Russell and Langella Resurface as FrontDoor Communities
Just like that, Terry Russell and Michael Langella are back in the saddle with a new company that will take the rampway through real estate advisory services right back into home building.
The two came of note as two of the executive-rank breakaways from the John Wieland Homes team in 2007, as the Southeast’s home building boom quickly busted. For the past three-plus years, they’ve been toiling under the Reynolds Signature Communites aegis, and now they’re hanging up a shingle of their own in this most opportunistic of moments before recovery actually takes hold.
Their new corporate aegis is FrontDoor Communities, and although they’re both currently based in Atlanta, the footprint of their eventual activities is the greater Southeast, with an emphasis on Florida and South Carolina.
Terry Russell--FrontDoor Communities
Russell and Langella, you see, had been the nucleus of the go-vertical team at Reynolds Signature Properties’ Linger Longer Homes. When they joined on with the Reynolds Plantation team, they’d brought with them a strong tie with a rather vaunted financial services client with considerable interests in the high-end residential resort types of properties that Reynolds planned to develop in two northern Georgia golf-course retirement/resort communities, Achasta and Reynolds Plantation.
According to a series of reports about three weeks ago, developers of Reynolds Plantation were under duress to make a $45 million payment to impatient lenders in the weeks ahead.
The World Property Channel, a real estate information source, reported on Feb. 16.
According to the letter, signed by Reynolds Plantation Chairman Mercer Reynolds III, a group of banks is demanding a hasty payment of $45 million by April. The payment was requested while the development company was negotiating renewal of a line of credit.
In the letter, Reynolds says he and his cousin, Jamie Reynolds, had “pledged a number of additional assets (totaling approximately $60 million) to the banks,” but the banks still want the large payment in two months. The cost of construction of the amenities being sold is about $136 million, the letter says.
The Reynolds empire at Lake Oconee spans more than 14,000 acres and 90 miles of shoreline, comprised of three gated communities–Reynolds Plantation, The Landing and Great Waters– a golf academy, and six golf courses, with a seventh on the drawing board. There are around 2,000 residences between the three communities.
The letter says the line of credit was used by Reynolds Plantation, Linger Longer Development Co., and its affiliates to buy land for further development of the ritzy subdivisions and golf courses that are near the Ritz Carlton Lodge, a popular destination for Atlantans.
Mike Langella
Langella, who was chief financial officer at Linger Longer, says that Reynolds successfully recapitalized since the emergency, but that the recapitalization would “suck cash for an extended period of time, leaving no cash to move ahead with vertical.”
Hence, Russell and Langella’s exit from Reynolds, but the departure only opened the FrontDoor to new opportunities with some familiar backing.
Says Langella, “Terry and I had existing clients for real estate advisory services when we started at Reynolds, and built the home building operations from scratch starting three years ago. Now, we’re continuing to do work for this client [a well-known real estate fund that happens to be 80% owners of a highly visible portfolio of upscale vacation-and-or-retirement oriented masterplanned communities in the Southeast that Langella requested not be mentioned at the moment].
“Each of these communities has a unique set of challenges that Terry and I represent a fair amount of value to address–ranging from a need to change the business model, to operations management, to finding ways to take costs out to reflect business realities today,” Langella tells Housing Crisis.
What’s more, there are thousands of home building lots across these masterplans, and chances are pretty strong that Russell and Langella can make some sense of ways their client could “maximize the return” on those lots by building some homes.
That’s when FrontDoor Communities busts wide open for the next stretch of these two home builders’ careers.
If You Would Not Start Your Company Today, Think Again About Trying to Stay Alive
As we finish up our March-April print edition of Big Builder, a world outside of home building concatenates profound, seemingly chain-reactive transformations–shatteringly new political, cultural, and economic forces and directions that sweep housing and its divisible industry parts into a tidal wave of moment.
On a map, North Africa and the Middle East may look like a world apart, but in life they are as intimately part of the here and the now as any feature of quotidian living that comes to us by way of our fossil-fuel economy can be.
As we write, of course we’re not privileged to know what the ultimate reset of leaderships will be for Tunisia, Egypt, Bahrain, Libya, Algeria, Morocco, and any number of other sovereignties shifting in the tides of change. We know only that in our Western way of life and climes, we’ll deeply feel and immediately see what develops, for that is how geopolitical dramas unfold nowadays. We hold speed-of-sound new of revolution in the very palms of our hands.
Like it or not, history has picked this time and this place to occur. We don’t get a lot of choices as to what’s going to happen; all we really get to choose is the attitude with which we experience it.
Volume home builders who trudge determinedly forward into the months that some distant fantastical era–five or six years ago–earned them the label Spring Selling Season can relate. They too have felt the ground beneath them buckle. They too have awoken to the slap of reckoning that their legacy—however noble, powerful, and entrenched—is now in many ways their most lethal enemy.
Four years into and hopefully 12 or so months out of a hell that has literally lopped off 80 percent or so of the livelihood of an industry, we’d be so bold as to say this: If you can’t start with a blank sheet of paper and validate your company today as if you were starting it from scratch, knowing all that you know about current conditions and future headwinds, the likelihood is that your organization will fall into the category of excess capacity in the tough months ahead.
Anyone who’s graced enough to have been active in any number of recovery programs knows this about them: they’re never pretty.
This explains, at least in part, why we’re focusing on Atlanta-based Ashton Woods to run metaphoric interference for all of those organizations in home building—public and private–that are capable and willing to make a go of it for this last stretch of darkest hours before the dawn of a rebound. To succeed, it’s going to take not just cash, not just patience to await an eventual rising tide, but an out-and-out skill at dealing well with what the market offers in little doses. This means “deals with lots of hair on them” that require more than throwing money at the challenges.
This is one of the reasons Ashton Woods could justify its existence starting with that blank sheet of paper in the gloomy days of late 2009, as it created its plan to multiply itself by five within five years.
Ashton Woods CEO Ken Balogh
Central casting for Ashton Woods had to pick its leaders with care, and has done so. With a current run-rate of about 1,200 homes and just over the $300 million mark in revenues, the masterminds at majority owners Toronto-based Great Gulf Group are fond of an Ashton Woods senior management that allows for exactly 17 corporate positions in the company’s Roswell, Ga. headquarters.
That rounds out to about 70 homes and $18 million in revenue per corporate overhead position, so it helps that the CEO has more experience with leadership and responsibility than his 40 years would seem to suggest.
Jerry Patava, CEO of the Great Gulf Group says, “When someone’s handled significant responsibility without having significant years of legacy issues clouding the picture, usually that person proves to be talented beyond his years. That’s what we’re finding with Ken Balogh.”
Notes from the Selling Season Trenches
We know you’re busy these days. We thought we’d break in to let you know a little of what we’re hearing from behind the lines (the headlines) of a time known as spring selling season 2011.
Is there one happening?
We’ve been told that the selling cycle to bring a prospect from start to finish through a new-home purchase has accordioned out from two to three months a few years ago to more than double that now–at six or seven months. Even then, there’s no such thing as a fixed price. So even one sale makes you twice as busy.
“From the get-go a prospect will come at you and ask what you’re willing to take off or add in for incentives,” says a division chief for one of the public home builders in a tough market. “If you say you’re not throwing in such and such, they’ll name you a builder down the street and say, ‘we’ll they’re giving us this for free, so maybe we’ll have to go back over there.’”
To get the anticipated 350,000 units into the new-home sales pipeline in the 11 months starting in February means that builders will need collectively to convert a little more than 1,000 a day from now through Christmas.
The forces against continue to be jobs instability, tight credit, a self-perpetuating real estate value destruction, continued high levels of household debt to deleverage, and wily excess supply poltergeists. Those forces against are entrenched and numbing.
The forces for are recession fatigue, changing household needs, new families starting up, job promotions (yes, they still happen), retirements (some of them early and forced), a birth in the household, a finally saved down payment, or a new job in a different market.
Job metrics and consumer sentiment measures haven’t become sustainably positive to a point where anyone can be certain of any specific direction, especially for home purchases, the biggest buy people make.
If anything, market conditions have hammered people with reasons not to decide that now is the best time ever to buy and new is the best way to buy home ownership. And now, since distressed real estate is so common in so many markets, any home buyer with an ounce of intelligence would have to include short sales and foreclosures as part of his or her house hunt or would be doing a disservice to themselves.
So, it’s not home builder competing with home builder. It’s home builder competing with every brand of residential property out there.
Here’s some intriguing topline themes emerging as we continue to talk with folks about their spring selling efforts.
- Would-be buyer prospects are in a “crisis of lost home equity;” many, particularly in bubble markets have houses that have lost as much as 50% of their value since the downturn started. They’re without equity, and yet some of them have an instinct to move into a new home, get out of their underwater situation, and start over …
- Prospects are fixated on price (perhaps in light of dramatic shifts in their access to and limits on credit) rather than on value. A buyer will be unimpressed with a greater value per square foot in many cases, versus a home in the same submarket that is marked at a lower absolute asking price.
- The foreclosure tsunami is at full force, with no expectation that it will let up given that court dockets are so full of them that they can’t get cleared in less than 12 months in many cases.
- Appraisals are, for the most part, still being comped to distressed sales in spite of guidelines to the contrary.
- Most markets are still specs-driven, and the sale will go to the one with the ready-to-deliver inventory rather than the contract-to-build builders. We’ve heard that in some markets, an increasing number of buyers are shifting away from spec purchases to build-to-order ones to get more of what they want in the home.
- All added up, says the division president of one home builder we were talking with about the selling season, a new day of negotiation.
“It used to be that resale was where buyers came in and made an offer and that started a negotiation, but that’s increasingly the way in new-home buying,” says our division president source.
What huge implications for divisional structures so stripped down that local support and management layers are no where to be found in the infrastructure. What it means is that for each one of the potential sales that now cycles to about six or seven months through the process, the sales staffer (and/or real estate broker) is in direct contact with a division president who’s added practically a full-time job to get buyers through to settlement.
We checked in with John Burns, whose John Burns Real Estate Consulting is running an ongoing telephone survey of home builders on their spring selling narrative. If you want to participate in John’s survey and hear all the local and national results, you can e-mail jkahn@realestateconsulting.com and let them know you’re in.
John gave us some topline observations from his round of calls in the past few days:
We contacted more than 85 builders yesterday and have concluded that the usual post-Super Bowl bounce isn’t much to get excited about. National and regional builders we spoke with reported they were on plan last week, but their sales were nothing to be excited about. While this confirms what most of our home builder clients have been telling us will happen, it is slightly worse than we were expecting and far short of consensus expectations on Wall Street and in D.C.
We also confirmed that the national builders are discounting and running special marketing campaigns to drive the early spring season sales, even in stronger markets like Washington, D.C. They simply can’t afford to miss their volume targets, and will not wait to see if “organic demand” rises week over week.
Market Conditions This Week (from 85 building execs)
Strong week: Ft. Lauderdale, Denver, Washington, D.C., West Palm Beach
Good week: Charleston, Orange County, Orlando, Phoenix
Mediocre week: Atlanta, Austin, Charlotte, Chicago, Dallas, Durham, El Centro, Fort Worth, Fresno, Houston, Lakeland, Las Vegas, Maui, Nashville, Oahu, Philadelphia, Portland, Raleigh, Richmond, Riverside-San Bernardino, Sacramento, Salt Lake City, San Antonio, Stockton, Tampa, Wilmington
Slow week: Bakersfield, Hanford, Jacksonville, Minneapolis-St. Paul, Modesto, Oakland, San Diego, San Jose, San Luis Obispo, Sarasota, St. Louis, Visalia-Porterville
This pretty much matches what we’ve heard from various market sources. Minus federal tax credits, home builders are pumping whatever form of stimulus into the market they can to just get the spigot opened up a bit. They’re nearing a months’ supply flash point that could change the complexion of the market once there’s a national data point of less than six months’ supply.
Still missing in action is what real estate pros euphemistically say is a “sense of urgency.” In fact, we think the emotion that will galvanize sales is fear, and there are at least several balls up in the air right now that could release fear into the nearer term, even if there are several million foreclosure, short sale, and highly motivated sale homes to clear through the market over the next few years.
Fear motivators could be:
- Rising interest rates, perhaps ignited by rising inflationary pressure
- Scarcity in new homes in specific markets and submarkets
- The prospect of more expensive, more restrictive home finance, pending gradual and eventual reforms to the GSEs
- Missing the low point of the market on a monthly cost-to-own basis
Meanwhile, while it has been noted that house price declines have vaporized zillions in household asset wealth, the stock market gains of the past two years have restored many people’s financial assets back practically to where they were before the trouble started. This, some sellers of active-adult and move-up product have noted, can be a tailwind in itself, especially for older people who had been in homes so long that all they’ve lost is paper profit on them rather than hard cash equity.
The point in the early going is this. All is negotiable. What’s more, we’re hearing, it’s brutal out there on the Realtor front. If you tell them what you’re paying and it’s not up to snuff in their minds with the commission levels other home builders are offering, “they’ll drive right by your community without a second thought,” says one of our builder insiders.
Negotiability is right down to the homeowners association fees. Some buyers want to pull costs for items such as lawn maintenance and cable out of the association fees because they’d rather cut the grass themselves and get a dish than to face a monthly cost they think is too high. At the same time, “people are spending gobs of money on options because they want to get them into the mortgage” rather than to have to try to borrow later on to pay for improvements to the base house.
We’ll continue to update you on the themes of spring selling season 2011 as we talk with more builders in the weeks ahead. Meanwhile, the comments box is available below, and we hope you’ll add your observations on the market from your point of view.
“What We’re Seeing” on Spring Selling–Embrace the Reset
Traffic is up. Quality traffic is up. Despite bad weather in some parts of the country, traffic is better than it was at this time last year.
Sales are coming, but each one comes with work across all fronts: price, qualifying the buyer, meeting or beating the competition, and, ultimately, educating the buyer on the value.
The folks we spoke with about the first weekend of spring selling were hesitant to say they’re more than “carefully optimistic.”
Clearly, home buyers have begun self-identifying as that now, and they’ve got the message abundantly clear that there hasn’t been a moment better than this one to buy a home in a generation. As interest rates nudge up, there’s a double edged sword of motivation and disincentive. Rising mortgage interest rates certainly sparks a few people to move off the sidelines, but for those contingency buyers who may have locked in a below-5% rate, it’s getting dicey–they think they may have missed their window on a move into “new.”
Here are some of the themes that come across as a number of home builders book sales in what may or may not add up to this spring’s modest turn toward a recovery cycle.
- sales are extremely price-sensitive … says one of our sources, “the deal gets the sale, and this is partly due to the Realtor traffic that’s coming in. People are coming in with crazy low offers, and we’re doing a lot of ‘teaching value’ negotiating to try to make something work. We ask these folks, ‘are you thinking about this purchase as if you were buying stock, or are you thinking about it as a place your family’s going to be living for a while.’ In about three out of four cases, we can find a price we can live with, but that fourth case, we lose.”
- In spite of indications that move-up and even active adult may play an outsized role in this recovery, one builder says, “we’re still seeing most of the action in the price-sensitive low end.”
- To that point, one of our home builder sources says that some of the “bargain land purchases” they’ve been able to make buy paying cash at the banks lately translate into a “competitive edge” on resale in some of the more conservative, middle America markets. Real estate plays–paying cash for land great land positions at a highly favorable price point–will be many a private home builders’ ladder out of the muck of absurdly tight terms on their own acquistion, development, and construction loans and home buyers, as well as hesitant lending to consumers for mortgages.
- A subtle shift is occuring as builders’ concentration of sales begins to shift from spec to contract-to-build. Many of last years’ buyers preferred a ready-to-deliver spec house to one that had to be ordered to build. This year–perhaps because buyers believe that prices and values are stabilizing–even the home builders that specialize in pumping out specs are finding that people are opting for more of the home they want.
- Home builders need “appraisal strategies,” as homes more often than not won’t appraise for more than the base price for a given square footage. For buyers who are going to go for upgrades, builders need to work with them on putting more skin in the game on their down payment to pay for the options, and need, for the most part, to avoid FHA and VA-backed loans in order to keep LTVs in banks’ comfort zones.
None of the builders we talked with would go so far as to say the 2011 Spring Selling Season will even match up to the home buyer tax credit-fueled paces of 2010. But they’re encouraged.
If home builders could wipe the slate clean and start their company in today’s market with capital and a business model, what price points would direct costs, land-base, and SG&A come in at? And what value would that provide a home buyer who’s loathe to compare her purchase to the nightmare that was the middle part of the last decade?
That would be the right mentality, although realities are different than that, since home builders have to commit on the raw material land often before they know where demand is. One of the factors that gives builders who are on a solid footing confidence is that new-home supply is “dwindling.”
One more short year on the supply side may be what it takes to clinch “new’s” ultimate role in this recovery.
A Moment of Truth for Home Builders’ 2011 Starts Right About Now
The sensation today and tomorrow–on the eve of what home builders, developers, trade partners, manufacturers, Realtors, homesellers, banks, farmers, ranchers, distributors, toolmakers, earthmovers, sandwich trucks, and municipal treasurers hope somewhat against hope will be a bona fide Spring Selling Season–must be like the night before a bigtime parole hearing after a few hard years in jail.
Either you’re going to walk out of prison, and try to continue to make your way out of the shadow of the wreckage of the past, or you’re not. You’re not entitled to know based on all of the facts you can put together ahead of time.
With that feeling of suspended animation in mind, three stories we came across this morning as we assembled our Builder Pulse drill for the morning’s mailing began to weave together into a notion.
These are the three stories.
- What pent-up demand for housing looks like statistically
- Winning against tough odds and complex choices: skill or luck?
- Sellers will trade off a hit on their sale for a bigger reward on their purchase
Here’s how these stories blend, especially as we continue to listen to public home builder company management teams discuss their quarterly earnings performance and talk about how their operations are going to rationalize themselves in the months and years ahead.
The stories each have a what-you-can-control and a what-you-can’t-control element to them. Pent-up demand is a delta of potential that could be a game-changer. The skill vs. luck in winning question is totally relevant for businesses whose mantra runs along the lines of “a bad market can take down a good builder.”
The story on the couple who’d take a loss on their current home to get a bigger win on a new one ties the other two together.
Let’s put this into some context.
In home building cycles past, the plotline usually works in such a way that home builders could roll back their pricing and narrow or even temporarily invert the premium that home buyers would pay for a new home. This would re-ignite demand for new homes, which would spark both construction and consumer spending and serve as a catalyst to the broader economy.
Assuming there’s not a structural change in the way that people who reach adulthood opt to make a home for themselves, the need for home building and home builders is defined by the present and near future demand for new-home construction. The marketplace can tolerate cyclical periods of excess capacity only for so long before it begins to ratchet down the capacity and the money locked up in supporting it.
This is what has been happening now for a few years, and it will continue. We don’t think the era of casualties among home building companies is over. There are still private companies who borrowed money, and whose collateral based on the value of their land holdings has fallen, and who’ll either figure out a way to come up with more capital from somewhere or who will go into default.
Now, in broad strokes, the trickle of demand for what new-home builders do has decimated one of the few ways to gain visibility into how the money will hit the books of the companies: backlogs.
Almost everybody’s orders were down all of the second half of last year. The tide ebbed.
So, what most all of the companies did–given many institutions’ willingness last year to make a greater amount of money by agreeing to wait longer to get it back–was to shift short term debt to longer term debt and shrink their balance sheets to a best-guess at current pace of demand. If they could operated net positive exclusive of one-time charges or land write downs, they’d did the next best thing to growing. They had a water-treading plan that could get them the rest of the way across the abyss.
What public and private home building companies did during the 2000s was to become much better, or more professionally disciplined operators from a manufacturing process standpoint and a financial–debt and equity capital–management standpoint.
Which brings us to the pent-up demand story.
Here’s the graph the National Association of Home Builders’ economics brain trust of Dave Crowe, Robert Denk, and Robert Dietz put together.
Normal household growth since 1965 is 1.5% of households each year. But, between 2000 and 2007, the household growth rate averaged 1%. Looking at total households, that means that 2.1 million of them did not happen during those seven years, that if economic times weren’t so rough, may have formed.
Now, take a look at the story of the couple in Atlanta who were willing to sell their townhouse for less than they’d wanted for it because they knew that with today’s prices and today’s interest rates, they could net out a gain ultimately, because they’d get an even larger concession than they were giving, and they’d wind up with a lower interest payment.
“From a financial point of view, that could make a lot of sense,” said Karen Gibler, an associate professor who studies real estate at Georgia State University’s Robinson College of Business. “You hear people talking about how they don’t want to sell their home at a loss, but they want to move. If you wait for the market to improve to sell your home, the home you want to buy will likely go up in price, as well.”
We’re apt to think of “pent-up demand” as adult children living in the basement, or families doubled-up in apartments. But the example above is a kind of pent-up demand that’s not even counted in the 2.1 million that the NAHB economists have identified. It’s the people who have been antsy to move up or into more fitting homes, but have been waiting for the right moment to do it.
Now, just as on the negative side of the equation we see people willing to strategically default on a home loan where it looks as if the consequences of doing so will be more positive than bearing the weight of an underwater mortgage in a moribund housing market, so too, we may see a similar logic work in another way.
If people know the math of investment and return works out better to take a lesser loss on a current home for a greater gain on a next home, then all they need is the reason your company could give them to do it.
So, stepping back now to the eve of Spring Selling Season 2011, here’s what we’ve got.
In a foreclosure-dominated landscape, home builders need to do more than to motivate buyers with urgency around price as they may have done successfully in cycles past. Instead, they have to create urgency around value.
They have to reinvent value, especially in the minds of those who are among the ranks of the “missing but expected” household formers, and in the minds of those like the Atlanta couple who wanted their move-up home in spite of not getting the price they wanted on their currently owned home.
So if the 2000s were about home building’s coming of age in the disciplines of manufacturing and operations process–that balance of labor, materials, scalability, speed, and simplicity of design templates–as well as finance, the next stretch that will define successfull home builders will be their capability in marketing and selling their value. Their name, their quality, their service, their investment smarts, and their delivery of an experience.
If a rising tide lifts all ships, the home building’s next patch will be about seeing which ships can find the channel they need to navigate until the tide rises sometime hence. This is where the skill vs. luck story comes in, especially in this highly complex moment.
Increase complexity, and skill — broadly defined — takes on greater value. Luck still plays a role, but those who succeed in complex environments have talent and quickness on their feet. They can adapt. When complexity edges closer to chaos, luck may carry the day. But astute players know how to put themselves in situations where they are less at luck’s mercy and instead better positioned to affect the outcome.
Does this describe the eve of Spring Selling Season or what?
Thoughts about PulteGroup’s Plan to Close the Margin Gap
A few operational items of note jumped out of Friday’s PulteGroup earnings call in which CEO Richard Dugas addressed Wall Street’s front line of equity research analysts on how and why Pulte is “lagging its peers” on gross margin progress.
Without an almost-$1 billion NOL tax carry back benefit, Pulte faced the music on Friday, the refrain mostly being, “where are you going to find the gross margin improvement that’s been eluding you even as you’ve taken several hundred million dollars of redundant costs out of the Pulte Centex combination, and further sized down the balance sheet to reflect anemic sales velocities?”
“PulteGroup, Bloomfield Hills, Mich. (NYSE:PHM) on Friday reported a net loss of $165 million, or $0.44 per share, for the fourth quarter ended Dec. 31. The loss included $196 million in write downs, including $82 million in land-related charges and other costs associated with organizational restructuring, debt retirement and other financing amendments partly offset by a $35 million income tax benefit and a $10 million insurance reserve reversal realized in the quarter. Wall Street was expecting a loss of 9 cents per share, ex charges.”Dugas, who has become more hands on by virtue of some pretty heavy-duty management team cuts during the past eight months, says he’s personally out on a mission, convinced there are more expense opportunities in the home building operations themselves to hack away at and improve both directs and SG&A.
Still, beyond going from division to division to preach unity of purpose and pore over each of the divisions’ p&ls, Richard Dugas referred to one having to unwind a process he’d earlier been a champion of, and it has to do with the three home building platforms–Centex, Pulte, and Del Webb–that each gets its own real estate and capital resource strategy as well as its line of homes.
The reality of an agonizingly slow-absorption market, especially after the sunset of the home buyer tax credits program in mid-year last year, proved that the heavier hand of corporate control–on floor plans, operational systems, and purchasing–turned out to be a costlier alternative to forcing the nimbleness and opportunism of entrepreneurial de-centralization into its wide net of divisions.
It’s proven to be the case for many high volume builders that national purchasing contracts, beyond a few product categories, wind up costing more than buying the same items through distributors. More often than not, distributors carry more clout and get better prices than a national builder can.
So Dugas indicated that what had been a move to take more control into headquarters would move back out into the divisions, where not only real estate decisions but a whole gamut of community management executions would be turned over to the division chiefs.
This is a corporate cultural 180-degree turn, and it’s going to be interesting to see how well corporate can entrust more to divisions after spending the better part of the past two years saying, “you do what you do best, which is the real estate and home buyer segmentation analysis… we’ll take care of the rest.”
This means that division presidents won’t necessarily have to take a floorplan off the corporate shelf and make it work in his or her market. They’re going to have an opportunity to decipher more of what the particular market’s home buyer targets may be looking for and willing to pay for. Dugas hinted that base houses under the corporate control system had put costly features in that home buyers were not interested in paying for, which took its brand out of the consideration mix.
The second area of interest that came out of the call was an ongoing unsureness regarding the three-tiered brand structure that Pulte has embraced, with Centex and Del Webb flanking Pulte on the low end and the aging buyer end.
In an ideal world, Centex land positions and those of Pulte and Del Webb would each set themselves up with discrete buyer segmentation opportunities. Centex is the entry level brand now, but for many years, Centex marketed its homes not just to entry level buyers, but to first- and second-move up buyers as well. Many of the lots Pulte acquired with the Centex deal don’t nicely fit into an entry-level package, but nor do they pencil necessarily as Pulte style move-up positions.
What Pulte may be learning is that its ambitious triple-threat plan for three brands for three buyer types is one of those objectives that simply takes time, and we all know that “time and the tides wait for no man.” Reengineering up to 147,000 lots so that they’re each mapped to a brand simply can’t be easy, especially when it’s the minds of the home buyers that matter in the mapping.
We think that Pulte, just as it’s unwinding its plan for central versus divisional control, may also find that its big opportunity is to unify three into two. In other words, keep Del Webb, but make the rest just Pulte (over time) so that it doesn’t have to use the bandwidth nor resources to support three brands among three separate home buying audiences who consume different information largely through different channels.
We don’t know that Dugas will agree, as he’s a branding specialist, and he’s brought on Deborah Meyer from the Detroit auto business more than a year ago to make-over the company’s three-pronged brand strategy. Still, in this market, it may be an opportunity to capture more costs and unify its purpose around its strongest competitive position.
Lastly, we do find it encouraging that Del Webb may be gaining traction as the stock market picks back up and home buyers find that their stock assets are showing some of their bygone muscle.
It would be odd if, especially given the overwhelming atmospheric ooze of foreclosures, it’s a move-up and active adult home buyer’s needs and desires who puts the housing economy on his or her back at this point, as opposed to the traditional pick up from entry level buyers.
It looks for all the world as if federal policy won’t be planning any new creative financing ploys for first-time buyers looking to get into homeownership, at least for some time. So, the Del Webb segment may be one of the most recovery-sensitive opportunities out there, since what may be pent-up at this point is older adults moving to a lifestyle they really feel they deserve, especially after a few years of pain and patience.
Still, PulteGroup faces more challenges to its operations, particularly if the overall rebound transpires as torturously as it seems to be setting itself up to do. The big strides it seems many of Pulte’s peers have made in the past 18 months or so is the assumption that things are going to be less-than for a while now, and there’s no getting around costing one’s business around less-than assumptions.
That may be difficult given the timing of Pulte’s biggest play to become America’s largest home builder a couple of years ago. But, it may be the reality America’s No. 2 builder (in unit volume) needs to face up to now.
For New-Home Builders, Tomorrow’s Super Friday, and Sunday’s the Kickoff to Spring
Last year, as Super Bowl Sunday approached in the days ahead, two thoughts prevailed among home builders (especially those who were neither Colts nor Saints fans).
One was, “Have i built enough?”
The other was, “Have I built too much?
The extended and expanded, Sen. Johnny Isakson-authored, home buyer tax credit was set up to offer a cushion of psychological support for the month of December 2009, and then kick into gear in January.
Those who championed it banked on a theory that it would not just stimulate sales, but that it would, as had been the case in a prior recession, actually catalyze a daisy chain of economic reaction responses that would eventually ignite a broad-based rebound.
Now, we know. When a huge percentage of residential properties sold in a few-year period returns to the marketplace as a tsunami of distress, the theory of home buyer tax credits kickstarting economic traction goes soundly out of policymakers bag of tricks … at least until Congressional amnesia does its thing.
At any rate, what the home buyer tax credit didn’t do for the broader economy, quantitative easing 2.0 is doing. Nevermind that housing, and new-home building needed to take a step or two backwards before it could regain its own footing.
So, the two prevailing thoughts of last year–”have I built enough?” and “have I built too much?”–this year have blended into one thought. “Have I built what I can sell?” or “Can I sell and build enough to make money?”
Oversimplistic as this may sound, we believe this characterizes home builder sentiment every bit as helpfully as a number drifting in the mid-to-low teens month after month.
We know this. Any builder who can put their hands on the capital plans to do more building in 2011. Among the dozens we’ve met with and talked with, community counts will increase on an average of from 5% to 20% on a net operating basis in the next 11 months or so.
With absorption rates of just under 2 homes per month per community, you can do the math however you want, but you’re going to come up with an increase in the number of neighborhoods actively selling homes.
Last year, the three stars that stood in alignment that played a mind-game with home builders strategies were 1) home pricing was favorable, 2) interest rates were favorable, and 3) a federal tax credit was going to yank people out of their torpor and get them into the transactional marketplace.
This year, there are three stars aligned again, but one of them is different. Prices and interest rates are still favorable. In place of the tax credit, however, jobs numbers are beginning to stabilize.
Now, providing that seemingly endless stream of global or environmental “Black Swan” events doesn’t wreak havoc with this “little recovery that may be able” to sustain itself, jobs and income stability are going to lead into an inflection point. At this tipping point, whenever it occurs, we’ll see the household formation that has not been occurring for two years start to occur in earnest.
Then, scarcity, especially in new homes will become a factor. Maybe that won’t be this year, but we don’t believe that tipping point is factored into any of the technically designed housing economic models that draw on fundamental drivers of supply and demand.
Supply will continue to be a mess for a couple of years, and why not. If for four or so years straight 20% to 25% of home purchases new and used were by either speculators or people who were financially incapable of reasonably following through on their mortgage commitment, then there’s a lot to clear.
Too, though, the U.S. has been adding roughly 2.5 million living souls a year to its population for the past few years, many of whom haven’t made their way into their own households at all.
There’s got to be demand. Much of the absolute demand pent-up out there will be fore rental housing. But once jobs and income start to stabilize; once that fear of getting laid off starts to come off the table, people will want to start buying again.
This image is Calculated Risk’s illustration of a weekly indicator from the Department of Labor that tracks initial claims for unemployment insurance. When the fever line tracks downward, it’s good, because it means fewer people have lost their jobs and are looking for unemployment benefits. The running average has been gaining positive traction, as have private payroll job creation data points over the past few months.
Tomorrow’s monthly employment report from the Bureau of Labor Statistics will likely move the equities market one way or another. Still, positive is welcome, but it’s not the juggernaut needed to bring down unemployment rates fast. Almost one in 10 potential workers being out of a job is still a heavy weight on the economy. But a slow turn to the plus-side is necessary before anything can improve. The question of the moment for home builders is, will mere stabilization on the jobs front cause qualified buyers to move off the sidelines and buy, even as pricing softness prevails due to distress? Jobs and income confidence on the one side and low prices and interest rates on the other could be the market’s elusive balanced equation.
Check out the new neighborhood models come Saturday, Lincoln’s birthday.
Will Private Home Builders Cut it in 2011? We Think the Answer is Yes.
Something funny’s happening on the way to public home builder domination of the low-pulse, anemic housing recovery.
Without question, public companies have made big strides, not only in their own operational disciplines but in the way they flex their muscles in the markets they have chosen to fight out the early stages of a new cycle competitively.
It’s Darwinian reality at this stage for the publics not just to make their numbers, but to make their less-well capitalized private brethren go out of business while they do it.
And public companies aren’t the only well-resourced menace to the well-being of private home building companies right now, either. Clearly, national political expedience favors saving the banks in favor of saving new-home building capacity, so government will sooner and more emphatically look to support the disposition of the 8 million or so properties in the foreclosure-distressed financial asset bucket than to promote the kind of economic well-being that would lead to demand for new construction.
Private home builders, in other words, have cyclical, structural, competitive, and political currents to fight upstream in; it’s no wonder so many of them have gone under in the past four years, a loss not only in capacity, but in the character and culture of home building. No one can deny that while publics have leveraged their heft, the patience of their capital, and their growth in professional disciplines to a competitive advantage, many of their home building operational innovations have come by way of private home builder acquisitions along the way.
Meanwhile, private home building companies, the incubators of much of what is “better practices” in home building–for arguably, best practices will be a phenomenon of some future stretch for the industry sector–are facing their steepest challenges yet, even after four years of cleverly surviving the teeth of the worst downturn ever since housing became its own industry sector.
Still, we talked this morning with Dan Ryan, the eponymous leader of Dan Ryan Builders, based in Frederick, Md., and operating in six states–Maryland, Virginia, West Virginia, Pennsylvania, North Carolina, and South Carolina.
There are three essential bullet points to Dan’s report on his 2010 performance:
- Settlements increased from 397 in 2009 to 502 in 2010, a 26% rise
- Although operations in Raleigh didn’t make a profit, outlier markets like Morgantown and Charlestown, West Virginia more than made up for the losses, bringing the company into the black for the year
- The market dynamics allow Ryan to “grind through” challenging land holdings to diminish the pipeline of less profitable lots
For 2011, Dan Ryan–whose father Jim Ryan founded Ryland Homes; whose Uncle Ed Ryan founded Ryan Homes of NVR; and whose cousin Bill Ryan founded and runs William Ryan Homes, a builder in the Chicago market, as well as Florida, Arizona, and Wisconsin–is pushing. He sees his company–thanks to an expected contribution of 80 homes out of the Raleigh operation, which has five decorated new models raring to go for Spring Selling Season traffic–doing another 30% quantum leap to 650 homes.
We’re hearing equally sanguine fast-growth scenarios from our friend Eric Lipar at LGI Homes in Texas, from Ken Balogh at Ashton Woods out of Atlanta, from Jay Lewis at Surrey Homes out of Orlando, and from a number of other private mini-powers.
Where do they get their moxie, especially when everybody knows bankers are essentially loathe to use the ink of their rejection stamps when it comes to lending to home builders.
Unless.
Unless what?
Well, unless there’s not only moxy but a clean, well-positioned, reliable plan to turn money into more money. That’s what some private home builders have been able to demonstrate, and that’s why they’re still in the game.
And when they’re able to shift gears from “survival” mode to “let’s kick ass” mode, they’re a force to be reckoned with.
Surrey Homes does it by careful segmentation. In both buying land and building and selling homes, Jay Lewis believes Surrey should steer clear of the fray of first-time buyer, entry level homes, a ferociously fought battle in the land of Disney magic. Instead, he’s positioning Surrey as a move-up and second move-up offer, where his rather unique twist on customer care–a five-year full warranty and a designated service and satisfaction follow up program–can actually help him move the metal.
For Ryan, it’s about keeping the fire in the belly he feels as a principal lit among his trusted associates. Word is, Ryan spent one weekend day recently going out personally to the home of one of his best sellers in the West Virginia market because he’d heard she was feeling burnt-out and frustrated. After his visit, she arrived back on the job and has been rocking the sales in the pre-selling season weeks.
Ashton Woods offers another part of the story of how privates can and will compete with publics. It’s called the land committee, and private companies don’t have them in the same sense as publics, whose land committees are a necessary part of a deal to acquire parcels opportunistically. Some times this slows them down.
In one case, recently Ashton Wood scored on a parcel that was sought-after by several publics in the Atlanta area–Madison Park, off Old Alabama Road in the Roswell area. Ashton bought it out of the banks by virtue of their ability to close, and their knowledge of the value.
Because they didn’t have to put their bid before an underwriting committee, Ken Balogh and his team landed the deal, and blasted through 45 of the 49 homes in the community in 2010. Here’s a few photos showing construction on some of the few homes left to be settled, at 3,200 square feet and ranging in the high $300s to low $400s.
We commented on what an uplifting sight all the actual home building activity on the site was, and a sales manager commented, “Yes, we’ve had folks from other home builders come over just to hear what it sounds like.”
Rumors of the death of private home building companies are premature.
We have one idea to offer that maybe they haven’t thought of as such. Why not develop a “pent up demand” home? One that intentionally recognizes that young adults and/or aging parents will be part of the household. We think there’s a future for this as a new product.
Home Builders’ Plan to Narrow the Gap Between New and Used Homes
In Orlando the week before last, we confess that we didn’t spend a whole hell of a lot of time on the exhibit hall floor. The reason is that we wanted to spend time with home builders, and, by and large, a lot of them weren’t spending time on the floor either.
It seemed to us that what a lot of the builders wanted to do was to spend time with other builders, finding out how it’s going in regions other than the ones they operate in, etc. A remark uttered in one of those informal compare-notes sessions from one of the builder executives there is haunting still.
He referred to the fact that banks were still not opening the spigot of lending to private home builders for new construction, and that Federal policy wanted it that way.
“They’ve got seven or eight million foreclosures to clear out somehow; as for us [little private home building companies], they’d like a lot of us just to go away.”
Quite a few conversations, as a matter of fact, centered on the question of whether we thought that more home builders would head into obsolescence in 2011, or having made it this far through the troubles, would see the light of day at the other side.
It’s hard to say, and we have to admit that while we’re relatively sure this Spring is not going to ignite a rebound, we’re far from sure what the “selling season” that gets formally underway in about three weekends will hold.
As for home builder casualties, we believe there will be some this year, but that they’re probably going to be more a function of the ownership or management’s age demographics and less a byproduct of an inability to find some means to stay solvent.
The sad but true statement from the home builder above reflects a common sentiment. Multiplier-effect or no on jobs, consumer spending, local tax revenue, government policy support for new construction has more than worn out its welcome. And now, if housing is going to shift from being a link in the middle of the economic train to being the engine, it’s going to have to do it on its own two feet.
So, we have what the superb housing and economics online gadfly Bill McBride refers to in his Calculated Risk Web analysis as “The Distressing Gap.” Simply, it’s the ratio of the number of existing homes sold for each new home sold.
For about the past 15 years, SAI Consulting’s Fletcher Groves points out that the “Distressing Gap” has averaged one new home sold for every six resales. In 2010, Groves notes that that ratio has morphed into a multi-headed monster– 1:16. This means 16 resales for every new home sold. The fact that many of the resales are distressed sales — either short sales, duress sales, or sales in some stage of foreclosure — is the reason for Calculated Risk’s name for the infographic, “the Distressing Gap.”
Here’s the picture of it now:
with premission from Calculated Risk
Economically, this information means one thing, which is that, under present circumstances anyway, there is an overcapacity of home building in the nation. This is the context for our friend in Orlando’s sentiment that “they’d like a lot of us just to go away.”
However, within the framework of the industry sector, the Distressing Gap is part of what benchmarks opportunity for some home builders, most likely at the expense of others.
Why is it that when you talk with the strategic management of a home building company–whether they’re small or large, private or public–they always say they want to have access to capital like a large public company but they want to work and care for customers in their markets entrepreneurially like a solid private company? In other words, if you’re a public, you find yourself emulating NVR, and if you’re a private, these days, you kind of want to take after Shea.
Neither of these two companies perfectly captures the public capital access with private entrepreneurial culture, but they’re probably as good as home building can offer.
Now, as for the Distressing Gap, the fact that it’s taking 16 resales to get sold for every new home relates to one of the anomalies of this downturn versus others. We wrote in Builder Pulse this morning:
In downturns past, foreclosures never amounted to much in the plot line of recovery. New-home builders could roll back their pricing to beat resales sellers, and that would reignite an economic daisy chain of positive effects. With estimates of as many as 8 million foreclosures to clear from this point, the government, lenders, investors,etc. don’t want to hear from added new-home capacity. Still, consumers vote with their feet, and they’ve wanted new when they can get it. The “normal” ratio of new-homes sold to resales is about 1:6. By the end of 2010, the ratio spread to 1:16. We’d peg survival for the top 200 home building companies in 2011 as reliant on getting that ratio back down to a 1:10 run-rate by the end of the year. Or else there’s just too damned much capacity.
The operational opportunity we’re talking about has to do with the stars-aligning moment that brings new, low price, low interest, lower monthly energy cost into a fleeting, don’t-miss-it instant.
Fear of losing this window of time when all of these advantages converge may be the spark of urgency buyers need.
Now, the buyers who’ll put the new-home community on their back for the next several months may not be the ones production home builders have customarily depended on, especially in the past decade.
Builders’ got competent at ushering the borderline credit-worthy aspiring home buyers across the crevice of spotty credit histories and insufficient resources.
There’ll always be buyers like that, although getting prospects from a 540 to a 640 FICO is going to elongate a lot of timelines for closings. The early-recovery buyers that home builders need to do a better job at courting are ones who have better credit, more cash, and traditionally have looked for already established communities for their families in locations with proven track records of providing what they’re after.
Some fair amount of that Distressing Gap is people finding the resale house of their dreams for a foreclosure song. Some of it is investor buyers buying up homes in bulk for another flip as the market gains a little bit of traction.
At any rate, builders need to close the gap. They won’t do that by competing on a national scale, but within submarket arenas that have eclats of opportunity to buy right and sell fast.
What we came out of Orlando with was the sense that there are builders who feel confident that although the new-home environment will be characterized by distress, there will be a one-two punch opportunity to get just the right real estate deal and offer just the right product to push the ball up the field. This is how they plan to narrow the gap.
Add This to the Flashes of Positive News: Traffic is Up
A leading indicator that’s turned solidly positive for construction is the American Institute of Architects Architecture Billings Index (ABI) for December, which hit its highest level since 2007. A lagging indicator that has turned positive, existing home sales blew through consensus estimates by a run-rate figure of 430,000 home resales in a 12-month period.
What’s more, pending home sales have cobbled together a run of positive reporting periods, initial jobless claims are tacking together a four-week moving average that is encouraging, and most of the regional economic measures of demand for goods and services reflect expanding structural demand building momentum across the board.
Now, take away from the positive tidings the fact that the European nations’ debt minefield could set off a global daisy chain of financial white light moments, and the fact that domestically, we’re seeing local governments writhe under the tyranny of past and present misguided capital planning, and closer to home, the fact that the pig in the python of foreclosure clearance seems to be stuck somewhere between the paperwork the lawyers and common sense.
Clearly, with still nearly one of every 10 employable adults out of work and both the tangible and psychic ripple effect of that phenomenon, there’s still big questions hovering over the 66% of the economy that comes from consumer spending. Don’t forget all that household debt that’s still there to be dug out of.
On the other side of it, big questions hover over the appropriate balance of for-sale versus for-rent housing, as well as the appropriate balance of government versus private sector investment in housing finance, as well as the appropriate way to securitize loans and make them safe for slicing and dicing into global structured investments.
When it comes down to it the two big question areas have to do structurally with how people can earn a living in society today and how valuable the property is that they would buy to reside in if they so choose.
Big questions.
Which brings us back to the news. The news is that amid the burgeoning signs of life in the broader economy and a feint pulse-beat in housing, we’re hearing reports that traffic numbers are up, specifically in California, post the holiday-season torrents of December.
According to our sources, traffic data is spiking normally for this part of the seasonal cycle. This is noteworthy because last year’s business was artificially stimulated, and this year, it’s working on its own two feet. Demand is simply demand.
We asked our sources two things. One is whether they thought that the 50 basis point spike in interest rates was playing a part in the motivation of potential buyers, and the answer was “probably.”
The other is does anything in the traffic in the neighborhoods suggest that people are turning to new because of any anxieties they might sense over who actually owns the title for a distressed property deal. The answer here is less clear. The broad sense is that people are tiring of the rigors of trying to purchase homes out of foreclosure. But there’s no one expressing an explicit anxiety that has arisen from the mess in the processing of foreclosures by mortgage servicers.
Still, the news is that traffic is up.
This is but a two-week moving average, and therefore not a true real estate trend. We’ll have to see how this tracks into the more formalized Spring Selling Season, should it actually evolve this year.
One thing we’re hearing many builders express is the delight they’ll have as they reach mid-year, and they can stop comp-ing their performance to months where the home buyer tax credits were playing havoc with prospects’ timing.