In 2011, It’s Not How Many Homes You Build, It’s What you Make or Lose

Three-hundred-twenty-one thousand new homes sold in 2010, according to United States Census Bureau data. If Black Swans–geopolitical unrest, natural disasters, Euro debt crisis–don’t derail the putt-putt economic recovery we’ve seen signs of during the past several quarters, we’ll see a new-home sales rebound of round about 10%, up to 353,000 in 2011.

This dollop of glad tidings comes compliments of an outlook for housing from Jonathan Smoke, Hanley Wood Market Intelligence resident economist and analytics maven.

Here’s the way Jonathan’s outlook rounds out through to the midpoint of this decade, nowhere near the seven-figure starts figure until two years from now, with new-home sales not tipping the half-million balance until 2013 rings in 2014.

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Still, one of the more astonishing facts underlying this plotline is this–and it took one of the smarter guys in the business to boil it down to its simplest, scariest essence. This fellow put it in the form of a question.

“How many of the 221,000 new homes sold in 2010 were profitable?”

By extension, he applies the question to the current year.

“How many of the 253,000 new-h0mes predicted to sell in 2011 will be profitable?”

This fellow’s questions premise themselves on reports from just over a dozen public home building companies, which showed that a mere handful of them operated cash-flow positive during the past year, and have already pre-indicated that doing so in 2011 is going to be an even tougher slog than last.

The point here is two-fold.

One is that externals, things you can’t control–like the severity of winter weather, or geopolitical dislocation affecting oil prices, or offshore oil spills, or nuclear energy risks, or Portugal, Ireland, Italy, Greece, and Spain nearing default on their nations’ debt, or even the United States’ struggle with the role of a tax-payer subsidized government hand in housing finance–will continue.

Black Swans are now practically as common as jack rabbits on the prairie. They’ve sped up, and there doesn’t seem to be any calming them down.

The other thing is, however, that every other thing that happens in your business needs to count. Knowing how far you can push trades on your labor costs… Learning how you can double, or triple, or quadruple up on a truck delivering materials or manufactured items to your site… Finding out how one home builders’ “legacy land” issue might be your opportunistic grab for the parcel that’s just perfect for your product line (for the right price).

As you’re well aware, there are a few markets that have shot out of recovery’s gate by virtue of a robust jobs showing. And there are, in almost every market however beleaguered, tales of a particular neighborhood that’s striking a chord with buyer prospects who want to buy new for reasons they know and everybody else can find out.

We’re also well aware that the 10% increase in new homes sold that Hanley Wood Market Intelligences’s Jonathan Smoke has in his 2011 outlook essentially reflects an industry-wide emphasis on introducing new communities for sale–incrementally adding to the ones that have been active by the end of 2010. If those pre-existing neighborhoods keep relatively stable and achieve flat sales, the new ones should account for the bump up.

The challenge for home builders — and not just ones who are selling entry-level, first-time buyer homes — comes down to down payments.

If you’re a paycheck-to-paycheck household, you don’t have 20%, and so you’ve got to have an otherwise impeccable credit rating. And after three years of jobs and income instability, lots of people might be able to boast progress but far from perfection.

The downpayment is the single most compelling issue in the food-chain of demand right now, and is likely to get even more compelling when policymakers get through pawing at regulation around risk protection for mortgage backed securitizations and effectively shrink the amount of liquidity in housing finance.

The questions for 2011 and beyond for those home builders who are going to be around scrapping for their 10% increase in new-home sales volume for the year, are how do you make more of those home sales more profitable, or more likely, profitable in the first place.

Our fellow with the smart question about this above notes that because we’re all just people, it’s natural that what we’re always gunning for when we do things is a secret of some sort that will help us, or our companies, or our stakeholders get more and give less.

As many times as you hear that there are no silver bullets, the thought of getting one, just once, could hardly be a more compelling desire.

We’re holding a conference in Chicago that’s all about recognizing the non-existence of silver bullets, and the nonetheless absolute imperative that home builders learn to do–even in a sub-500,000 new-home marketplace–what they do profitably, even if it’s not for the money alone.

It’s true that the program for our Housing Leadership Summit came to be a felicitous, high-level strategic forum, taking place at Chicago’s Drake Hotel, May 23-25. We’re again teamed up with J.P. Morgan’s Michael Rehaut, who’s hosting his 4th annual J.P. Morgan Homebuilding and Building Products Conference.

What this means is that it will be a two-day “doing-what-counts” fest, because the number of units you actually sell this year may work out to be less important than how profitable or un- they are.

As an added bonus, Hanley Wood Market Intelligence’s Jonathan Smoke will be there to tell you more about his outlook and the industry consolidation narrative that underpins his forecast.

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Comments

2 Responses to “In 2011, It’s Not How Many Homes You Build, It’s What you Make or Lose”

  1. Larry Webb on September 29th, 2011 6:58 pm

    maybe,just maybe bigger isn`t always better…

  2. jmcmanus on October 1st, 2011 3:16 pm

    Just because you’ve said it many times before doesn’t mean you haven’t been right all along, Larry. Thanks!!

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