Where Housing Meets the Beach
Happily for our co-workers, we availed of four bona fide paid holidays to skip town on you last week, but promise that’s the last time off we’ll enjoy for the balance of this year. We won’t tell you precisely where on the Northern California coast we vacated, because it should remain a best-kept-secret.
Still, we will attest to feeling especially calmed, cheered, and comforted at clear evidence we were neither the laziest nor the one with the biggest gut on the beaches we visited–those distinctions claimed unreservedly by a host of lolling fish-fed denizens, lying glimmering in their sealy torpor as the foamy tides crashed upon their rock beds below.
Along the cliff trails were a slow motion thunder of waves, the silent sun that played hide and seek with the fog, the sweet smell of salt and distant campfires, a smart wind out of the northwest, and a vast bouquet of muted coastal flora that blanketed the upper ground and draped over the lichened cliffs that plunged to the sea.
92% Blackberry-free for a week, we kept email-induced bad moods to a tidy minimum, and tried our best to stoke the grown-local economy with dollars we felt were better meted out to add to our store of fond memories than on a yet-to-be needed big screen TV.
Still, perversely perhaps, the Housing Crisis and our infatuation with what lies beneath it [and, in turn, what the Housing Crisis lies beneath] was never entirely expunged from our thoughts, even during such a blissful retreat. California freeways glutted with bicycle-laden recreational traffic and tourist packed restaurants notwithstanding, we were struck equally by none-too-subtle evidence of swelling ranks of the displaced, from the streets of San Francisco to the streets of Guerneville.
With more than one in five work-capable souls unable to secure gainful employment, and another hefty bunch of folks not even hopeful enough to try to find it, northern California is like a super-sized You Tube home video of our economy not at work.
Clearly, the bygone tax credits for home buyers and their April 30 expiration, aside from a fleeting manic fillip, played little to no part in the state of the market straits that face housing’s developers and builders.
Our vacation thought was this, and it was even before we caught up on some financial pages reading that we’ll reference below:
Let’s hope China and India get a middle class in time so that we don’t lose ours.
That notion came of at least three or more years of hearing that jobs, jobs, jobs should be everybody’s priority No. 1, but also hearing no one much talk intelligibly about where and how jobs will get created in the United States economy. No shortage of smart people have spoken. Recently, Intel founder and former chief Andy Groves offered his view of America’s job creation deficiencies in a Business Week piece. Here’s a key indictment:
Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.
Further, in today’s New York Times, Bill George, a Harvard Business School professor and former chairman and CEO of Medtronic, comes out blasting consumer targeted tax stimulus programs in favor of a series of business tax incentives and inducements that would encourage U.S. investment and hiring. No sooner does the government get lambasted for interference and heavy-handedness after its trillion-dollar American Recovery and Reinvestment Act than a new barrage of critics call for policy’s helping hand to move the dollars from the household to the business community.
To get the country growing and Americans back to work, the government must shift course to invest in America. Tax policies and incentives should stimulate private sector companies to invest domestically in research, innovation, manufacturing, infrastructure and exports
From vacation’s remove, the red v. blue fray over policy and the nation’s treasury seems only slightly more imbecilic than press tidings that America has yet, actually, to take its medicine for The Great Recession and that we’ve instead tried to glean the nobler parts of The Depression with a great deal less of the pain and agony of that earlier slump. Such a Puritanical manifesto seems to underlie the analysis Judith Warner offers in yesterday’s Sunday New York Times.
Our nostalgia for the Depression speaks volumes about how we feel not just about the past but also about our lives today. A creaving for a simpler, slower, more centered life, one less consumed by the soul-emptying crush of getting and spending, runs deep within our culture right now.
Warner’s theory–which seems to suggest someone is to blame for something but won’t say whom or what–is not so unlike another piece that published while we were lazing with the seals. It appeared July 30 in the Financial Times, and was highlighted in Barry Ritholz’s The Big Picture blog.
The FT piece reads as a stop-action report on the giant You Tube video we mentioned earlier. It does what newspapers do best and worst. It gets all or most of the facts right and gets the story at least somewhat wrong.
The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.
The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.
If that’s not an editor saying, “find me story for why the rise of Tea Party America,” then we don’t know what would be.
Again, we lay out in the sun among the napping seals, but we couldn’t help but think that all the accusatory noise about one political party or the other being to blame for the present state of the economy is just that, noise.
At issue is that it’s currently cheaper to scale manufactured goods and a growing number of services in overseas lands than it is to do that here. Either until consumers in those overseas lands begin to buy enough of what the U.S. produces, or when workers in those places get powerful enough and scarce enough to charge more for their labors, there’ll be a natural shift by companies toward sourcing materials, products, and services from non-domestic markets.
If the industrial age made what people needed more attainable and the post-industrial age made what people wanted more attainable, the question is how we follow that act.
Assuming for a moment that we haven’t gotten things quite as wrong as Sunday Times writer Judith Warner would suggest, nor that the U.S. middle class simply will go by the boards, we’ll have to figure out a decade or so bridge to when the Indian and Chinese economies become true consumer-led economies that will demand U.S. produced goods, services, and talent.
Or so the sleepy seals would have us think.
Did Home Builders Trade Off Better Land Deals to Juice Cash Generation?
Cliches do their work and get tired for good reasons. They’re often annoyingly obvious and aggravatingly true. “Be careful what you wish for,” for instance. Way back when–in December and January–as we were tallying up Net Operating Loss tax refunds home builders recouped after the extension from 24 months to 60 months backward, the clawback number quickly climbed well north of $2 billion without so much as breaking a sweat.
“That was the stupidest thing that ever happened,” said one of our highly placed public home building company executives.
Right about now, after a phalanx of home builders completed an 18-month tear to devour finished home lots everywhere at prices that swelled to double or triple distressed-deal pricetags, the sense of this comment, “the stupidest thing that ever happened,” becomes clear.
When you think about it, home building’s biggest beneficiary of an NOL refund–Pulte–already had enough land, so it didn’t need to participate in the ‘09-’10 run on finished lots. Too, the No. 2-ranking NOL refund recipient, Hovnanian, probably did use some of the windfall for land purchases, but most likely banked the lion’s share of the tax rebate for operations.
So, in fact, less actual NOL refund money made it into the land-buying market than meets the eye. But, that doesn’t mean the perception among land-sellers and banks has not been impacted by NOL refunds’ flow into builders’ acquisitions piggy-banks.
Says another home building company CEO:
It scares me, to be honest, when I look and see what happened in the Fall. There were three years of pain–builders beating land sellers and banks over the head, trying to convince them that market values weren’t there… and [the land sellers and banks] had to get to a psychological adjustment on what market values needed to be, because when you residual it back, their perspective on what the values were just didn’t work. And overnight we made that go away.
We just said, ‘poof!’ and it was gone. Because, now after the big Fall, everybody says, ‘those really are worth what I thought they were.’ But guess what, when it comes through the cycle, the house isn’t going to appraise there.
In other words, invoking the option to shift accounting timing on collecting tax refunds on business losses from later (the future) to sooner (the past) may well have won a policy battle, but it likely made the war longer and more difficult, with an even greater list of casualties as a result.
Says one of our trusted public home building company leaders:
“[NOL refunds] probably did contribute to a temporarily elevated demand for lots, and distorted the market for a while, but that’s over now.”
So thanks to an “extend and pretend” bank regulatory environment, an artificially inflated liquidity pool of cash put into the coffers of public builders who were bursting at the seams to open new communities to flex their competitive muscle and validate their footprints, an opportunity was lost.
A true-up of land market bids and asks that could have occurred widely by now got delayed. Near-term cash-generation interests trumped longer-term health and profitability.
Here’s a painful truth. Minus a jobs and consumer confidence recovery (which could still emerge, however anemically, out of the fog of broad regional economic trends), housing’s now stuck between a rock of no demand stimulus and a hard place of land sellers who won’t mark their lots to realistic end-home-buyer market rates.
Home builders’ focus on what they can control–which is not the economy and jobs growth–is more important than ever.
A key story of the balance of 2010 will be whether at least the public home builders displayed financial discipline (or not) in their lot acquisition activities dating back to Spring 2009. We have, or will see a fair number of communities come on line in 2010 and early 2011 based on those lot purchases, and the question of the moment is whether the underwriting was sound or not.
So even as end demand remains in the thrall of unclear employment and disastrous home finance trends, the supply side–namely land prices–is going to be where players seize a competitive and profitability edge coming out of 2010. But that won’t occur for anyone who hasn’t learned to pencil lot acquisitions with the discipline to exclude both appreciation and a faster pace of absorptions.
An anemic recovery is a recovery, period…
(Folks, this note will be our last until our return from a week on the Sonoma California Coast … a vacation we gratefully appreciate. Until August 9, then, best regards to you all!)
New Home Economy Works Slowly from the Bottom Upward
The story behind new home sales data out today, we believe, is that home builders collectively are managing seriously adverse economic conditions about as well as one can imagine in the limbo of a thus-far jobless recovery.
Look, for three years, the outspoken veteran home building company executives said the housing market was the worst they’d seen in their lifetimes. It could hardly come as a surprise to see unstimulated new-home demand revert to historical lows.
Remember, the absolute number of people who are out of a job is the highest it’s ever been, and the absolute number of homes in or headed for default is the highest it’s ever been as well. The multiplier effect of both of those trends hammers consumer spending, and bruised consumer spending translates into more pink slips.
So how could the new-homes number have eluded the economy’s wrecking ball once the U.S. government removed its tax support for purchases?
One of the more negative headlines, from blogger Calculated Risk, cites an all-time record low for June 2010, vs. a prior non-seasonally adjusted June of 1982.
Again, we’ll say that if you’ve got some of the sales associates who actually took deposits in May, June, or this month on new homes, you’d better do what you can to hang on to those sellers in the months ahead.
In the teeth of this adversity, small, medium-sized, and larger home building organizations have gotten yeoman’s work from their many-hat wearing associates.
Collectively, they’re turning inventory faster and they’ve ratcheted down both the absolute supply number (to 210K, down from 213K), and months’ supply, from 9.6 months to 7.6 months.
What’s more, analysts have observed the beginnings of a return to the market of first time buyers, as well as those in higher price points, indicating that contingency sales have begun to pan out for a number of folks in the new-home arena.
Even in the unlikely event that the unseasonally adjusted number of 1,000 new-home sales a day were to continue at its slow pace, and if the absolute supply number falls at the current level of 1.4% a month, we’ll be inside of six months’ supply by the end of 2010.
That’s hard work. And that sets up better times in 2011.
The very big question to think about, even if there’s little home builders can do about it, is job growth. A true housing recovery remains a ludicrous notion in the vacuum of a consumer-driven economic and jobs recovery, even if there are positives in home builders’ collective management of the supply of their wares.
Too, home builders can spark demand–like rubbing sticks together–if they can buy land cheap enough, which is not, for the most part, what they did in 2009 and the first part of this year.
Many of the finished lots purchased in the past 18 months were at rates that may reconcile to divisional operational overheads, but hardly pencil to a reset in the cost of homeownership that one may still reasonably expect after the dislocation and financial trauma of late 2008.
Strategically, just as home builders need–as a group–to learn more about who their home buyers are and what makes them tick, they’ve got to make strides on the buy-side of the equation as well.
When it comes to land buying, too often home builders get played for chumps. They are too easily played against one another, and too often they get tricked into not playing their own game.
Right now, for private home builders anyway, the ones to beat are not other home builders; the ones to beat are the banks. The banks hold (or rather, they’re mired in) assets, real and paper, for which they have no clue about how to get dollars. What they will get for the REO properties they’ve taken over from builders and developers are fines, headaches, taxes, lawsuits, lost money as entitlements expire, and grief.
A couple of home building companies–Lennar’s Rialto and Toll Brothers’ new Gibraltar unit–have set up to work with the FDIC at the bottom-dollar level to get value from holdings like this.
But, among banks who are still solvent, home builders may play at least a small role in their redemption from the hell of assets that can take on an evil life of their own if they’re not in the hands of someone who knows what to do with them.
Now that there’s beginning to be flashes of capital availability, home builders–particularly ones that can help banks work out of the myriad petty jams that some of their unintentionally acquired real estate holdings represent–may finally get their opportunity to buy low enough to sell something for a profit.
At least banks have staffed up their special services departments, and they’re said to be moving real estate deals to resolution, versus playing extend and pretend possum with the assets.
It figures home builders would have to take on yet even more risk as investors in recovery before they’ve got true visibility on its arrival. But that’s what it means when your industry sector is called the engine of the economy.
Somebody has to start spending money first, so hire a land expert who can get a bank out of a broken, messy, legally troublesome deal, and you’re on your way for dimes on a dollar.
New-Home Builders Try New Tactics to Win Share from Resale Real Estate
Hardly a soul in home building’s arena needs reminding, but nine out of every 10 homes selling into this beast of a market are not newly built houses. Data’s now out on June existing home sales, and a quick review of run rates on mortgage applications for purchases and pending home sales data suggests that a 4 handle on existing home sales for July and/or August may easily come as no surprise.
One in 10 of a universe of 4.9 million can conjure bad-trip flashbacks to October 2008 through June 2009 for most new home builders. Still, most of the ones we’re talking with believe that the 4th quarter of 2010 will mark the moment housing will begin to walk on its own feet for the first time since subprime meltdown became a Google search term.
Still, how many home building company executives feel precisely the way Sheryl Palmer, CEO of Taylor Morrison describes her sense of gravity-free zone housing entered since Uncle Sam stopped using tax dollars past, present, and future to prime the demand pump?
“For the first time in my life I should be on the debate team,” Palmer says of her gut sense of what’s next for housing. “I feel like I can get on either side of the debate and win! When I try to articulate where the market’s at, I can give you all the good reasons that we’re going to start to see improvement. But I can also give you all the reasons that this is going to stay with us for a while. I think they’re probably going to balance themselves out.”
Palmer attests to being an optimist with her optimism in check.
What will go on in the market through the balance of 2010 and all the way through 2011 and likely into 2012 is an X factor new home builders haven’t needed to script into their playbooks during past downturns: seven figures worth of homes whose borrowers will reach the end of their respective tethers.
So the plot line typical for a home builder to work through periods of rough going–which is to shrink the balance sheet, triage land exposure, cut directs and indirect costs, roll back prices, and gut out the worst by generating barely enough cash to cover everything that’s got to get paid for and hope that somebody doesn’t come along and appraise the land asset at less than one thinks one can get for it–doesn’t work for this downturn.
In too many instances and too many places where new home builders make their living, the market environment is too full of current and imminent distressed sales for the usual housing slump rules to apply.
Now, the questions of whether a prospective buyer can get financing, can afford to move, can sell their current home for what they paid for it or even what they owe on it, can hang on to their job, etc. loom large in today’s economy.
New-home builders offer new-home communities, and a certain number of times–one in 10 right now–buyers want that. What about the other nine out of 10?
How many of those 90% of resale buyers in today’s market are on the fence about whether they’ll go for used or new?
Realistic home building company strategists believe that their first best plan hinges less on the housing economy getting better and more on their own firm’s ability to take share in the current market.
“There are enough of our buyers out there right now,” is the way one of the nation’s dozen largest home building company CEOs puts it. “We just have to do better at getting at them.”
Truth be told, until the jobs picture changes, and changes sustainably–which some people believe is entirely possible as an entire multi-billion person consumer class of spenders continues to take shape on the other side of the planet–adversity will remain the flavor of the day in the residential investment part of the U.S. economy.
Meanwhile, the 200 or so companies who’ve been able to stay alive through a four-year slog to this point are going to have to step it up yet one more notch to snag sales from among buyers who are on the fence trying to decide whether to buy new or used.
“We needed a tie-breaker,” says Meritage Homes CEO Steve Hilton of his decision to make affordable energy sustainability a core skill of Meritage’s recovery strategy. “All other considerations being equal, we think our green initiatives can and will swing buyers our way.”
Hilton reports that Meritage’s vaunted Lyon’s Gate community in the Phoenix market town of Gilbert, Az., has netted 1o sales to buyers with qualified financing in its first three weeks since grand opening. Not a bad absorption rate in what may go down as one of the nation’s worst post World War II new home periods.
Meritage’s Lyon’s Gate equation–exceptional energy efficiency performance and exceptional affordability–owes part of its viability to the downturn itself. The 210 lots were purchased from RBC Bank as a result of the demise of Hacienda Builders–the reset on the land price was, and will continue to be the way any home builder can shut the gap between owning and renting, and between cost of owning and household means.
Also, the Meritage Green strategy now comes in four versions, of which Lyon’s Gate represents Version 4, the most ambitious. Each version of the Meritage Green starts with a minimum of Energy Star qualified plus, and ladders up the efficiency spectrum to solar/thermal and a high performance wall system that come as standard features in new-home communities such as Lyon’s Gate.
C.R. Herro, Meritage vp of environmental affairs, explains that just as all real estate is local, all affordable green home building initiatives are local as well. Step one is the lot purchase, which ensures that a production home builder or developer can roll back home prices substantially to compete in the market with resales, including distressed sales.
Next came building science, says Herro. “We worked on building the home the right way to achieve the energy savings we were shooting for, and after that we attacked the costs,” he said.
The savings to the buyer, he said, come with the overlays achieved not only on direct per square foot building and materials costs, but via concessions among vendors, credit programs with local utilities companies, and local and federal tax credit programs. It’s a complex layering of operational savings and cost take-outs that benefit the home buyer not only on the home price point but on the operating cost of the house.
Herro says that regional and divisional leaders across Meritage’s geographical footprint are enthused about introducing Lyon’s Gate type features and pricing in the communities they open nationwide. But they need, by the same token, to make sure they’ve got the same or equal cost savings and credit benefits to bring to bear, given their different climate zones, local green initiatives, utility company programs, and Meritage’s national agreements with key vendors.
“In many ways, we’re challenging the regional and divisional people to show us why they can’t implement these programs rather than to prove to us that they can execute,” said Herro.
Looks like Meritage may have found the “tie-breaker” it’s looking for to get a home buyer off that new-or-used home purchase fence.
Do you think new-home builders can or will make any headway in their efforts to wrest share from the resale market as the downturn stretches into its final innings?
FDIC Release on $1.8B AmTrust Deal with Toll’s Gibraltar and Oaktree May Come Tomorrow
The Federal Deposit Insurance Corp. could announce as soon as tomorrow its auction of a $1.8 billion portfolio of distressed loans under the now-defunct AmTrust Bank to a joint venture of Toll Brothers’ new Gibraltar Capital and Asset Management unit and Los Angeles-based private equity player Oaktree Capital Management, according to an executive familiar with the transaction.
“Normally, the FDIC would have put out an announcement by now, but they’ve been busy with a lot of issues these days,” said this executive, who asked to remain anonymous. “The press release may come as soon as Thursday this week. We think they’re paying about 30-plus cents on the dollar.”
Here’s an excerpt from an FDIC release on the award of another $898 million AmTrust pool of residential mortgages to a consortium of financial players led by Residential Credit Solutions, CarVal, and RBS Financial Products.
AmTrust bank failed on December 4, 2009, and the FDIC immediately entered into a purchase and assumption agreement with New York Community Bank, Westbury, New York, to assume all the deposits and approximately $9 billion of the assets. This transaction completes the sale of the majority of the remaining assets of AmTrust Bank.
- See related story from Big Builder’s Teresa Burney on Toll Brothers’ new Gibraltar unit.
Word is, the AmTrust 280 loan portfolio with an average of $6,000 per loan encompasses 1800 properties, primarily in the Nevada, Arizona, California, Florida, Georgia, and the D.C. Metro/Maryland markets.
The Oaktree-Gibraltar JV’s assumption is that, after combing through the 1800 properties, they–like Lennar’s Rialto–have an opportunity to profit at least three different ways on the financial disposition of the property assets covered under the loans.
- They earn management fees as they move some properties through to foreclosure and an ultimate sale;
- They can selectively sell properties to home builders or developers;
- They can rehab or develop the properties through the Toll Brothers operation and put more value on deals that may have failed sheerly due to lack of adequate capital access.
The Gibraltar-Oaktree JV, just like in the Rialto case, will have to cover its nut with the F.D.I.C. before it can write profits on to its balance sheet and flow them through to Toll Brothers’ Corp.
We hear that Oaktree’s deal with Toll Brothers taps into a different fund than the acquisitions joint venture it had formed last year with Ryland Homes. “Other home builders are not part of this AmTrust/FDIC deal,” according to the executive we spoke to.
Now that Lennar has triggered a financial skill-set it had developed during earlier downturns and Toll Brothers has established a captive unit to play in the distressed paper and hard asset arena, it may be a question as to whether other home builders explore adding such capabilities to their repertoire. This question surfaces especially as conventional home building operations continue to battle lack of visibility and low absorption rates.
No doubt public home building companies will explore all means possible to generate cash and write new profitable business onto their balance sheets, but most are set up with more limited financial resources and expertise than Lennar and Toll, and would have too much to learn too quickly to avail of the opportunities in so sophisticated a financial/legal game.
We’ve head KB Home is taking a look at partnering and that M.D.C. Holdings has had a conversation or two, but most companies will focus short term on opening stores and taking share, primarily from the nine out of 10 home buyers these days who are opting for a resale vs. a new home.
“Problem is, we’re competing with resales that were built in more and more cases in 2005 and 2006, so we have to do better than ever at getting our share,” said the CEO of one of the nation’s leading public home building companies.
Housing Data Tops the List of Economic Releases this Week
This week’s economic news calendar is chock full of housing data releases, some of which serve as important proxies for pre-sentiment around jobs stabilization and consumer confidence. At the same time, Week Two of earnings season features blue chip companies whose 2nd Quarter numbers may be strong, but whose visibility into 3rd and 4th Quarter visibility is opaque at best, menacing at worst.
Sound familiar for home building companies? They’d done just about all they can to shrink their balance sheets for the worst of the downturn periods, and now time is nigh to drive topline performance. Question is can they? As we listen to the earnings calls among home builders over the next two weeks, we’ll be keen to probe both the analysis and the plan each company puts in place to sustain their hard-won momentum.
Collectively, with a few exceptions, the public home builders behaved as if 2010 will ramp nicely into a fully-formed if modest demand cycle in 2011.
The economy, a little like the stubborn low-pressure weather system that has settled in for a petulant stay in the Atlantic off the Carolinas and has blanketed the mid-Atlantic coast with a several-week muggy heat-wave, seems to be challenged by inertial as well as dynamic forces.
The one manifest source of big demand for capacity globally is Asia, which is shifting from overheated to a more sustainable level of growth. Europe is day to day, given its debt and credit landmines, and the U.S. seems to be an equal mix of pluses and minuses, with the pluses losing steam even as the minuses seeming to find a more stable high ground.
Clearly too, debate over policy, action, or a decisive plan to cease interceding at the government level sharply, and antagonistically, devides those who are most outspoken about righting the what has gone off in the economy. The conversation in too many cases crosses the line of argument into ugly ideologue, unbecoming of the nation’s spirit of resilience, tolerance, and particular manner of blending disparate interests.
We’re with New York Times Op-Ed essayist Roger Altman in assessing the moment’s need for business and policy-makers to call a time-out on their dance of death, because together U.S. business and government have a few of the answers Main Street wants right now.
The tension between President Obama and the business community is hurting both sides and may hamper economic recovery. Closing that divide requires the business community to mute its criticism, and the administration to make personnel and policy adjustments. Neither should be hard.
The summer of 2010 may go down as the period–similar to many stock market crashes–that retests lowpoints of both consumer and business confidence that occurred as the financial system came unhinged in the Fall of 2008.
Robert Shiller, in the book “Animal Spirits” he co-wrote with George Akerlof, talks about a term that makes all the sense in the world right about now: “the confidence multiplier.” At the center of the word confidence, Shiller notes, there’s a Latin word root “fido,” which means “I trust.”
It’s the Summer of 2010. No one can make the 2009 Obama $790 billion stimulus package bigger now than it was. No one can make the George W. Bush 2008 $200 billion tax and spending stimulus package bigger now than that was.
The question of yet another stimulus plan comes now amid heightened rancor, fear, and suspicion in the ramp-up to November’s mid-term elections. Whether more stimulus would instill or asphyxiate a confidence multiplier is likely to get lost in the heat-wave debate between “Austerians” vs. the “Stimulites.”
That’s why, in looking this week at the latest data for housing starts, permits, and existing home sales, it would be a good BS meter to put them into a trailing three-month bucket, and compare the latest three months to the same three-month period in 2009.
This way, one can filter out some of the artificial timing moves that show up in the single-month release, and perform analysis based on reality. (HT to a reader Marvin Chosky for this recommendation).
Here, from blogger Econ Grapher, is a line-up of key data releases expected this week in the U.S. and global markets. And don’t forget the parade of 2nd Quarter earnings we’ll also be attuned to.
Day Time (GMT) Code Event/Release Forecast Previous MON 8:00 EUR Euro-Zone Current Account s.a. (euros) (MAY) -5.1B MON 14:00 USD NAHB Housing Market Index (JUL) 16 17 TUE 1:30 AUD Reserve Bank of Australia Meeting Minutes TUE 5:00 JPY Leading Index (MAY F) 98.7 TUE 6:15 CHF Trade Balance (Swiss franc) (JUN) 0.82B TUE 8:30 GBP Major Banks Mortgage Approvals (JUN) 52K 51K TUE 8:30 GBP Public Finances (PSNCR) (Pounds) (JUN) 16.0B 12.0B TUE 12:30 USD Housing Starts (MoM) (JUN) -2.8% -10.0% TUE 12:30 USD Housing Starts (JUN) 577K 593K TUE 12:30 USD Building Permits (MoM) (JUN) -0.7% -5.9% TUE 12:30 USD Building Permits (JUN) 570K 574K TUE 13:00 CAD Bank of Canada Interest Rate Decision 0.75% 0.50% TUE 22:45 NZD New Zealand Net Migration s.a. (JUN) 250 WED 3:00 NZD Credit Card Spending s.a. (MoM) (JUN) 1.9% WED 8:30 GBP Bank of England Meeting Minutes WED 14:00 AUD NAB Business Confidence (2Q) 17 WED 14:00 USD Ben Bernanke Testifies to Senate Banking Panel THU 3:00 NZD ANZ Consumer Confidence Index (JUL) 122 THU 4:30 JPY All Industry Activity Index (MoM) (MAY) -0.4% 1.8% THU 7:30 EUR German PMI Manufacturing (JUL A) 58.0 58.4 THU 7:30 EUR German PMI Services (JUL A) 54.5 54.8 THU 8:00 EUR Euro-Zone PMI Manufacturing (JUL A) 55.2 55.6 THU 8:00 EUR Euro-Zone PMI Services (JUL A) 55.0 55.5 THU 8:30 GBP Retail Sales ex Auto Fuel (YoY) (JUN) 2.4% 3.4% THU 9:00 EUR Euro-Zone Industrial New Orders s.a. (MoM) (MAY) -0.1% 0.9% THU 12:30 CAD Retail Sales (MoM) (MAY) 0.5% -2.0% THU 13:30 USD Ben Bernanke Testifies to House Financial Committee THU 14:00 USD Existing Home Sales (MoM) (JUN) -8.1% -2.2% THU 14:00 USD Existing Home Sales (JUN) 5.20M 5.66M THU 14:00 USD House Price Index (MoM) (MAY) -0.3% 0.8% THU 14:00 USD Leading Indicators (JUN) -0.3% 0.4% THU 14:00 EUR Euro-Zone Consumer Confidence (JUL A) -17 -17 FRI EUR EU European Bank Stress Test Results Due FRI 1:30 AUD Export Price Index (QoQ) (2Q) 12.0% 3.8% FRI 8:00 EUR German IFO – Business Climate (JUL) 101.5 101.8 FRI 8:00 EUR German IFO – Expectations (JUL) 101.5 102.4 FRI 8:30 GBP Gross Domestic Product (YoY) (2Q A) 1.1% -0.2% FRI 8:30 GBP Gross Domestic Product (QoQ) (2Q A) 0.6% 0.3% FRI 11:00 CAD Consumer Price Index (YoY) (JUN) 0.9% 1.4% FRI 11:00 CAD Bank Canada CPI Core (YoY) (JUN) 1.9% 1.8%
A Message to Capitol Hill from Housing Industry: Say You’re Done with Housing Stimulus
A couple of observations: 1. Americans procrastinate, and 2. the danse macabre that has gone on between Wall Street and Capitol Hill policy makers must stop, if for no other reason than this. Their ludicrous performance is another reason for Americans to procrastinate.
Washington needs to do one thing loud and clear right now in its mission to improve America’s jobs outlook, and home builders and developers would do well to demand it from anybody in Washington who seriously plans to keep his or her job after early November.
No more stimulus programs that contain federal tax credit programs for home buyers. Over. Done.
Especially now that financial regulation reform is about to go live, it is precisely the moment for housing’s industry leaders to insist that Congress, the Administration, and the Fed pipe down and allow the private sector to resume work to clear residential real estate values via the efficiency of market forces.
Author and behavioral economist Dan Ariely discusses procrastination at length in his work. Our human and cultural nature seems to predispose us to need deadlines to act, including in such important decisions as buying a home.
Clearly, after two administrations’ housing stimulus policies and the better part of three years of witnessing their impact, here’s what we can best tell about where those programs have left us.
- Stimulating demand has–in combination with reduced home building activity–accelerated the reduction of the surplus of new homes. This is positive.
- By the same token, stimulus–in combination with bank bailouts, and NOL carryback extensions–stalled real estate markets from behaving as they should have.
- Also, by changing, extending, and expanding the inclusiveness of the home buyer tax credits a number of times, potential home buyers have begun to think that if they go ahead and buy a home with no hand-out from Uncle Sam, they’ll look like a fool when a few months later, Congress passes another round of tax credits they could have qualified for.
After all this, we’re left with the exact opposite of pulling-buyers forward. Home buyers are confused. They might buy now, but what if Congress concocts yet another tax credit, amounting to thousands of dollars in a handout on a purchase later in the year or next year. Expectation that the “Lost Our Lease Clearance!” sale signs will be plastered across the storefront windows over and over and over again has fed into Americans’ habit of procrastination.
What’s more, policy–since 2008 at least–has become a genuine barometer of officialized fear. The more policy, the more grim the indications are with respect to the focus of that policy. So we’ve come to connect policy with “holy moly, things are really much worse than we even knew, so we shoud probably just sit tight.”
Industry leaders should unify and raise their voices in a clear call to action for Capitol Hill and the Federal government agencies. That action is simply and forcefully to assert their confidence that the market may be far from strong, but it’s strong enough to stand on its own two feet and work as it should.
We only need to look back at how quickly, how badly things went from 2007 to 2008 to 2009 to begin to sense confidence that that kind of devastating destabilization has run its course.
But right now, as Americans procrastinate, the American domestic economic outlook dims. A sequence of events negative to property values, residential investment, consumer spending, corporate earnings, small business viability, and, ultimately, economic recovery goes into motion.
Why are Americans procrastinating now? Home mortgage rates, with a 4.6- handle on an 80% loan to value loan, are historically low. No, we mean historically historically low. Prices on new homes, a smidge over $200K median, are low too, especially for what you get in a new home these days.
Now too, supply–especially of new homes–is trending toward scarcity, an unheard of phenomenon for the better part of five years or so.
Let the battle of the theorists and economists rage on as to whether austerity or more stimulus is a better route with respect to influencing the direction of the GDP and its ability to create domestic jobs and ratchet down unemployment.
A third of the way through an earnings season that had been anticipated to be frought with doubt, uncertainty, and diminishing returns, we’ve seen resilience in materials with companies like Alcoa, in technology, with Intel, and in financial services, with JP Morgan.
We’re also seeing signs of stabilization and resolve in some of the more worrisome Eurozone states, and calmer heads are now prevailing, essentially as heads of those states do one thing: express confidence by piping down.
Global demand will continue to be a bright spot if not the juggernaut it’s been; but it won’t redound to enough significant effect in our domestic jobs situation.
Focus needs to be on American jobs. If both Wall Street and Capitol Hill would do what they’re supposed to do on job creation and stop their death dance, local market economies would begin to improve.
An issue we don’t hear much about is the number of industry sectors that are passing through both cyclical and structural secular shifts in demand.
America became the pilot nation for a society that shifted supply and demand dynamics from what people need to what they want. The economics of meeting needs were subsumed by the algorithmically more glorious economics of meeting people’s wants.
We called that our quality of life, which is relatively high if not the highest among nations.
After the insanity, the pricetag in real dollars, the capacity, and the demand for what we want is in question. How many things, beyond what we absolutely need, can we afford these days as we deleverage our household balance sheets?
As home builders and developers, the task will be to persuade a procrastinator to stop doing that. You’ll want some help from the government though, which would come in the form of a clear, simple statement that no more home buyer tax credits are in the pipeline.
Vultures Finally Flocking to Home Builders’ Turf
Now, here’s a good one for a home builder or residential real estate developer to hear. It’s a quotation from a piece in today’s financial newspaper of record, the Wall Street Journal. Are you sitting down?
The Fed has been encouraging banks to ensure that credit-worthy small businesses can get the credit they need. Reacting to complaints that its own bank examiners are contributing to overly tight standards, the central bank is also conducting training programs with examiners to drive home the message that encouraging loans to small businesses that can repay is positive for the banking system.
Fed Chairman Ben Bernanke has taken up a crusade to urge lenders to, um, lend. Those banks did $710 billion in loans with small businesses as the downturn deepened in Q2 2008, and after a big TARP bail-out and a solid year of record earnings, the banks lent $40 billion less in the same quarter in 2010.
So, Ben says:
“The challenge ahead for lenders will be to determine how to assess the credit quality of businesses in an uncertain and difficult economic environment.”
Which is why this note is about private equity and hedge funds, not about banks
We recall the private equity false alarm that occurred in 2007 and 2008, as word spread that dozens of multi-billion funds had been set in motion for a big vulture fest. Other than a few bold moves, the most important being Morgan Stanley and MatlinPatterson’s, the landing of the vultures was a non-event.
Now, however, conditions are ripe. Traditional capital isn’t working in the arena. The timing–if not the direction or trajectory–is such that the worst has come, which means that exit strategies and strike points now lie with in a three- to five-year comfort zone for this type of money.
The best news of all, if you’re a fund (not if you’re a builder or developer), is the need, which there’s plenty of and it’s plenty urgent. If builders and home building companies don’t build for long enough, their principals and brain trusts start into existential crises vs. curb cuts and dry wall calculations, which is not good for the universe.
So, we started hearing that private equity money was beginning to move in earnest on a project basis starting around six months ago, notably with the GoldenTree InSite folks, Wheelock, Starwood, Oak Tree, Angelo, Gordon, John Paulson, and a few others.
Now we’re hearing that private builders who are willing to muster up 35% to 40% or so of their own skin in the game can get 60% to 65% financing from any number of private equity sources.
Word from the wise is that it’s less about the size of the investment required or conjecture on how fast a given market will come back, and more about “sponsorship,” i.e. Does the home builder operator have a good regional brand, a track record, and a strong history of repaying what’s owed?
Mitchell Hochberg, one-time president of WCI’s northeastern region and a longtime private builder in the New York metro, rates private equity activity and readiness to pounce as a 7 on a scale of 1 to 10.
“It can be a lifeline for strong, regional private builders,” says Hochberg, who’s a partner in Madden Real Estate Ventures, and has been working as an advisor to a number of funds.
Meanwhile, Ben Bernanke’s Fed is trying to demystify a complex issue for federal examiners and the banks they’re regulating. From the Journal:
Lending to creditworthy borrowers is in their interest, Bernanke said, since “that’s how they earn their profits.”
Go figure, or better yet, sit down with some one who’s got a private equity fund and talk business.
Mid-Summer Notes for High Production Home Builders
Double-take du jour came with this morning’s first cup of cafe. An analysis from Citi home building and building materials sector analyst Josh Levin on “private homebuilder perspectives” reports that three out of five home builders in his monthly survey say June sales were either flat with May or up.
This note will graze across three themes that have cropped up and will recur here during the summer months: 1) limbo, 2) cash, and 3) demand.
Conclude what you may about the 40% of executives surveyed by Citi who say sales worsened, this albeit early reading tells us that the destabilizing impact of The Great Expiration of April 30 may have been overstated. And why not, if it generates higher TV news ratings and a few more newsstand sales of newspapers? Being right for an instant and then wrong forever doesn’t seem to carry the clout with the press that it once did.
So, let’s look first at limbo. Fact is, if 40% of folks in the field of Josh Levin’s universe say sales didn’t get worse and 20% say they got better, we believe it’s fair to look at June as month number one in a series that already has gone some distance to dispel home builders’ worst fears–instead of a brand new cliff-dive, it’s a stabilizing, bounce-along-the-bottom month that no one could be ecstatic over, but by the same token, people can’t be too unnerved by either.
May unnerved because with the April 30 tax credit sunset came fresh flashbacks to second-derivative deterioration and a free-fall mentality that tapped into broader depressives like the Eurozone meltdown and the Gulf oil tragedy. June began to restore calm and resolve because, when you worked out the math of the tax credit demand stimulus, the numbers rightly added up to a necessary correction period of a few months.
What remains is spec to sell, incentive codes to crack, the down-and-dirty of shutting out all the noise of ideological economic psychobabble crossfire in favor of identifying, reaching, and meeting the need of “my buyer.”
In a 300,000-to-400,000 seasonally-adjusted new-home sales environment, the macro term “home buyers” is one thing: death. The CEO of a public home building company told us this with certainty: “There are enough of our buyers; we’re going to either succeed or fail on whether we get our buyers, who are out there even today.”
Surviving limbo is about your buyer. Your buyer will either lean toward continuing to rent, or toward a resale/distressed sale or not. He, she, or they, will have not just skin but flesh and bone to put in the game–see “Cash” segment below–and wants mostly to accomplish one goal with the purchase: Not to be taken for an idiot.
If you can make your buyer feel smart, you survive limbo. Operationally, of course, that means being very smart with the materials and services you pay for, which delivers your buyer more value for less. Broadly, shifting from the “funny money” to the “real money” era also means shifting from “something for nothing” expectations to a “more for less” mentality.
Private home building companies survive another day or go away based on whether they close on one or two homes regularly, vs. lots of homes across a longer time span. Public home building companies have created a lot of pre-recovery buzz in the past 14 months with cash down on finished lots wherever they operate, especially California.
That impulsive lot grab phase is done now, and things are going to work differently for a while. Plotlines that will grab headlines but wind up being less important in any real sense are comps with 2009 and mid-term elections in November. Remember, comps in September and October this year will be to year-earlier figures those months that lit up the charts in anticipation of the first home buyer tax credit deadline last November 30th. Again, the math of what got pulled forward last Fall versus baby steps toward a new-normal this September through November shouldn’t come as a shock to anyone, particularly with the kind of balance sheet work that occurred two years ago.
Strategically, what will go on will look a fair amount less dramatic than the testosterone-laced deal flow that characterized this past phase, which has now checked up. What occurred is that D.R. Horton, Meritage, M.D.C., Lennar, Toll Brothers, and to a lesser extent the other public companies availed of a generous moment in the debt markets and a generous windfall in tax-carry back refunds to build themselves a runway into the next upward run of housing’s sine curve.
Writing checks for lots at a dramatic discount to what one would have paid for them five years ago is all good. Now comes the interesting part, which is to see how what they all paid plays in the market. Each public builder, based on its overheads and leverage level has a bogie of an absorption rate to break even. Best of class is NVR, followed by Toll Brothers, who have to build and sell around one home per community per month to break even. Most of the other more competitive publics are clustered around an absorption rate of two-plus homes per community per month. The ones with the heaviest debt burden and highest SG&A need the highest rate of inventory turns to break even. Guess who: Hovnanian and Beazer.
Cash. Simply, cash is what separates those who can do something from those who have to wait. Waiting today may be tantamount to waiting for the grim reaper. Cash, cunning, and credibility are today what credit was yesterday. For a while, and probably a long while, cash will not only be king, but every other position of power and influence in the realm as well. With few exceptions–where cunning and credibility can stand in for hard cash for fleeting moments–cash at its present level, and the ability to generate more of it in the next 12 will shape the big builder landscape of 2012.
An X Factor under the heading of cash can cause some drama in the next few months, especially if public company share prices keep taking a beating. Call it idle cash, or cash that will expire and go back where it came from if it doesn’t get used. There’s a fair amount of that around right now, and insiders sense it could tip balances here or there in the next few months.
An example: Orleans Homebuilders’ assets might have been well on their way to becoming NVR’s but for the “idle cash” factor. Hedge funds, namely Strategic Value Partners heading up a trio that also includes Bank of America-Merrill Lynch and Anchorage Capital, bought up enough Orleans debt to take control of the company, and the hedge funds are willing parties to a restructuring plan that’s said to be gaining favor with the company’s Delaware-based bankruptcy court judge.
Strategic Value Partners is among hedge fund players, like MatlinPatterson, John Paulson, and Angelo, Gordon whose cash might work to significant effect in the next 12 months, before recovery solidly takes hold. We could see hedge funds buying up the debt of any number of public or private home builders and go so far as to precipitate combinations of some of them based on the prospective need for land assets once a rebound becomes manifest.
For private home builders, cash is what is already in their pockets or in the pockets of those with whom they enjoy a great deal of credibility. As Josh Levin’s note mentions, “the vast majority of survey participants reported that acquiring AC&D financing from banks remains difficult if not impossible to source.”
There are a few private builders around who can stomach “difficult” and are also cunning enough to take it on. Some, like WB Homes’ Bill Bonenberger, figured out a pretty solid runway for a private company to 2012 or so. He divvied up a land parcel with Richmond American, put the M.D.C. money toward what he owed his bank on the land deal, and thereby came back into within covenants to draw on vertical construction financing with other lenders. How many “wins” can you put in a row on that one, not to mention the bank’s not setting there with another REO deal to try to offload for a song?
For others, braving “difficult” is standing firm on personal guarantees, which banks have extracted mercilessly from longtime builder customers for the past few years.
Which is why cash–having it and having a way to generate it–is not optional as part of your runway to 2012.
Finally, demand. It’s amazing to us how blurred supply and demand have become. That’s nowhere clearer than in the fact that the number of jobs the economy’s shed since 2007 and the number of homes in the shadow inventory pipeline of delinquency is roughly the same, around 7.3 or 7.4 million.
Job losses and residential investment are inversely tied to one another, the economy’s dirty little chicken and egg. What the American Reinvestment and Recovery Act home buyer tax credit stimulus did accomplish was that it reduced months’ supply of existing and new homes by several months, almost down to what would be regarded as normal levels. The programs catalyzed enough sales to bring more scarcity to the market than an unstimulated environment.
Now, with industrial activity picking back up, and the global economy readjusting around who’ll buy and who’ll sell what, all the while continuing to create entire new populations of consumer classes, the biggest near-term question is this: what are the new family-supporting jobs in America, and how can this country get people in sufficient numbers to where those jobs crop up? Bureau of Labor Statistics forecasts for the next decade call for the US Economy to create 15 million new jobs, doubling the amount that it took out in since the downturn.
The biggest question is when that decade of job growth gets underway, and how many of those jobs are family supporting jobs. It’s those higher-paid workers who’ll funnel into the real demand universe of your buyer in the years ahead.
This is why home builders, if they do nothing else while recovery is still around the corner and over a bridge, need to learn as much as humanly possible about who your buyer is today. If you don’t, you risk no buyer tomorrow. That would wreck your runway.
2010 is that one more year to eke out, and 2011 will be a year you can get some of it back. But not if you don’t learn who your buyer is today.
Home Building’s Tale of Two Year-Ends
The second week in May, we hosted the Housing Leadership Summit in Chicago for the single family new-home industry’s leaders, and it was fun. That was different.
Not in 36 months or more could the word fun have even remotely fairly described the tenor of a home building executives’ event. This time, though, public company CEOs spoke with the first faint taste of profitability on their tongues, and private firm leaders were at it cobbling confidence-laced tactical work-arounds to chronic trouble getting bank loans to buy and develop lots, and build houses.
“We’re by no means out of the woods, but … ” was the broad spoken sentiment. Meanwhile, in their physical mien, one detected what looked like sparks of a strut and swagger there’d been no signs of in hallways such as these for three solid years.
Yes, there were profits or near profits, one or two quarters in sequence, based on a gross margin management and math that modeled out better with each succeeding financial reporting period. Yes, there was deal flow, at least on a project finance level, and it seemed genuinely as if cunning, compromise, and customer focus might actually carry the day as privates’ answer to publics’ facile access to a briefly open window in the debt markets.
What mostly felt different is that you were hearing these executives start to talk about what was working. They didn’t pretend to understand why, they just knew that products, and projects, and processes had started to work. The vast gap between bids and asks was, now and then, closing to a point were rough guesstimates on value had begun to materialize out of the clouds of inertia.
That was then. Twenty-days earlier, a blow-up occurred on the Deepwater Horizon oil drilling rig in the Gulf of Mexico. April 20th. Look that day up in history; not generally a day to celebrate.
In Chicago, in May, among home building’s leaders, “the spill” factor had not yet become a national catastrophe and a global economic force. That would start a week or so later, after several failed attempts to cap the gusher and after horrific images began to filter across the zeitgeist.
A month later, at the Pacific Coast Builders Conference in San Francisco, any vestige of the feeling of fun was gone. Defiance, resilience, even brilliance, in some cases, maybe, but nary a hint of strut and swagger. All gone.
What had come and gone was the putt-putt motor of a trillion dollars of U.S. Treasury stimulus money making its way into housing through April, through tax credits for home buyers and mortgage back securities purchases for the housing finance industry.
The putt-putt motor cut out, and the wind hasn’t picked up, mostly because wind in the sails of housing wouldn’t happen during the summer time, even in a good year. Before home building companies became prey to the tyranny of Wall Street, the business’s leaders often would take their families on a long vacation, and fish, hunt, golf, or do just about anything but think and read the financial pages.
The April 30 deadline for orders of new homes–the end date for settlements has now been shifted from June 30 to September 30–effectively divided 2010 into two separate time periods within a single calendar year.
“At least internally, we’re doing two yearends this year,” the CEO of a public home building company told us. “One yearend is everything to do with the tax credit, so we’ll count all our business through June 30. The rest of the year will go toward the December 30 yearend. We still don’t know how the back half is going to turn out, but looking at 2009 and 2010, we believe 2010 is the bad year.”
What can be said about the back half of 2010 for home builders is that there are four and only four kinds of home builders.
- Those who have cash enough
- Those who have cash, but may need more
- Those who don’t have cash, but don’t need it
- Those who don’t have cash, and need it
One of the only positive places to be right now, between July 1, 2010 and the first glimpse of a recovery most housing economists regard as normal–1.2 million to 1.4 million single-family starts–is to have cash, or at least not to need it.
Others might as well at least enjoy the rest of July and August fishing.