Home Building’s Plot Thickens
Theory, circa 2006: Efficiently scaled home builders had enough elasticity in their systems to push their home prices down — and out ahead of — below the competing market. That would keep them in the business of sustainingtheir management, marketing, and home building infrastructures in well-oiled condition, turning inventory in a methodical manner, and generating cashflow on a virtuous time-released schedule.
Nice theory.
Circa Spring 2009, a third successive “Spring Selling Season” has turned into a third successive Hand Wringing Season. Even the best-scaled, balance sheet scrubbed public home builders are looking at every dollar in their cash till and gut-checking themselves as to whether that dollar has 2009’s name on it, or maybe 2010’s. Is that dollar “dry powder,” for opportunistic muscling for market dominance once the constipated land-transaction market finally gets moving again?
Or, just as likely, will that dollar need to try to attract other capital, get in the lengthening line of debt term renegotiation with nameless, faceless, and sometimes clueless lenders and bondholders who are beyond sweating over whether their risks have come to roost.
With KB Home’s bellwether earnings call a couple of weeks ago, the Los Angeles-based home builder’s CEO Jeff Mezger offered a ray of hope amid the brutal realism that prevails as to the difficult leg ahead. Eventually, one will finally stop saying, “It’s going to get worse before it gets better,” because despite the complex of negative feedback loops whirring us into more pain, it will finally be the worst it can get.
Second up in the bellwether home builder earnings call parade was Lennar CEO Stuart Miller. Recalling Stuart’s prognosis at this time of year since 2006, each time it was for continued deterioration in the market, with no signs of an end to the worsening. Now, at least, Mr. Miller, while not sanguine, is indicating that the bump-along-the-bottom period may be approaching.
The twist to the Circa 2006 theory above is that while the big home building companies are secularly a shadow of their former selves, they’re practically the only engine left in the barely pulsing new-home economy. They’ve morphed into quarter-sized versions of their 2006 heft, they’ve said to hell with methodical liquidation of inventory, and chewed off connections to immense land holdings like they’re coyote ugly one-night stands; they’ve scrapped and scrambled for sales; they’ve stormed Capitol Hill with bids to knock reason into the unreasoning, irrational political complex; they’ve excavated their balance sheets of huge wells of expense; and they’ve piled up cash reserves in hopes of being around for an Resolution Trust-like land reset goldrush.
Still, each percentage point of unemployment–coming as they do torturously on ladder-steps of months and quarters, and half-years–represents a new spread of distance between now and a recovery horizon.
We’re out on a limb, of course, but we believe we’re in the middle of the last non-starter spring selling season of the current cycle. Another tough eight month stretch and the rare rays of light that have sparked up the gloom will start adding up.
Meanwhile, we continue to be amazed at the fortitude, or maybe its just stubborn resolve of those who’ve stayed in the game with every trick in the Book of Housing Cycles. You must be in it more than for the money; it must be part of the DNA. Former U.S. Secretary of Housing and Urban Development Henry Cisneros, calls you “housers,” which is not a pretty word.
But what it means–he describes a young mother coming home to one of your homes with a newborn who’ll one day be going off to college–is why you continue to fight to be here.
That’s Fact, Circa 2009.
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