Housing Market’s Fate is Tied to Jobs and Mortgage Finance

Like we needed another metaphor for housing’s deep freeze here in Washington, D.C…. now intrepid (or foolish) souls who venture out–as we did this morning–into the bleak icy tundra that is the nation’s Capitol need to tromp nary a block before they encounter some car or truck stuck, tires screaming, going nowhere at full speed.

Ice and snow paralyzed city streets….Wheels spinning futilely, hmmm, now what does all this remind us of? Here, verbatim, was the comment one of our best remote workers had when he learned our D.C. offices might be closed in synchrony with the human resources dictates of the Federal Government:

Hey….if the federal government shuts down, that means they can’t spend any money… BRING ON THE SNOW!

You’d have to question the intelligence, sanity, or desperation of the people who’d actually get in a car–especially an everyday two-wheel drive sedan–and try to get around Washington’s mean streets amid the historic blast of winter that has been D.C. over the past few days. Then again, you’d be questioning lots and lots of people. There they all are, stranded atop virtual burgs of ice or rocking from forward to reverse deeper and deeper into their personal snowbanks.

Whether or not it’s a case of a low IQ, an elevated degree of madness, or same extreme measure of urgency, we think each of the paralyzed drivers must have started their vehicle with the same thought: “Not me; others might get stuck, but I won’t.”

Isn’t this just like the mess so many of us have gotten ourselves into with our household balance sheets? Isn’t it also just like the boneheaded ways many of us try to get out of the mess, which only appear to make matters worse?

If 2009’s rabbit-out-of-hat economic development–both costly and hard-earned–left us with a nascent, entirely-too-fragile housing recovery, what we’ve got now is either an affordability-and-scarcity-based continuation of that baby-steps recovery, or we’ve got a relapse into full-scale housing deflation and misery.

Housing Bulls believe right now that historical affordability–monthly payment comparisons to market rate rentals, household income levels, and comparisons to peak pricing of 2006–and the gradual vanishing point of new-home inventory will catalyze demand beyond April 30, June 30, right through and into 2011 on a modestly upward trajectory.

Housing Bears believe right now that historically high levels of absolute house unit vacancies and scary rates of delinquencies and defaults will continue to smother any green shoots of demand with a tidal wave of supply.

What those in the know fear most about the fragility of recovery is not so much the expiration of home buyer tax credits, but the host of artificial supports and supply constraints that have buoyed housing for the better part of three years now, but which have also prevented assets from finding their own supportable floor.

So, policy’s double-edged sword is that the programs that are probably masking widespread insolvency in the financial system are also keeping the private investor sector from engaging in productive bid-ask dealings. The kind of catharsis that would truly cleanse both Wall Street and Main Street of all their respective financial shennanigans, would cripple too many parties too profoundly–or so the thinking goes.

Hence, the daisy-chain of interventions, some of them mere theories and ideas thrown against the wall to see if they’ll stick. Treasury’s HAMP hasn’t.

Sheila Bair plunged head-first into trying to get her agency to lever FDIC powers among member banks to play nice and HAMP distressed homeowners with more tolerable monthly payment terms. The FDIC’s focus on enabling mortgage modification brought with it a series of consequences, one of which has been a massive stalling of the resolution of properties around newly viable bid-and-ask transactions.

Just talk to a  few veterans of the home building world, and many of them will tell you it’s still “too soon” to find opportunistic, franchise-making plays in the market place.

What residential real estate continues to deal with is a bunch of “wished fors” that we should have been more careful about wishing for in the first place.

We’re in limbo because “strategic non-foreclosures” — a term we borrow from The Big Picture financial blog — have become the banks’ answer to “strategic defaults.” If there’s little or no negative consquence to the pervasive “extend and pretend” environment, then what incentive might there be to work through the problem and concede on some portion of  each dollar at stake that one wants.

What current dynamics and actual transactions tell us with eloquent brutality is that the residential real estate dollar is no longer worth a dollar (or, rather it was never worth a dollar but everyone thought it was). 

In exchange for our 2006 dollar we get a series of difficult choices: 1) a few pennies and a lot of  righteous indignation; 2) a few more pennies and a willingness to cooperate with so-called opposing interests; 3) the most pennies, the willingness to cooperate, and a go-forward plan that viably bridges a job-loss environment to a job-creation environment of the future.

Andrew Hede, a managing director for restructuring consultancy Alvarez & Marsal, worries that smaller, lending-reliant home building and development companies hold the short end of the stick when it comes to proving their viability for the long run in this inhospitable marketplace.

“Lenders look first at where they have the most to lose, the bigger companies, and they’re beginning to be willing to renegotiate and come to new terms,” says Hede. “They’re not so willing to do that with the smaller players, which doesn’t bode well for smaller players’ viability in the long run.”

“Extend and pretend” may keep foreclosures from erupting into Armageddon, and it may actually keep some lenders from foreclosing on some nonperforming communities and AC&D loans while everybody keeps vigil on the mood of the almighty prospective home buyer.

Some estimates are that the tangible net worth of the average renter right now is about $7,500. That’s 20% of less than $38,000, which is about one-third the cost of a modest new home.

So, the tailwinds necessary for the pro formas of any new-home construction business to make viable sense right now are 1) the opposite of job losses, and 2) the opposite of excessively tight lending standards. Anything aggressive in a home builder’s sales projections will still get a big red flag from any body with money at stake.

“Until there’s beginnings of a marketplace recovery, and you see job creation and easier access to mortgage finance, companies have to focus on fundamental balance sheet issues,” says Hede. “Liquidity, cash flow, preserving core fundamental assets, possibly exiting non-core communities or markets, and everybody needs concessions everywhere with partners, lenders, and other creditors.”

In other words, 2010 is one big work out.  Or as New Yorker writer James Surowiecki phrases it in his piece, “The Populism Problem:”

“The only way out is through.”

What some drivers learn in Washington, D.C.’s ice and snow choked streets these days is that the more they gun the accelerator, the more likely it is they’re going to need more people and more time to push them out of the hole they’re in.

Too bad the government’s shut down, or some of them might learn something by walking through the Capitol’s streets on a Winter’s day that should be the start of housing’s Spring selling season.

February 11, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Small Business’ Rep Sees Little Cheer in Improved NFIB Optimism

The saying went, “as Detroit goes, so goes the economy.” But now? Actually, half the private sector Gross Domestic Product traces to small business activity, and small business is not going well.

The latest sentiment numbers, at least, are headed in the right direction, or so it would seem from the National Federation of Independent Business’s “Small Business Optimism Index” for January. The survey indicates a month over month improvement of 1.3 points in January, which is 8.3 points above the benchmark’s most recent nadir last March.

Still, William Dunkleberg, chief economist for the NFIB, is unimpressed, and he wants everybody to know that.

You see, Dunkelberg is part of the growing cake-and-eat-it crowd that James Surowiecki has described so well in the current New Yorker, in a piece called “The Populism Problem.”

On the one hand, Dunkelberg espouses a free-the-market indictment of government policy for being way too heavy-handed in its role in economic conditions.

On the other hand, he’s saying that the $30 billion tax credit stimulus package for small business hiring is a sniffling insult, “a drop in the puddle.” He compares the $30 B to the $80 billion Uncle Sam handed to Detroit in bail outs, and, well, takes offense.

This reminds us of an observation shared by a trusted source in residential real estate finance last week.

“Normally, when times are bad, you see some people horning in on opportunities that open up because times are bad,” our trusted advisor said. “That’s still not happening to the extent it might because assets have not, and perhaps can not be written to tradable values yet.”

The last line in the New Yorker piece is this: “The only way out is through.” The only way things are going to get better for small business, is for small business to do what it does, find opportunity where opportunity exists. Small business can and will identify needs among consumers even as they deleverage their household balance sheets and decide to save rather than spend.

Dunkelberg says stop giving bailout money to businesses, and give it to consumers instead. He says none of the stimulus package initiatives have aimed stimulus dollars at consumers.

That’s at least arguable. What about the home buyer tax credit? What about the tax break (Stimulus 1) that occurred in Spring 2008 under the W administration?

So the rest of Dunkelberg’s commentary on the NFIB Small Business Optimism must be taken with a large grain of salt. It’s that mix of anger and ideology that the current populism movement finds so appealing while the economic pain is general.

But as far as grains of sale, not now, because here in D.C. we need all the salt we can for the city streets, which we’ve seen no sign of since last Friday.

February 10, 2010 | Filed Under Financial Crisis | 1 Comment 

New Home Building’s Ten Most Critical Factors–And What to Do

Winter’s insufferably long days have started to relent to the point where it’s no longer necessarily pitch dark both when you arrive and go home from work. Still, whatever the geography, cold, difficult days and nights lay ahead, even if optimism attaches itself to cautiousness in an increasing number of pronouncements of publically traded home building company leaders in their quarterly and fiscal year financial reports to analysts.

This, the first formal week of what’s long been known as spring selling season, here’s how we’d oversimply characterize the 10 most critical dynamics in the higher volume new-home market:

As you can see, almost every negative factor has a neutralizer, an offsetting positive one. This is why it’s true that nobody but nobody knows for sure whether 2010’s economic and housing trajectory will go down as part of a W, a lazy U, an L, or even a V-shaped recovery. There are simply too many unpredictables.

This is why, in addition to executing flawlessly on your Spring Selling Season tactical plan of driving people into your sales centers and models, starting specs aimed at the margin of demand you can pull out of apartments and other rentals, and putting absolutely miserly discipline on all expenses beyond the first half of the year, there are other strategic building blocks to work on now …

The good news is that one of them is not simply working to lower your golf handicap this year, with faint hope that the U.S. Census population clock suddenly tolls the end of the housing depression.

Even as Capitol Hill remains all too involved in the day to day of business and finance lives and livelihoods, and even as a stubborn economy suggests that incumbent electoral officials will be pulling out the stops on economy-boosting programs, we believe we’ve seen the last of home buyer tax credits. We don’t think that even the housing lobbyists give another extension much of a chance, especially in light of what it took to get the last home buyer tax credit through.

In other words, whether or not the 10 aforementioned critical dynamics play one another to a draw, it’s going to be up to operators themselves to manage through the next stretch. The minute you succeed–as some of you will–in getting home not-buyers to become home buyers, private sector liquidity and even banks will come back into the space looking for your business again.

This is probably a 24-month process. Still, it begins now, with the 2010 Spring Selling Season. What comes next after that? Well, you can focus on that question and come away with an action plan as we gather the Housing Leadership Summit, a conference designed for both strategic leaders and operational management, in Chicago, May 10-12. It’s a must-attend event for the home building industry’s CEOs, presidents, and top operating management.

February 8, 2010 | Filed Under Financial Crisis, Home Builders | 2 Comments 

Home Building M&A in 2010? Don’t Count it Out

Just a little visibility for home builders would be so welcome right now. However, it looks as if clarity about what exactly to anticipate next among home buyers and sellers is on hold.

So, we’re looking at 2010 as another pre-visibility year. It’s another year where we see cash and balance sheet management action plans (a.k.a. savings wherever possible and sales at almost any cost) playing to greater emphasis than revenue generation. It’s not the inflection-point year we might have hoped for, but that doesn’t mean operators get more time just to practice their putting or sand saves.

That pre-visibility period, which essentially got set in motion with the collapse of the credit markets in the Fall of 2008, is not without news, drama, and the need for a plan.

High-probability and low-probability/high-impact events–ranging from China’s tapping the breaks on its economy to the dollar index rising, to domestic GDP growth losing steam, to continued question marks around a real economy that can start putting people back to work–each figure into housing economy scenarios for the next few months. It’s tough to tell them apart, let alone which ones cancel out the others.

New-home building’s economic outlook has in it what we believe to be two opposing forces at work that can make or break survival strategies for 2010. One is job and income trends tied to real economy earnings–and this is an imponderable. We may get another $100 billion stimulus package aimed at jumpstarting a tide-turn from negative to positive job formation.

What home builders place great stock in–perhaps even more than in any headwind they face right now–is scarcity. In many markets, the new-home supply has shrunk to a level where many feel that they’re one good gust away from a “shortage” of homes. Is that gust likely in 2010?

Well, if the burst of home buying activity expected this month and in March and April leading up to the end of the latest tax credit for home buyers runs seasonally true to form on a historical basis, the months’ supply of new homes should close to within a whisper of  five to six months’ supply on a run-rate basis. This could be an X factor, and it’s one that many private home building company executives are counting on as a market tipping point.

Meanwhile, it looks as if one drama for the year will be the question of whether we’ll hit that point of a shortage in new-home supply or a shortage of new home builders first. Unquestionably, given the credit and savings environment for both consumers and businesses, the pre-visibility year will be a year of consolidation of greater home building resources among fewer players.

Will we see mergers along the lines of last year’s Pulte-Centex combination? Some say yes, sooner than later.

Although high finance powers that be tell us that 2010 offers little if any greater likelihood of mergers and acquisitions than any other year, it’s not unreasonable to speculate on deals that may get done. Word is that Taylor Wimpey, the United Kingdom-based parent of Taylor Morrison, is exploring either a sale or an IPO for the North American home building operations.

A number of other entities have been the subject of acquisition talk among public companies replete with cash. Woodside Homes, which just emerged from bankruptcy, has a national footprint that matches many of the publics and could represent a valuable land-asset pipeline with operational capacity where needed and efficiencies to capture.

Some mention Standard Pacific as a platform for a company to jumpstart solid volume activity primarily in California, and the just-purchased Florida land assets of TOUSA as a similar opportunity to catalyze cash generation opportunity in the Sunshine State.

Public builders, save Orleans Homebuilders, have all mostly been able to kick their debt-burden can down the road. So the question of distress as a motivator for M&A looms large.

One-off motivators, such as the age and financial disposition of current chief executivies, are also hard to predict. But in an environment where taxation–particularly tax rates on the wealthy and capital gains taxes–will be a force to contend with, don’t count out conversations on succession plans and even mergers that have tax implications as a role player.

February 1, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

For new home builder, Joseph Carl Homes, the moment to rise from Phoenix’s ashes is now

When Joseph “Carl” Mulac  grand opens his CantaMia active adult community in the Estrella master plan in Goodyear (Phoenix market), Az., Feb. 10, home building’s spring selling season officially begins.

Mulac–whose youthful appearance belies his three decades of experience in home building management–is a veteran of large enterprise companies, most recently as the Phoenix division president of the now no-longer TOUSA’s Engle Homes. But to him, he is one thing.

“I’ve worked for several of the nationals, but I think of myself as a home builder,” Mulac told me over a cup of coffee at Caesar Palace’s Augustus cafe at the International Builders Show in Las Vegas last week, talking about the fledgling Joseph Carl Homes’ imminent ramp up to big builder-dom in one fell swoop.

Mulac is living proof that “you have to be good to be lucky.”

His opportunity right now in Phoenix springs from being the right guy in the right place at the right time. He’s the right guy for a couple of reasons. Amid and despite TOUSA’s demise in 2007 and 2008, he ran the Engle division like a pro and remained one of CEO Tony Mon’s most reliably successful value producers.

Now, staying in Tony’s graces as TOUSA’s fortunes deteriorated after its disastrous acquisition of Transeastern Homes at peak market prices on the eve of the meltdown was a smart thing to do for a number of reasons. Not the least of which was that when Reuben Leibowitz–the fellow who originally invested in and made an eventual killing on Tony Mon’s Pacific Greystone back in the early 1990s–asked Tony who he should tap to lead his charge on an up from the ashes play in Phoenix that would start by getting Engle’s holdings back out of the banks, Mon didn’t hesitate to tell Leibowitz that Mulac was his man.

Leibowitz didn’t have to ask Mulac twice. Here’s how the Arizona Republic reported the big deal went down:

The first phase encompasses 215 acres and calls for 643 homes to be built over about four years. Future land purchases could expand the development to 1,700 homes.

Community amenities will include indoor and outdoor swimming pools, a fitness center and tennis courts.

Province was only a month from opening when the project came to a halt, according to Mulac, an Engle executive at the time.

Property records show Engle financed the project under a $250 million loan in March 2006. Mulac, who signed the documents for Engle, said the loan funded up to 18 communities around the Valley.

At Province, Engle built 14 model homes, a 15,000-square-foot sales center and infrastructure, and began construction on a 30,000-square-foot recreation center.

But Engle’s parent company, TOUSA Inc., filed for Chapter 11 bankruptcy protection in January 2008.

Property records show E/S Property Holdings LLC, managed by JPMorgan Chase Bank, bought Engle’s Estrella property at a trustee sale in February.

Joseph Carl Homes paid $8.5 million for 215 acres, according to Mulac.

So, the land price has been reset massively; he’s coming out of the gate with 14 models and a sales center already built, and he just hired his 21st employee–Joseph Carl Mulac 3rd–out of University of Arizona to work harder than he imagines and wear a lot of hats.

They say that even in these most hostile of times, you can start a home building company with a lot of immediate momentum and promise if you have the money, the people, the land, and the product. Carl Mulac counts himself fortunate on all of these accounts, but it doesn’t mean he’s not working his butt off. But that’s nothing new.

Until he had a major run-in with a medial collateral ligament in the early 1980s, the elder Mulac was starting point guard material, albeit, he protests, at Pittsburgh’s Carnegie Mellon, which is no Division 1 powerhouse. Still, that floor general, court-sense approach comes through with Mulac to this day, as does the confidence amid the challenges.

Why does he say he’s a home builder? He says he finished his last tasks and proceedings at Carnegie Mellon on a Friday, and by the following day, he was on a home building site in Cincinnati, working for Ryan Homes.

With a flattering title along the lines of Technical Assistant, Mulac soon discovered during his job of inspecting and recording problems in homes during various stages of construction that one of three problems needed recording in almost every home he inspected:

“I was always frustrated,” Mulac recalls. “Something was either always broken, didn’t work, or missing because it was stolen. Home after home after home this was the case. I went back and talked to my supervisor about how frustrated I was about this, and he said, ’The good news is that this is why you have a job.’ I looked at the problems more positively from that point.”

 So, Mulac in his DNA is not only good enough to be lucky, he’s also the kind of guy who, by nature, looks at problems as opportunities. Not just other people’s problems either.

“Every company I’ve spent time working at has gone bankrupt,” Mulac says. “Ryan Homes in the early 1990s, UDC Homes in the mid-90s, and TOUSA. In every case, it was the land that got them. I have to figure I’ve learned that lesson.”

The other critical lesson learned Mulac will abide by will be research and branding.

“When we were with Engle, we’d get approached about doing all the work and study to make sure we had the right value proposition and the right understanding of who our potential buyers are, but we always decided it was too expensive, and we didn’t really need it,” Mulac says. That’s changed.

Mulac brought on Michelle Mace-Basha’s M3B Inc. to work through a disciplined several-month process [see Michelle as part of the Big Builder Virtual Event Phoenix Dream Team ] to learn as much as possible about the “who?” of his potential home buyer, and what would appeal to those buyers.

So, from the outset, Mulac is launching a community whose offerings reflect a full-commitment to customers needs–not simply his sense of those needs, but their sense of them, which is entirely different. This is why CantaMia’s product will come standard not only with solar panels, but with thermal features as well.

“Our research showed that our customer segments profiled as wanting sustainability in their homes at an affordable price point,” Mulac says. “We had to decide from the beginning whether we were going to invest fully in that commitment to our customers or not, and we felt it’s the right thing to do.”

By the time Joseph Carl Homes officially opens CantaMia for business, they’ll have sold a couple of dozen of the 600-plus homes in the first phase of the 1,700-home tract. Once he gets that part going, he’s going to be doing his damndest to line-up business for an operator he’s got on the ground in Las Vegas.

Just like that, a big builder rising out of Phoenix’s ashes, even as uncertainty prevails in the big builder landscape. In some cases private equity money is proving it’s ready to rumble, and in some cases the banks are ready to make their play to get what they can on their holdings.

Although many home builders are finding that bank loans for vertical construction loans are well nigh impossible to come by, Mulac got a line from National Bank of Arizona to get things started.

He’s taking nothing for granted, not even office space.

“A friend in the business was going through the tragedy of having to auction off everything from his office, including the 30-foot marble-top conference room table he was so proud of,” says Mulac. “I don’t think we’ll be seeing the days of fancy 30-foot conference tables coming back anytime soon.”

For now, and the near future, Mulac is running Joseph Carl Homes out of his own home.

January 28, 2010 | Filed Under Green Home Building, Home Builders | Leave a Comment 

Home Builders to Suppliers: You’re Part of the Problem if You’re not Part of the Solution

With so much of focus going to housing demand stimulus policy that has been playing havoc with monthly new home sales trends, it takes readers to bring the conversation back to earth.

Here’s what one production home builder wrote to us about his experience last week in Las Vegas at the International Builders Show:

“Still lots of folks WAY out of touch on the supplier side.   Expensive stuff catering to a market that might never return, green touches that buyers won’t pay for, the cattle call financing section was off the rails…..builders don’t need someone to talk to them about financing a ‘deal’ they need someone to finance the future (deals, vertical, overhead…..getting back to work). I think that I was impressed that the show was well attended. You’re spot on that it proves that there are survivors who are looking for the next opportunity. I think that the disconnect between the supplier side and the builder side is wide though. I can’t even begin to guess how companies that sell $20,000 to $50,000 software apps plan to market in the coming years, how the fringe suppliers will survive.  If more with less is something that customers are demanding certainly the suppliers didn’t seem to be trumpeting the charge. 

There you have it. A gap separates building materials, products and services suppliers from the needs of their customers, the home builders. Government policy has been working like an on-again-off-again spiggot, but home builders are mostly still struggling to understand how to work in the real world beyond the punch-bowl economic gyrations of the moment.

So, in the real world, everybody takes a hair cut, and not one they think will be the most flattering. Homeowners have given up trillions of dollars in household wealth–including home values; builders and developers have done the same with regards to their raw material–building lots–pipeline; banks are smothering in toxic and petrified assets and greed.

In a “good enough” era, a baby steps marathon is  more likely to be the way out of the world of hurt than any sudden blast of recovery.

Which is why we should focus questions on the role of builder-supplier partnerships in what’s likely to be a long, long path to healing in the market. After the policy punch bowl goes away, what to expect? The answer is work.

Just as banks, investors, land holders, land losers, the owers and the owed are now just beginning to engage in a great financial reoganization that will reset home prices more in line with household incomes and monthly rents, builders need to have similar work-out plans with their supply sources.

Value engineering is not a new term, but the urgencies around making it more than just a b.s. phrase to describe doing things in design, construction, and operations essentially the same old way are peaking.

Our reader’s view expressed above is that products, services, and materials suppliers should be highly motivated to be part of the solution to reset new home prices on higher-performance new homes lower.

“We can’t compete on price alone,” says Jenne Conger, vice president of sales and marketing at History Maker, a Dallas-area home builder that has four generations of staying power in a market that’s cyclically as tough as they get. “We had to find a point of difference for our buyers in addition to the affordable price point. That point of difference, for us, is green.”

Here’s how the company describes its “green” value offering:

The world is going green and History Maker Homes is no different. To add even more value to all of our homes, we’re now offering a guaranteed energy savings option called Energywise, from BaySystems™, the umbrella brand for the global polyurethane systems operations of Bayer MaterialScience. Bayer MaterialScience is a subgroup of Bayer AGAG, an international health care, nutrition and innovative materials group that produces Bayer Aspirin. This Energywise system provides energy performance improvements that add value to every home through reduced lifecycle costs and improved sustainability, resulting in a two-year guarantee of annual heating and cooling costs.

History Maker, which Conger attests maintained flat sales year-on-year with 2008’s level, sold 60 of its 400 homes in 2009 with the Energywise package. Their price point? Under $200k.

BaySystems’ explanation of the package:

Energywise’s “systems approach to residential energy efficience combines an optimally designed HVAC system with Bayseal spray foam insulation installed by an Energywise Preferred Contractor… Of the 40,000+ homes designed and build using the energywise Energy Cost Savings Guarantee, annual energy savings are commonly more than 50% versus conventional construction.

“Yes, the buyer pays more in the purchase price of the home to get the Energywise package,” Conger says. “But when we go through the total operating cost analysis with the home buyer, and they see the cash flow positive difference from the minute they take over ownership, they’re not put off by the fact that the initial investment adds about $25 or less to their monthly mortgage payment. They’re saving way more than that with the guaranteed energy cost and savings from day one.”

We heard lots of talk among builders that the cost of energy high performance and other sustainable features outweighed the willingness of home buyers to ante up in this environment.

Still, History Maker and Bayer Material Science, which is pushing to expand its distributor and installer network for concerted growth among bigger volume home builders, have apparently struck a balance in their message: Monthly total operating costs, especially when they capture savings in energy and put money back into homeowners’ pockets, are beginning to hit an inflection point as new home buyers grudgingly move off the sidelines into purchases.

At one of the educational seminars during the IBS, Tim Sullivan, of Sullivan Group Real Estate Advisors, had a come-back for home builders who wonder “is this green thing going to remain a factor in our business?”

“If you’re not leveraging monthly total operational expense savings to include energy performance in your new home marketing and sales, then something’s wrong with this picture.”

Sullivan, albeit his Southern California base of perspective, has it right. We may have the luxury of considering energy performance an extravagance or an option at this point, but that’s merely testament to the power of denial.

At any rate, here’s the key point: suppliers that, like Bayer Material Science, can give home builders a point of difference in their submarket selling effort, offer sustainability or high-performance in that point of difference, and partner with the builder to make the investment affordable are going to go into the early lead and maintain it as tough times stretch farther ahead and recovery becomes a glimmer.

January 27, 2010 | Filed Under Financial Crisis, Green Home Building, Home Builders | 3 Comments 

Six Secrets from Behind the Headlines at the International Builders Show in Las Vegas

Everybody talks these days about “take-aways” when there’s an industry event of  significance. Last week, we hunkered down in the trenches, mostly behind the scenes of the NAHB International Builders Show in Las Vegas with our industry friends–home builders–and tried to learn which way their fates and fortunes are headed: up, down, or sideways.

You have heard and seen in other reports that the sentiment among attendees was positive although attendance at last week’s International Home Builders Show was middling at best. File them under wishful thinking–if optimism turns out to have been well-placed, it will be less the result of what challenges are likely to play out, and more to do with what lucky turns of events are unlikely to play out.

As for take-aways, here are a  half-dozen IBS show nuggets you can’t make up if you try:

“So, do you think this ‘green stuff’ is here to stay?

You’d think that might be a rarity to hear among home builders, but it’s surprising how widespread an attitude it is among those who believe that if home buyers won’t pay for energy performance, then it’s not a consideration. Period.

“My name is Carl Mulac, and I’m starting a home building company.” A heckler, whose name will go unpublished, responded: “You’re crazy!”

Still, in an environment where bank funds to go vertical are as rare as rocking horse dung, Mulac and company got $2 million to build on from National Bank of Arizona, so expect the sound of saws and hammers out at CantaMia to echo through the foothills of the Sierra Estrella Mountains.

“[The Selene Residential Mortgage Opportunity Fund] It’s his attempt at atonement. But $2 billion is $2 billion, and there are hundreds of billions of home mortgages in distress right now, so it’s not going to put a dent in foreclosures.”

“There’s talk he withdrew cash from the credit facility set up for the old company and is using it for the new company. How he’s going to wind up getting away with that is anybody’s guess.”

“You talk about privates, but why would public companies continue to counter-bid one another and drive their own land acquisition prices up? Who’s going to be profitable this year? NVR, yes. Maybe, Meritage. Who else? How insane is it for them to be overpaying for lots just like they did three years ago just because they all want the same parcels?

“We’re in the process of developing a strategy to operate the company and generate value as an operator going forward. We’re not for sale.”

That’s not to say that scores of lenders and creditors who retain significant influence on what Woodside’s asset portfolio should ultimately do to generate them value won’t ultimately push for sale of the company.

Still, they worked through a long, painful process to come to new terms as a top-five private builder operator, so it seems likely they should at least give Shine a strong crack at his strategy:

“A private builder culture that looks like a public builder.”

Sounds like he might be aiming to navigate the balance of the market downturn and position Woodside to go public when the right moment comes along in the months ahead. Still, that doesn’t stop Woodside from being–like the North American home building operations of Taylor Wimpey, including Taylor Morrison–assets that may find high regard among public builders.

Other than these take-aways, about all we know is that exactly no one is sleeping easy about what happens to the market come the sunset of the the extended and expanded home buyer tax credit on April 30 for sales, and June 30 for closings.

After the Colts-Saints bash-fest on Feb. 7, 2010, in Miami, Saturdays and Sunday afternoons reopen as that traditional time for couples of many ages to renew their nesting instincts. Spring selling season this year, should it actually occur, may reset the bar of expectations for whether the housing recession can end this year or drag on into 2011, where the IBS venue will return to Orlando.

The IBS this year was populated by a group of intrepid believers in the industry, ones who tend to drop into a disaster scene as soon as possible after a calamity ends. They’re the ones who say, “we’re going in,” and they start the mission of stabilizing the place for a more concerted recovery operation. We didn’t hear optimism at the show. We heard determination. We heard urgency. We heard in the voices of many we trust, this message:

“The time to hesitate is through.”

Face it, practicing with the short stick might make the puts go straighter, but not too many folks we spent time with wouldn’t give up some birdies for a string of quarters operating in the black.

January 25, 2010 | Filed Under Uncategorized | 2 Comments 

Meritage Homes CEO Steve Hilton Pulls Out the Stops as Company Nears Profitability

Steve Hilton says he can “almost taste it.” Call it Goldman envy if you like, but what Meritage Homes’ CEO can hardly repress excitement over is that his company is nudging nearer by the day to earnings.

Not just an earnings release, either, although Hilton is working with his folks on the final drafts of language for investors ahead of Meritage’s Q4 and full-year earnings call with Wall Street next Wednesday, Jan. 27.  By this time next year, Hilton believes Meritage will already be trying to string quarters of positive earnings together.

We caught up with Steve in Las Vegas yesterday in what has to be one of the Western World’s best real-life metaphors for why we’re in the mess we’re in, the $9 billion Dubai World/MGM real estate moon shot, The City Center.

“What I’m really excited about right now is that we’re so close to making money. We’ve been operating in the red, but working on getting back to profitability for more than two years now, and we’re just about there,” he says of the company he co-founded 25 years ago amid the S&L crisis. “I can’t tell you how good it’s going to feel when we start making money again.”

Hilton has a long-term vision  and a short-term plan that probably strongly reflect what many other home building company executives–from companies large and small–find the courage to get up each day and keep going at it through the downturn.

His long-term vision is of an industry cycle parabola that stretches from 2005 right through to 2015.

“I’m not seeing real recovery from this thing until 2015,” Hilton says. “I call this home building’s ‘lost decade.’ If you look at where we were in 2003 and 2004 and where were going to be when we come out in a few more years, it’ll look like we’re exactly where we were 10 years earlier.”

Imagine the intestinal and financial fortitude you have to have to weather a decade-long slog to stay alive and stay flat. By the same token, Hilton points out, if you take a look at an even longer period of 20 years, you see healthy growth for the business that suggests recovery after a thrash for another few years will be strong.

So, long term vision ultimately positive. Short term plan is to fight it out in the trenches, focusing not just on rival new home builders but where the real battle is, with resales.

To that end, Meritage recently brought on Phillippe Lord as director of market research, a former Acacia Capital and Centex market research real estate market model whiz. What Lord is introducing at Meritage will be a knowledge base drawn from real time home transaction data that shows sales, price points, demographics, and absorption velocities by submarket. Using this data, which includes both resale and new home sales, Meritage can much more knowledgeably reload its lot supply in submarkets where it has the right product to compete.

“We used to do our land deals by driving out to the tract, picking up all the sales brochures in the sales centers of competing builders, going back to the office and penciling out a product that would  beat new home rivals on price in the submarket if we could,” says Hilton.

Lord’s analytics will allow Meritage to do lot acquisition in a more logical and strategic fashion.

“We can put a polygon around a submarket that’s got some good sales going and be much smarter about a lot of things,” Hilton says. “For instance, you can zero in on which Realtors are the producers in a market and focus on working with those few folks versus a scatter shot Realtor effort.”

So, having a more strategic approach on the ground as Meritage works to keep reloading its current mid-one hundred stores at when and where it needs to. Typically, like many publics, Meritage turns a third of its communities a year, with a 3.5 year avergage sales cycle for each community it opens. Importantly for the near term will be not overpaying for new lots even as multiple home builder bidders seem hungry for buildable lots these days.

“We feel the finished lot business has gotten a little overheated ahead of where real end demand might be,” Hilton says. This means his company needs smarter rationalization of land pursuit both on price and location.

Meanwhile, as Hilton and his finance and investor relations team put the finishing touches on their message for investors next Wednesday, they’re also unvailing an aggressive trifecta of product and sales programs aimed to capture every possible bit of momentum for today, tomorrow, and this weekend.

Remember, “spring selling season” officially starts practically the minute the cooler of Gatorade gets dumped on the coach of the winning Super Bowl team in a couple of weeks.

As much as Hilton can almost taste the deliciousness of operating a profitable enterprise some time in 2010, he’s leaving little if anything to chance or luck. Likely, post April 30th (the deadline for sales that qualify for the current expanded home buyer tax credits) and post first-quarter 2010, when heavy-handed Treasury policy is set to cease supporting mortgagte interest rates with its MBS purchase program… the free market itself will test the fortitude of home builders yet again.

Meritage’s sales initiatives focus on three buyer programs.

Effective for homes started after January 1, 2010, Meritage Homes will include the following green elements in every home it builds to provide buyers more value while respecting the planet’s resources.

 * Energy Star qualified.   Meritage Homes exceeds the strict energy
   efficiency criteria set by the EPA and US Department of Energy,
   employing materials and practices such as more effective
   insulation, high performance windows, tight construction,
   sealed ducts, higher SEER energy efficient cooling and heating
   systems, and Energy Star qualified appliances, lighting, and
   water heaters. Energy Star qualified homes are inspected and
   tested by independent home energy raters to ensure they are at
   least 15 percent, and typically 20 to 30 percent, more energy
   efficient than homes built to the current International
   Residential Code.
 * SEER 14 minimum HVAC.   Developed by the DOE, the Seasonal Energy
   Efficiency Ratio is a measurement of an air conditioner or
   heat pump's energy efficiency. A higher SEER indicates higher
   efficiency and typically lower energy bills. Comparing with
   models 10 years or older, cooling costs can be lowered 20 to 40
   percent with newer, more efficient models. The 14 SEER units
   provide significant savings over many of the newer models -- so
   efficient they exceed the EPA's Energy Star Program' high
   efficiency criteria.
 * Low-E windows.   The average home loses 25 percent of its heat
   through windows, which can be the greatest cause of heat loss in
   a home.  "We've chosen to use windows manufactured with Low-E
   coatings because they reduce energy loss by as much as 30 to 50
   percent over regular windows, even though they typically cost us
   about 10 or 15 percent more. The energy bill savings over the
   life of the homes more than makes up for this increased cost,"
   Hilton said.
 * Energy Star programmable thermostats and Energy Star appliances.
   "By incorporating Energy Star appliances along with programmable
   thermostats, Meritage home buyers will have advanced
   technologies that use 10 to 50 percent less energy without
   sacrificing features, style or comfort," said Steven J. Hilton,
   chairman and chief executive officer of Meritage Homes. "This
   makes Meritage homes a fantastic long-term value proposition
   over older homes that contain less efficient technologies."
 * Low-flow faucets and showerheads.   Every faucet and showerhead in
   a new Meritage Home exceeds industry standards for water
   savings.  Installing low-flow shower heads and faucet aerators
   provides the single most effective water conservation savings
   for the home, reducing water bills and the cost of heating water
   by as much as 50 percent.
 * Low VOC carpets, paints and finishes.

“Lots of people think that buying a new home takes six months or a year,” says Hilton. “This program will be about getting people into a new home practically as fast as they could close on a resale.”

So, Hilton can almost taste victory even though he knows the market’s going to remain hostile for many months more.

January 21, 2010 | Filed Under Financial Crisis, Home Builders | 1 Comment 

Las Vegas Housing Enters New If-You-Build-It Moment of Truth

We were out once again on the Las Vegas area’s 215 loop, heading to the master plan Inspirada to try to gather more insight into what’s going on in the trenches here in Las Vegas new residential real estate market.

We saw several iterations of the vaunted new Open Series product from KB Home, in both attached and detached form. The product flexes here, it fits the lot to bring a bit of the outdoors in there, it strips down complexity, and swaps out expense for function and simpler design.

It seems that Good Enough is more than good enough to keep action going in a market where entry-level in all its policy-backed splendor is about the only scale play in town.

What the Open Series does most, it seems, is act as a magnet for people of a diverse range of household compositions and ages to cross over into homeownership at a moment they believe can not be improved upon. The biggest visible innovation in the homes is right there in the sticker price, which attests to the biggest invisible innovation–the operational process that makes this product pencil.

Repeatedly, we’ve heard that if you can build and sell on Las Vegas’ relatively constricting lots for $100 a sq. ft.  or less, you’re in the game here. If not, you’ve got problems.

Here’s what Raymond James’ home building and materials equity analyst Buck Horne has to say about the Las Vegas market right now.

* Las Vegas single-family sales rose 37% y/y in December, which also represented a surprising 10% sequential increase from November. The strong activity levels in Las Vegas reversed typical seasonal patterns, and are particularly noteworthy, in our view, given the demand drop-offs seen in other markets due to the effect of the prior November 30 tax credit deadline. From our perspective, we believe December’s sales trends in Las Vegas are likely being skewed by a higher mix of “foreclosure flipping” from investors, given the high percentage of recent re-sales acquired by investors in this market. Nevertheless, the 3,420 single-family homes sold last month (according to the Las Vegas Association of Realtors) was the highest level of December sales on record dating back to 2003. For reference relative to 2006, December 2009 sales were up 108%. Meanwhile, condo sales also remained strong, rising 77% y/y and 7% sequentially.

* Year-over-year single-family median price declines moderated for the seventh consecutive month as prices fell 22% y/y to $136,000. Condo pricing, however, showed some incremental weakness as y/y median price declines accelerated downward falling 27% y/y to $65,300. The median sales price per square foot ($76) for single family detached homes appears to be holding steady though, albeit down 60% from the 2006 peak, according to Dataquick.

Imagine, the word “strong” being used to describe activity in December in the Las Vegas market. Who’d a thunk it?

Naturally, when you’re doing business in this environment, the gorilla in the room is what happens after HBTC 2.0 (Home Buyer Tax Credit) expires in April for sales and the end of June for closings.

Most of the talk among those who work in the trenches here see a front-half-back-half scenario for 2010. 

What all this means is that operations are in overdrive now. The land hunt is manic; the starts numbers — down for December – will pick up sharply in January through March, and then go into eerie silence.

If a newly balanced Capital Hill can do anything positive on jobs before mid-year, we might come out of that eerie silence with some genuine traction. Otherwise, the guessing game will focus on trying to estimate how many buyers the tax credit programs pulled forward, and how long it’ll take for time to work out that challenge.

One observation we’d make is that irrespective of the depressing level that home builder sentiment measures out at, we’re seeing determination and resolve offset low confidence levels. Clearly, the larger companies have cut so deep they barely recognize themselves, but they’ve all got action plans and those action plans call for lots of action now.

We’ve entered an If-you-build-it moment where all the disciplines on price, cost management, operational efficiency, etc. that these companies can bring into play are actually at work. So we’ll see if the builders are able to seize their own destinies, and become an economic engine, or whether they’re just another box car on the rails.

January 20, 2010 | Filed Under Financial Crisis, Home Builders | 1 Comment 

A Windshield View of Las Vegas Real and Unreal Estate and Housing

This week, we’re on the go to the nation’s annual home builder convention, the National Association of Home Builders’ International Builders Show. We’ll see some of you there, we hope. We’ll be in Las Vegas, that big bowl of steamrolled desert rimmed by ridges, sprawling in all directions with Mediterranean style roof tops.

Las Vegas, which enjoyed generations of ill repute, got a good halfway through its silly money financed extreme makeover redemption and rehabilitation before the economy in about 2008 shouted, “Move that bus!” When the bus moved, well, the picture wasn’t pretty like on Sunday nights on ABC.

Building Harmony Homes at Ladera

Yesterday, we arrived at McCarron, caught a bite to eat in a sports bar among Brett Favre haters and lovers alike, and took off by SUV with Rick Hildreth for a look-see, not only at what is going on, but at what’s in the pipeline to occur in new residential real estate in the year or more ahead.

A word or two about Rick Hildreth. If you’ve been in a car with a knowledgeable Realtor, driving neighborhoods where he or she has been doing business for years, you probably have a good idea of what it’s like touring the Las Vegas perimeter mosaic of master plans and not so master plans with Rick, who for just over six months has been the on-the-ground operative in Las Vegas for the Phoenix-based Land Advisors Organization.

Rick came to Las Vegas from his native Kentucky as part of a software company, one which eventually became a casualty of missteps that occurred during the great Tech bubble of the late 1990s into early 2K.

Since, Rick put in time as a land acquisitions pro for now-defunct Engle Homes (Technical Olympic USA), and later at the now-absorbed Centex Homes. As a home building company land executive, Rick made it his business to learn Las Vegas’ land grid inside out, backwards, in his sleep, etc.

For example, we’re driving past a tract of land that a commercial RE company paid $1.3 million an acre for during the run up. It was a piece of land Rick coveted as a potential site for a Centex multifamily active adult community during the first half of the just-finished insane decade. He lost out to the RE company, and now the commercial project is but a skeleton of rusting beams, back with the banks.

“I remember being so angry that I lost that bid,” Hildreth says, somewhat belying a mild manner you’d hardly associate with a bad temper. “I said to the seller, ‘I just don’t lose these bids.”

Spend a few hours with him on L.V.’s perimeter roads–now immensely improved after years of construction and detours–and you hear him quote lots, buyers, sellers, banks, legal status, potential deals, and dynamics for every piece of dirt out there in the vast desert Valley.

We start our odyssey out at Inspirada, where you see KB Home, Meritage, and Toll Brothers valliantly making a go of an MPC that has had to weather the three whammies…. an economy going upside down, a developer going broke, and several key builder partners imploding.

Still, it’s a workout, and there are deals going on for the lots that had been Kimball Hill’s.

This leads to the two large insights of our trip:

These two insights come out of Las Vegas, but they illustrate the questions we need to keep asking as we look at an overall economy going sideways thanks to an over-leveraged consumer and an uncertain jobs environment.

We haven’t got stability in home prices, partly because of defaults among borrowers who never should have borrowed, partly because of income and job loss, and partly because the deflation of home values is its own gravitational force.

Countering that lack of stability, we have “affordability,” which describes a relative set of circumstances that compare with phantasmagoric baselines of two to three years ago.

Will and can affordablity act as an economic catalyst, or will it work simply as a descriptive of a market that has finally corrected and cleansed and delveraged itself after a 15 year boom cycle that crescendoed with a bubble?

This is the question we see so clearly delineated in Las Vegas. We have an economy that relied heavily on construction and real estate speculation checking itself out as the dust settles to see what it’s made of. We have billions of bubble dollars out there in cast-iron beams, rusting in the sun, waiting for multiple forms of market impasses to clear before 1 or 2 becomes the new 10.

We have natural household and job formation thrown into a limbo of questions based on whether companies are actually hiring or firing, whether incomes are actually stabilizing or losing ground, whether population growth is netting positive or negative.

But affordability is a phenomenon of noteworthy-ness now.

And the companies that run on heft and scale need to start using it or losing it, one or the other.

So, Hildreth, the guy who probably knows more on a lot by lot basis about Las Vegas valley — he can tell you who sold, who bought, who flipped, who’s holding, who’s distressed, who’s angling to buy, and where the bodies are burried for just about every piece out there right now — claims that big builders may be in for a surprise if they think they’re going to be able to make their numbers by picking up finished lots in the Vegas market.

“They’re all talking about opening several more stores here in the valley in 2010,” he says. “They’re going to find that’s tougher than they think. They do that in a good year, but I don’t think there’s enough finished lot inventory here for them to assume that.”

We’ll see.

More later from our ramblings in the Valley after we go back out to Inspirada to take a closer look at what all the KB Home Open Series magic is all about.

Let us know if you’re out here, and we’ll try to say hello over at the Convention Center.

January 18, 2010 | Filed Under Financial Crisis, Home Builders | 3 Comments 

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