan Cummings Foundation’s director of shareholder activities, Laura Shaffer.
“Over the last two years, there has been substantial movement among some companies in the homebuilding industry towards both increased disclosure and concrete action to reduce GHG emissions…. NVR is building all new homes to Energy Star standards, KB Home is building all new homes in new communities to Energy Star standards, and Pulte is focusing on increasing the energy efficiency of the homes it builds while simultaneously looking to reduce operational GHG emissions. Meanwhile, companies like Lennar, Ryland, Standard Pacific and Toll Brothers are falling even farther behind. None of these companies appear to be anywhere near the completion of a GHG emissions assessment, let along the establishment of a GHG emissions baseline covering operations, electricity usage and products as recommended.”
Each of the four companies asserts that its building and corporate operations are already making strides in efforts to reduce their carbon footprint. However, nonetheless, they are recommending that shareholders vote down these proposals because complying with them would take away their ability to compete in a ferociously competitive arena with other home builders.
“We are pro-green, and we do everything we can in our homes, communities, and our company to reduce greenhouse gas emissions,” says Toll Brothers executive vice president and CFO Joel Rassman. “Fact is, our customers tell us a lot of what they want in their homes, and while we encourage them toward greener choices, we can not comply with what we can’t control.”
Rassman notes that Toll Brothers shareholders defeated the proposal, with 56% of the vote going against, 23% in favor, and 21% an abstaining vote.
The Nathan Cummings Foundation’s Shaffer says that support for such proposals is growing each year. “We introduced the first shareholder proposal for greenhouse gas emission reduction goals at Ryland in 2005, and got 7.9% shareholder support. In 2009, support was up to 29.9% of shareholders.”
According to Shaffer, the Foundation owns, 200 shares of Lennar, 103 shares of Ryland, and 170 shares of Standard Pacific, not a lot of weight in and of itself, but enough to raise the issue.
What’s clear is that the executive management and boards of directors of home building companies will have an increasing number of shareholder proposals calling for changes to both strategy and operations of their companies. Pulte, whose annual meeting takes place, May 12, will vote on six shareholder proposals, mostly having to do with executive compensation.
Leading Builders Here on the Hill in Energy Push
The Leading Builders of America charter group of 16 large public and private home builders has joined the 33-year-old Alliance to Save Energy to strengthen its more direct line of contact with Capitol Hill.
Today [Wednesday, March 10], Meritage Homes Chairman and CEO Steve Hilton addressed the Alliance’s Great Energy Efficiency Day (GEED), in the Capital’s Dirksen Senate Office Building, as part of a daylong agenda that put building and communities in the spotlight:
Building for the Future: EE Technologies Today and Tomorrow
- Moderator: Robert Dixon, Senior Vice President & Global Head, Efficiency & Sustainability, Siemens Industry, Inc.
- Steven J. Hilton, Chairman and Chief Executive Officer, Meritage Homes Corporation; Chairman, Energy Committee, Leading Builders of America
- Faren Dancer, Principal, Paradigm Development Partners
- Steve Hochhauser, President, Residential Systems, Ingersoll Rand
- Michael Lawrence, Vice President & General Manager, Johns Manville
“The key for us is getting appraisals to properly value the increased value of more efficient homes and recognizing the value of energy efficiency in the mortgage process so highly efficient homes are affordable,” says LBA executive director Ken Gear. ”We have created a unique partnership with the Alliance to Save Energy to help make new homes as efficient as possible without pricing them out of the market.”
Here’s the transcript of Hilton’s remarks, which gives good background on the Leading Builders of America and its policy initiatives, which we wrote about earlier.
[Bob Dixon will introduce Steve as Chairman & CEO of Meritage, and welcome LBA to the Alliance as part of the introduction]
Thank you for the kind introduction, Bob.I want to thank the Alliance for the opportunity to speak here today, representing the Leading Builders of America.
Leading Builders of America is a new trade group that includes sixteen of the largest home builders in the country. Combined, we delivered about 129,000 new homes in 2008, representing approximately 25% of all homes built in the U.S. that year, so we bring to the table a broad and deep understanding of home buyers across the country. We also account for more than 367,000 jobs nationally through our employees and sub-contractors.
LBA members are driving energy efficient practices and materials into the mainstream of homebuilding. We have been instrumental in helping ENERGY STAR reach 1 million qualified homes in the U.S., and our members are active partners in many other energy efficiency initiatives, including the DOE’s Building America Program. Through our collective efforts with trade partners and other organizations represented here, the homes we build today consume one-third less energy than homes built just 10 years ago.
Meritage Homes has been a member of LBA since its beginning, and I head the organization’s energy bill working group. As CEO of Meritage Homes, I am proud to say that Meritage is committed to energy efficiency and sustainability. This year, every home we build will exceed the EPA’s ENERGY STAR requirements, providing lower costs of ownership and healthier living environments to our home buyers, while reducing their energy consumption. Meritage’s commitment to sustainability is underscored by the fact that we are incorporating energy efficient features standard in every home we build, rather than making them optional at an added cost to the home buyer.
We are here today because we are all convinced that building energy efficient features into homes is the right thing to do, and we want to play an active role in formulating strategies to reduce energy consumption while also preserving and creating jobs to help strengthen the economy. Most importantly, consistent with LBA’s mission “to preserve home affordability for American families,” we want to ensure that homeowners realize a net benefit from the added costs of building more energy efficient homes.
Energy efficiency should be a win-win situation for everyone involved.
So why aren’t home buyers embracing energy efficient homes more than they are today?
There are several reasons.
It’s no surprise that energy efficient features cost more, but most buyers today aren’t willing to pay more for a new energy efficient home, given the choice of a lower-priced but less efficient home, unless they can clearly see the value and afford the higher price.
We are working with our trade partners to reduce the costs of building in more energy efficient features, in order to keep prices down. In addition, we see several opportunities to encourage buyers to opt for more energy efficient homes when buying.
Energy efficiency must be easier to quantify and compare, affordable, and provide a net positive benefit to a homeowner, in order for them to purchase a more energy efficient home.
LBA believes there are three key opportunities that we support in that regard:
(1) The first is to adopt a uniform standard for measuring and labeling the energy efficiency of homes.
So much of what we do to make a home consume less energy isn’t seen as you walk through a prospective home, and there is a great deal of confusion in the marketplace about how to quantify the benefits of an energy efficient new home.
Use of a standard efficiency measurement such as the DOE’s EnergySmart Home Scale is an essential first step to provide a basis for comparing the energy efficiency of homes.
(2) The second opportunity we see is to translate the additional energy efficiency into dollars, to be used commonly by buyers, appraisers and lenders. Energy Efficiency should make homes more affordable, not less.
In order to substantiate the increased costs associated with higher efficiency construction and components, the additional value of an energy efficient home should be reflected in its appraisal. That is not the case in today’s appraisal process.
Additionally, underwriting guidelines should allow for lenders to give a buyer credit for lower projected monthly energy costs when qualifying them for a mortgage.
This is an area where federal leadership is absolutely essential. If FHA and the other GSE’s address energy efficiency in their underwriting and appraisal standards, they will move the entire market.
(3) Third, we must use a cost/benefit analysis in setting energy efficiency targets and standards, to ensure that additional costs can be fully offset by reduced operating expenses.
LBA has studied this carefully and done extensive cost/benefit analysis, and we believe significant improvements can be justified in the near term. These improvements are achievable by carefully coordinating federal goals with the code development cycle, in order to ensure that builders and local governments have sufficient time to comply with and enforce any new requirements.
To summarize, if we want consumers to buy more energy efficient homes, we must address three issues:
First, give home buyers the tools they need to understand and compare new energy efficiency.
Second, ensure that energy efficient homes are affordable, by reflecting their higher value in the appraisal process and by incorporating energy savings into mortgage qualification standards.
Finally, ensure coordination between the federal government, code bodies, state governments and builders, working together to develop a realistic timetable for increasing energy efficiency in new homes.
I have additional handouts that provide a much more thorough discussion of these points, which I would be glad to share with you.
In closing, I want to let you know that LBA member companies are committed to energy efficiency. And we are committed to working with groups like the Alliance to help advance this very important national priority.
Thank you for your time.
Looks like the LBA is looking to buy time to comply with what it foresees becoming energy efficiency mandates sooner than later. In its phrasing, it seeks to coordinate “federal goals with the code development cycle,” and wants to tie energy efficiency to a tangible “net value” gain for a home buyer, which can involve tricky cost and savings over time analysis to get at. And, as Gear points out, if the government gives credit (in terms of appraised value) to home buyers with energy efficient home solutions, the finance-ability of homes becomes more achievable.
All in all, a strong positive message from a group whose stakes may differ on this issue from the short list of priorities the bigger NAHB builder group is pursuing in its lobbying efforts.
For new home builder, Joseph Carl Homes, the moment to rise from Phoenix’s ashes is now
When Joseph “Carl” Mulac grand opens his CantaMia active adult community in the Estrella master plan in Goodyear (Phoenix market), Az., Feb. 10, home building’s spring selling season officially begins.
Mulac–whose youthful appearance belies his three decades of experience in home building management–is a veteran of large enterprise companies, most recently as the Phoenix division president of the now no-longer TOUSA’s Engle Homes. But to him, he is one thing.
“I’ve worked for several of the nationals, but I think of myself as a home builder,” Mulac told me over a cup of coffee at Caesar Palace’s Augustus cafe at the International Builders Show in Las Vegas last week, talking about the fledgling Joseph Carl Homes’ imminent ramp up to big builder-dom in one fell swoop.
Mulac is living proof that “you have to be good to be lucky.”
His opportunity right now in Phoenix springs from being the right guy in the right place at the right time. He’s the right guy for a couple of reasons. Amid and despite TOUSA’s demise in 2007 and 2008, he ran the Engle division like a pro and remained one of CEO Tony Mon’s most reliably successful value producers.
Now, staying in Tony’s graces as TOUSA’s fortunes deteriorated after its disastrous acquisition of Transeastern Homes at peak market prices on the eve of the meltdown was a smart thing to do for a number of reasons. Not the least of which was that when Reuben Leibowitz–the fellow who originally invested in and made an eventual killing on Tony Mon’s Pacific Greystone back in the early 1990s–asked Tony who he should tap to lead his charge on an up from the ashes play in Phoenix that would start by getting Engle’s holdings back out of the banks, Mon didn’t hesitate to tell Leibowitz that Mulac was his man.
Leibowitz didn’t have to ask Mulac twice. Here’s how the Arizona Republic reported the big deal went down:
The first phase encompasses 215 acres and calls for 643 homes to be built over about four years. Future land purchases could expand the development to 1,700 homes.
Community amenities will include indoor and outdoor swimming pools, a fitness center and tennis courts.
Province was only a month from opening when the project came to a halt, according to Mulac, an Engle executive at the time.
Property records show Engle financed the project under a $250 million loan in March 2006. Mulac, who signed the documents for Engle, said the loan funded up to 18 communities around the Valley.
At Province, Engle built 14 model homes, a 15,000-square-foot sales center and infrastructure, and began construction on a 30,000-square-foot recreation center.
But Engle’s parent company, TOUSA Inc., filed for Chapter 11 bankruptcy protection in January 2008.
Property records show E/S Property Holdings LLC, managed by JPMorgan Chase Bank, bought Engle’s Estrella property at a trustee sale in February.
Joseph Carl Homes paid $8.5 million for 215 acres, according to Mulac.
So, the land price has been reset massively; he’s coming out of the gate with 14 models and a sales center already built, and he just hired his 21st employee–Joseph Carl Mulac 3rd–out of University of Arizona to work harder than he imagines and wear a lot of hats.
They say that even in these most hostile of times, you can start a home building company with a lot of immediate momentum and promise if you have the money, the people, the land, and the product. Carl Mulac counts himself fortunate on all of these accounts, but it doesn’t mean he’s not working his butt off. But that’s nothing new.
Until he had a major run-in with a medial collateral ligament in the early 1980s, the elder Mulac was starting point guard material, albeit, he protests, at Pittsburgh’s Carnegie Mellon, which is no Division 1 powerhouse. Still, that floor general, court-sense approach comes through with Mulac to this day, as does the confidence amid the challenges.
Why does he say he’s a home builder? He says he finished his last tasks and proceedings at Carnegie Mellon on a Friday, and by the following day, he was on a home building site in Cincinnati, working for Ryan Homes.
With a flattering title along the lines of Technical Assistant, Mulac soon discovered during his job of inspecting and recording problems in homes during various stages of construction that one of three problems needed recording in almost every home he inspected:
“I was always frustrated,” Mulac recalls. “Something was either always broken, didn’t work, or missing because it was stolen. Home after home after home this was the case. I went back and talked to my supervisor about how frustrated I was about this, and he said, ’The good news is that this is why you have a job.’ I looked at the problems more positively from that point.”
So, Mulac in his DNA is not only good enough to be lucky, he’s also the kind of guy who, by nature, looks at problems as opportunities. Not just other people’s problems either.
“Every company I’ve spent time working at has gone bankrupt,” Mulac says. “Ryan Homes in the early 1990s, UDC Homes in the mid-90s, and TOUSA. In every case, it was the land that got them. I have to figure I’ve learned that lesson.”
The other critical lesson learned Mulac will abide by will be research and branding.
“When we were with Engle, we’d get approached about doing all the work and study to make sure we had the right value proposition and the right understanding of who our potential buyers are, but we always decided it was too expensive, and we didn’t really need it,” Mulac says. That’s changed.
Mulac brought on Michelle Mace-Basha’s M3B Inc. to work through a disciplined several-month process [see Michelle as part of the Big Builder Virtual Event Phoenix Dream Team ] to learn as much as possible about the “who?” of his potential home buyer, and what would appeal to those buyers.
So, from the outset, Mulac is launching a community whose offerings reflect a full-commitment to customers needs–not simply his sense of those needs, but their sense of them, which is entirely different. This is why CantaMia’s product will come standard not only with solar panels, but with thermal features as well.
“Our research showed that our customer segments profiled as wanting sustainability in their homes at an affordable price point,” Mulac says. “We had to decide from the beginning whether we were going to invest fully in that commitment to our customers or not, and we felt it’s the right thing to do.”
By the time Joseph Carl Homes officially opens CantaMia for business, they’ll have sold a couple of dozen of the 600-plus homes in the first phase of the 1,700-home tract. Once he gets that part going, he’s going to be doing his damndest to line-up business for an operator he’s got on the ground in Las Vegas.
Just like that, a big builder rising out of Phoenix’s ashes, even as uncertainty prevails in the big builder landscape. In some cases private equity money is proving it’s ready to rumble, and in some cases the banks are ready to make their play to get what they can on their holdings.
Although many home builders are finding that bank loans for vertical construction loans are well nigh impossible to come by, Mulac got a line from National Bank of Arizona to get things started.
He’s taking nothing for granted, not even office space.
“A friend in the business was going through the tragedy of having to auction off everything from his office, including the 30-foot marble-top conference room table he was so proud of,” says Mulac. “I don’t think we’ll be seeing the days of fancy 30-foot conference tables coming back anytime soon.”
For now, and the near future, Mulac is running Joseph Carl Homes out of his own home.
Home Builders to Suppliers: You’re Part of the Problem if You’re not Part of the Solution
With so much of focus going to housing demand stimulus policy that has been playing havoc with monthly new home sales trends, it takes readers to bring the conversation back to earth.
Here’s what one production home builder wrote to us about his experience last week in Las Vegas at the International Builders Show:
“Still lots of folks WAY out of touch on the supplier side. Expensive stuff catering to a market that might never return, green touches that buyers won’t pay for, the cattle call financing section was off the rails…..builders don’t need someone to talk to them about financing a ‘deal’ they need someone to finance the future (deals, vertical, overhead…..getting back to work). I think that I was impressed that the show was well attended. You’re spot on that it proves that there are survivors who are looking for the next opportunity. I think that the disconnect between the supplier side and the builder side is wide though. I can’t even begin to guess how companies that sell $20,000 to $50,000 software apps plan to market in the coming years, how the fringe suppliers will survive. If more with less is something that customers are demanding certainly the suppliers didn’t seem to be trumpeting the charge.
There you have it. A gap separates building materials, products and services suppliers from the needs of their customers, the home builders. Government policy has been working like an on-again-off-again spiggot, but home builders are mostly still struggling to understand how to work in the real world beyond the punch-bowl economic gyrations of the moment.
So, in the real world, everybody takes a hair cut, and not one they think will be the most flattering. Homeowners have given up trillions of dollars in household wealth–including home values; builders and developers have done the same with regards to their raw material–building lots–pipeline; banks are smothering in toxic and petrified assets and greed.
In a “good enough” era, a baby steps marathon is more likely to be the way out of the world of hurt than any sudden blast of recovery.
Which is why we should focus questions on the role of builder-supplier partnerships in what’s likely to be a long, long path to healing in the market. After the policy punch bowl goes away, what to expect? The answer is work.
Just as banks, investors, land holders, land losers, the owers and the owed are now just beginning to engage in a great financial reoganization that will reset home prices more in line with household incomes and monthly rents, builders need to have similar work-out plans with their supply sources.
Value engineering is not a new term, but the urgencies around making it more than just a b.s. phrase to describe doing things in design, construction, and operations essentially the same old way are peaking.
Our reader’s view expressed above is that products, services, and materials suppliers should be highly motivated to be part of the solution to reset new home prices on higher-performance new homes lower.
“We can’t compete on price alone,” says Jenne Conger, vice president of sales and marketing at History Maker, a Dallas-area home builder that has four generations of staying power in a market that’s cyclically as tough as they get. “We had to find a point of difference for our buyers in addition to the affordable price point. That point of difference, for us, is green.”
Here’s how the company describes its “green” value offering:
The world is going green and History Maker Homes is no different. To add even more value to all of our homes, we’re now offering a guaranteed energy savings option called Energywise, from BaySystems™, the umbrella brand for the global polyurethane systems operations of Bayer MaterialScience. Bayer MaterialScience is a subgroup of Bayer AGAG, an international health care, nutrition and innovative materials group that produces Bayer Aspirin. This Energywise system provides energy performance improvements that add value to every home through reduced lifecycle costs and improved sustainability, resulting in a two-year guarantee of annual heating and cooling costs.
History Maker, which Conger attests maintained flat sales year-on-year with 2008’s level, sold 60 of its 400 homes in 2009 with the Energywise package. Their price point? Under $200k.
BaySystems’ explanation of the package:
Energywise’s “systems approach to residential energy efficience combines an optimally designed HVAC system with Bayseal spray foam insulation installed by an Energywise Preferred Contractor… Of the 40,000+ homes designed and build using the energywise Energy Cost Savings Guarantee, annual energy savings are commonly more than 50% versus conventional construction.
“Yes, the buyer pays more in the purchase price of the home to get the Energywise package,” Conger says. “But when we go through the total operating cost analysis with the home buyer, and they see the cash flow positive difference from the minute they take over ownership, they’re not put off by the fact that the initial investment adds about $25 or less to their monthly mortgage payment. They’re saving way more than that with the guaranteed energy cost and savings from day one.”
We heard lots of talk among builders that the cost of energy high performance and other sustainable features outweighed the willingness of home buyers to ante up in this environment.
Still, History Maker and Bayer Material Science, which is pushing to expand its distributor and installer network for concerted growth among bigger volume home builders, have apparently struck a balance in their message: Monthly total operating costs, especially when they capture savings in energy and put money back into homeowners’ pockets, are beginning to hit an inflection point as new home buyers grudgingly move off the sidelines into purchases.
At one of the educational seminars during the IBS, Tim Sullivan, of Sullivan Group Real Estate Advisors, had a come-back for home builders who wonder “is this green thing going to remain a factor in our business?”
“If you’re not leveraging monthly total operational expense savings to include energy performance in your new home marketing and sales, then something’s wrong with this picture.”
Sullivan, albeit his Southern California base of perspective, has it right. We may have the luxury of considering energy performance an extravagance or an option at this point, but that’s merely testament to the power of denial.
At any rate, here’s the key point: suppliers that, like Bayer Material Science, can give home builders a point of difference in their submarket selling effort, offer sustainability or high-performance in that point of difference, and partner with the builder to make the investment affordable are going to go into the early lead and maintain it as tough times stretch farther ahead and recovery becomes a glimmer.
FDIC Ya Later
Business considerations notwithstanding, we think it’s less than psychologically healthful that the FDIC gets the last word every week.
Note: The FDIC announced there were 552 bank on the official Problem Bank list at the end of Q3. The difference is a mostly a matter of timing – some enforcement actions haven’t been announced yet, and others may be pending.
Couldn’t we figure out a way to make these bank failure announcements on Monday morning? We realize every announcement means going in with agents and counting hundreds of millions or billions of dollars and figuring out what the bank’s got and what it hasn’t got.
But every Friday afternoon? Sheila, you hear what we’re sayin?
Retro Active–Obama Jobs Focus Spotlights Energy Home Improvement
Even as fresh jobs data flash hints of relief, the President and Congress consider going back to the present and future taxpayer well with a stimulative jobs program in hand.
If — like us too many times — you don’t read beyond the headlines or listen beyond the promo for the story, you’d say, “the jobs picture is improving, so why do we need to spend billions of our grandchildren’s money on a program designed essentially to get a bunch of people reelected in November 2010?”
Well, that’s why there are all those critters called words and charts with percentage signs lurking beneath the headlines.
Here’s why a stimulative jobs program might still make its way through a Congress whose largesse with grandchildren dollars convinces us that many of our elected officials don’t plan to hang around long enough for their grandchildren to realize what they’ve got on their precious little shoulders. (Maybe another planet will be accepting octogenarian former Senators and Representatives by then).
BB Staff, the clever pseudonym of a particular remote worker based somewhere north of the Mason Dixon line, has this analysis of today’s Bureau of Labor Statistics release. We’ve already established that you’re averse to reading much beyond the headline, so we’ll just say briefly:
The number of long-term unemployed (those jobless for 27 weeks and over) rose by 293,000 to 5.9 million, and the percentage of unemployed persons jobless for 27 weeks or more increased by 2.7 percentage points to 38.3%.The number of people working part time for economic reasons was unchanged at9.2 million, and the number of both those marginally attached to the labor force (2.3 million) and discouraged workers (861,000) remained elevated compared to November, 2008.
The improvement in the unemployment rate was concentrated in the lower demographics, with the rate among those lacking a high-school education falling from 15.5% to 15% and that for high-school graduates falling from 11.2% to 10.4%. The rate for those with some college held steady at 9% and that for college graduates increased from 4.7% to 4.9%.
Not so peachy, right.
Moreover, if you’re reading a Housing Crisis post, you’re probably also interested to know that, all told, residential construction jobs have shrunk by more than 20%–probably in the million jobs range. And that’s among people who allow themselves to be counted.
So, a jobs program–with a sticker price of $20 to $50 billion or more–is probably likely to get Capitol Hill traction.
One component we see repeatedly in ideas being floated could have a positive impact on that construction jobs number. An AP story on CNBC reports:
One new idea Democrats and the White House are looking at is a program to give people cash incentives to retrofit their homes with energy-saving materials along the lines of the Cash for Clunkers program that boosted car sales this summer.
Dropping in on a session called “Innovative Agenda and Green Jobs of the Future,” Obama said, “Not to tip our hand too much, but one of the things I would be surprised if we don’t end up moving forward on is an aggressive agenda for energy efficiency and weatherization. Because that is an area where we can get it up and running relatively quickly. You don’t need new technologies.”
This would not only put some of the million construction workers who’ve lost their jobs back to work, it would assume consumer spending to make these and other improvements, and it would probably in many cases do as well as any mortgage loan mitigation program could do to secure a family’s ability to stay in their home and pay their mortgage, and keep from being a foreclosure statistic.
Green remodeling could have a big comeback year in 2010.
Big Builder’s Atlanta Dream Team Seeks Victory at Vickery
Amid the ongoing economic and real estate storms, many new-home communities have a big question to answer.
Will new economic realities take away from the special character designed into a community that came online during real estate’s mad run to its 2006 peak? In other words, can the second half of a place be as special as the first half when the first half took off during the “funny money” days, and the second half needs to scrap it out when greenback dollars and the ways to earn them are scarce?
- Specifically, what do you do with an award-winning New Urbanism community that did spectacularly out of the gate in the halcyon days of yore (2004, 05, 06, and a bit more), but then hit the wall of real estate’s alternative reality?
- How do you sustain that character in a still-innocent and vulnerable place when it’s less than half complete, and prices, absorption levels, and demand have fallen off a cliff–and, alas, the original developer builder has had to cede the property to its banks?
That’s exactly what the Big Builder ‘09 Virtual event Atlanta Dream Team faces as it takes on its land parcel challenge–the “future Phase 8″–of the lauded Vickery community, which hit a wall in late 2007, and which has seen its assets go back to Wachovia by late last year.
The team–a hand-picked Dream Team of planning, design, business, and marketing executives from different organizations competing Atlanta’s market–will focus on what to do with 22 acres of undeveloped land at the Southwest end of Vickery’s 214-acre traditional neighborhood expanse. Their goal as they brainstorm ideas about how to bring value to the land and offer a viable big builder business vision for a distressed parcel?
Here’s the current land plan:
Click image for access to Vickery home page.
Do it so that it keeps the sense of place Pam Sessions and the original design teams infused in Vickery, but also build an affordable product in the “new normal” definition of the word affordable.
The Atlanta team:
- Chuck Fuhr, president, Atlanta Division, Ryland Homes
- Michael Langella, senior vice president, Reynolds Signature Communities
- Bill Evans Jr., co-founder, John Thomas Homes
- Michael Medick, architect
- Jennifer Landers, regional marketing director, Newland Communities
- Steve Palm, principal, SmartNumbers
Among the challenges, Vickery is a total EarthCraft certified community, so the team will have to figure compliance with this certification in its cost planning for the project.
Here’s a brief video in which Big Builder editorial director John McManus discusses the project and the talented team who’re working on generating a Big Builder ‘09 Virtual plan to present the week of Nov. 16-20.
Mandating Green
The House of Representatives yesterday gave President Barack Obama triumph in a battle amid the broad front of his agenda. The House voted to legislate dramatic reduction in the U.S. emission of greenhouse gas. The New York Times reports:
The vote was the first time either house of Congress had approved a bill meant to curb the heat-trapping gases scientists have linked to climate change. The legislation, which passed despite deep divisions among Democrats, could lead to profound changes in many sectors of the economy, including electric power generation, agriculture, manufacturing and construction.
Victory in the war is another matter.
Ahead of the vote, Big Builder online editor William F. Gloede wrote an informed, impassioned, and somewhat biased opinion piece on how the bill would impact residential builders.
A snippet from Gloede’s essay:
The bill would, among many other controversial provisions, mandate increases in the energy efficiency of homes of 30% upon enactment and 50% above standards set under the 2006 International Energy Conservation Code (IECC) by 2014, increasing by 5% in 2017 and increasing another 5% each three years thereafter until 2030. It would supercede state and local building codes regarding energy efficiency, withhold federal money from states deemed out of compliance and provide civil penalties for builders and/or homeowners. It would give significant new oversight and enforcement powers to the Department of Energy and the Cabinet-level post of Secretary of Energy, an unelected post that goes to a political ally of the President. And each day of occupancy of a structure deemed out of compliance would be treated as a separate violation. Ca-ching indeed. Not to mention dealing with officious federal bureaucrats on the jobsite.
The big problem with these targets–among a multitude of other problems with this bill–is that while they may be feasible, they are impossible as a matter of practicality. Unless builders build, and people buy, today’s equivalent of Buckminster Fuller geodesic-domes, attaining this level of energy efficiency would prove prohibitively expensive. Low-income housing?
The question is how much of the bill will survive the Senate intact. Ironically, construction trade groups have had mixed records in lobbying Senators for their interests.
It will be interesting to see which of the landmark rules as they apply to construction make it into law.