Another Home Builder Outlook — Two Scoops with No Frills — and What to Do About it
The good news about the market that got overbought this past summer is that it suggests that if people are afraid they’re going to miss a run-up, they’ll slash a hole in their mattresses and come up with cash to invest. The bad news is that the flight to safety is prone to histrionics. In this environment, more people will err on the side of caution and leave money on the table.
Thing is, even though there’s tons and tons of money in those mattresses, lots of people will lose their shirts awaiting its return to the marketplace where it can do something useful. Here’s a Big Picture blog post that makes this point loud and clear:
This is from “News from 1930” website
“There’s a large amount of money on sidelines waiting for investment opportunities; this should be felt in market when “cheerful sentiment is more firmly intrenched.” Economists point out that banks and insurance companies “never before had so much money lying idle.”
-August 28:, 1930
The more things change . . .
Let’s cut to the chase about what an economic double-dip — two scoops with no frills — may mean for those who make a living in the home building trade, particularly for the enterprise companies that build homes for volume.
- The economy may be recovering, but not cliff-diving may be the “new recovering”
- The consumer, i.e. households with income generation and job stability, is still de-leveraging, but there’s pressure growing on him/her to get back to spending to buoy 2010, or else
- Job losses are still piling toward and beyond double digit perscentages of the labor force; this will make September through December scary months again
- We’ll get to January 2010, and it’ll comp much better than January 2009, and that will be a relief
- Comp-ing flat to year-on-year will be a more reliable sign of recovery than watching seasonally driven trends spike up and down month to month
- For home builders, the “best time ever to buy a new home” will finally be more than a claim; home buyers, at every price point, will get more house value per dollar than any one of them had done in their home buying careers; that will last maybe 12 months, starting February 13, 2010, one week after Super Bowl XLIV in Miami, through to the end of 2010.
- Affordability–measured by comparisons to monthly rents and as a ratio of monthly household income–will be a driver in itself, at every price point; it will trump interest rates and whatever form a home buyer tax credit extension takes. The “affordability”–or the sense that I’m getting an awful lot for my money, whatever the price point–factor will be where new clearly will eclipse used, particularly for new wave of adult late-GenX and early GenY buyers whose dream of homeownership is different from that of their parents.
Which leaves us with the matter of competing with foreclosure sales, which is going to continue to be a fact of new home builders’ lives–perhaps even more so as unemployment rates crest and more and more home owners go deeper underwater on their mortgages.
We foresee, in the immediate offing, a first- and second-move up big push equivalent of KB Home’s Open Series, D.R. Horton’s Freedom product line, M/I Homes’ Eco series, and Meritage’s Liberty line.
Drew Holzwarth, Piedmont Realty & Construction, Charlottesville, VA
Part of the brilliance of young Drew Holzwarth’s Piedmont Realty & Construction vision–which Sarah Yaussi touched on in her story of this Charlottesville, Va.-based Generation Next home builder–is that he’s keenly aware of what to buy, what not to buy, how to buy, and what to sell to make his business model work.
- He’s buying eco-friendly building materials and furniture-grade installations so that he can differentiate his product position above the lower end;
- He’s not buying land; rather he’s taking a lot on such a soft take down level with developers that he never has to put the lot on his balance sheet, which saves him $100 per day of construction cycle and delivery time–about $12,000 all told–in land carrying costs for every lot;
- He’s buying based on knowing materials costs and making relationships with suppliers work for him.
- He’s selling a product that positions itself strategically well vs. his primary competition, a certain public home building company that used to employ him; his position: a best-value-for-the-money eco friendly move-up model.
Holzwarth’s model is not “asset light” but “asset never.” He doesn’t–for at least some of his neighborhoods–need to take on one penny of burden for dirt.
The other striking part of his plan is that he makes his subs and his suppliers make money themselves in their transactions with his company. He’s leveraging the relationship with them, but in a win-win equation based on his knowledge of total costs and time costs vs. merely unit prices.
It seems to us that home builders will need to apply techniques like these if they’re going to get through the second scoop of the downturn. They need to get lot prices reset in a bigger way, and that means getting real estate developers and owners who are willing to take on the risk with softer than soft take-down structures, post-sale profit shares, and other creative deals.
And they’re going to have to put time-value processes into action like never before so that suppliers on both the trade and materials side can operate profitably and, in turn, do what they can to keep home builders going verticle by offering “more house for the money than ever before.”
That’s what it’s going to take to battle the next wave of foreclosures, which seem inevitable.
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I like that concept of “asset never” vs “asset light.” What Holzwarth’s model demonstrates is the value of a) knowing your costs (and the costs of your vendors!) and b) building good relationships with everybody in the supply chain – developers included.
Good job Holzwarth!
Drew Holzwarth’s program works very well with Builders First Source. He truly cares about his vendors and does a great job of making his vision a true team vision! We feel he not only cares about his business but ours also.
thanks Drew
Drew has a formula for reducing the assets required to operate without diminishing the design of the homes he produces or marginalizing the subcontractors. The national builders could learn from him.