Infill Home Building Goes to the Back Burner
D.R. Horton made sweeping changes in its strategy recently, ones we look at for insight into how other home builders behave at this juncture in housing’s boom and bust cycle.
On both coasts, Horton divisions that focused on multifamily for-sale residences got orders to sell or opt out of their land positions and wind down. The company was “going back to its roots in entry level, single family homes… They’re getting out of the condo business,” an executive who’s familiar with Horton’s recent action plan tells us.
It was just about this time of year in 2006 that Horton’s management leaders affirmed that urban infill , multilevel, podium- and midrise style homes were a big part–a double-digit share–of the company’s future. And Horton had company in its embrace of the “inner rings” of urban areas as a rapidly emerging market for the nation’s biggest builders–the leadership at Pulte, then-Centex, Lennar, KB Home, and Hovnanian each asserted that closer-in urban home building would represent between 10% and 20% of their operations by 2010 or 2012.
This is where the market was headed, they said. Younger buyers prefer to be nearer their downtown jobs, and empty-nest Baby Boomers would downsize in droves out of the exurbs into cultural hubs for their “next phase” of being Boomers.
That was theory circa 2005-06.
That’s history now. Housing’s 2002 to 2006 boom came and went without teaching most greenfield single family home builders skills they needed to know about differences in capital management, the land and city politics game, nor construction operations to succeed with an inner-ring push.
Put it this way, $35 per square foot in direct costs may be fact for some home builders today or it may be malarkey. But it’s the standard of the moment in terms of an operating efficiency that has had to match new homes with foreclosure sales, and is going to have to continue to do that.
That means the cost per square foot metrics for urban building are a dog that won’t hunt in today’s market.
Horton, like the other publics save Beazer and Hovnanian, has amassed a cash war chest. Dry powder to pounce on opportunity or to have on hand for more rainy days.
Here are a couple of factors that could burn through those war chests in no time:
- Another year of less-than-three-absorptions-per-community-per-month operations; this is entirely possible thanks to a predictably huge ongoing wave of foreclosures and a rough double-digit unemployment rate picture;
- The onset of new costs of capital–as lenders have to set aside more capital for their risky investments, they in turn are going to require home builders to secure their borrowed money with more liquidity as well… this may take a chunk out of some of those war chests.
- Home building’s equivalent of the cash-for-clunkers program is the taxation measure under consideration that would allow them to carry current losses back beyond 36 months to a new limit of 60 months. In effect, home builders could swap out land they paid too much for but is worth very little for a tax credit that would allow them to buy new, cheaper land. If this measure fails to clear Congress–and in this environment, with all the politicking going on around health care, energy, and financial regulation, who knows?–home builders won’t get that cash-for-clunkers bump they may need as a cushion for another tough year on the sales front.
All of this means Horton and the other home builders are now under the gun on several levels.
- All their land needs to be rationalized. It must be capable of being sold for either cash purposes, or for profit.
- Their operations need speed at every turn to drive toward better margins.
- The must do what they know, and in turn, they have to sacrifice doing what they know they’ll need to do to meet the next market.
It’s an awkward time where a balance sheet strategy gets more emphasis than an operating long-term strategy. Horton knows this only too well. They know the inner-ring plan was the right one for the future. They, and almost all the other home builders who tried it with the exception maybe of Toll Brothers, didn’t have the capital runway to learn that business.
It’s going to hurt them down the road.
Comments
2 Responses to “Infill Home Building Goes to the Back Burner”
Leave a Reply
[...] Infill Home Building Goes to the Back Burner | Housing Crisis http://www.housingcrisis.com/home-builders/infill-home-building-takes-burner – view page – cached D.R. Horton made sweeping changes in its strategy recently, ones we look at for insight into how other home builders behave at this juncture in housing’s boom — From the page [...]
It’s a shame to see great homebuilders, those that had the vision to take risks, tuck and run during these challenging times. I understand the cash management side of the business, but instead of ‘going back to your roots’ companies should be reinventing themselves to take advantage of the next big thing – our economy is ready for new adventure.
That’s what were doing; instead of buckling down, we’re creating, inventing and developing the next big thing in residential construction. Infill projects will always be there, ever challenging us to think beyond conventional wisdom to find a solution.
This article is a glass that is less than half empty, when all I see is an oasis on the horizon. Only those who are willing to march forward instead of backwards will reap the bounty of this reward.