Will home building’s spring push create urgency?
Call this the “feed the beast” Spring selling season. The Starts calvacade of estimates is in full swing, and we’re hearing the gamut from optimism to bearishness. The National Association of Home Builders’ chief economist David Crowe is sanguine, calling for a mini-recovery of 21% improvement over abysmal 2010′s 474,000 single-family housing starts, to 575K s.f. units.
On the other hand, economists like Ed Sullivan (hmmmm) of the Portland Cement Association, focus more on the could-be downers in the near-term landscape. Sullivan’s forecast for single-family starts in 2011 is for a niggly 492k s.f.s, a mere 3.4% increase of this horrible floor.
In between the extremes, economist Tom Lawler is guessing there’s reason to project 520,000 single family starts, based on the drivers he stacks up in his model.
Pretty big spread, eh?
Well, the home builders we’re in conversations with here at the International Home Builders’ Show in Orlando this week are approaching the coming buying season (should it develop) with guarded optimism.
“We’ve got to feed the beast or we’re out of business,” one private home building company president tells us. “Our job now is to win share at somebody else’s expense.” The hope for new-home builders is that they can win it mostly at the expense of distressed and existing sales, which outnumber new-home sales by 12 or 14 to 1 these days, depending on where you’re doing the counting.
With distressed clearing, well, in distress due to robo-boneheads moves by the mortgage servicers and actual property ownership open to debate thanks to “shoddy” documentation, the window is open for smart new-home communities to pull out the stops to bring home buyers out to the neighborhoods and start tugging on their heartstrings.
Now that the home buyer tax credit adrenaline is long forgotten and slight interest rate upward gyrations have started to play on people’s trigger fingers, the biggest clouds of uncertainty we’re hearing about from the folks gearing up for Spring selling fall into these categories:
- pricing – how quickly will the big nationals concede to slower-than-modeled absorption rates, drop pricing, impair more land, and bring the market down in its entirety another notch or two?
- credit tightening — on the one hand, we hear that a builder can work a prospective home buyer’s credit score up as much as 100 points within a year if they’re willing to pay down credit cards, clean up their unpaid balances, etc.; on the other, banks are being more stringent than ever in running credit, and will knock a potential buyer’s rating down below FHA minimums of 640 and VA and USDA minimums of 620 at the drop of a hat. Will policy and market conditions put banks back into the business of trying to lend more to home buyers, or while those conditions continue to make it a hostile borrowing environment?
- renegade appraisers — what recourse do builders have when he as seller agrees on a selling price, the buyer agrees on the price, but the appraisal comes in sometimes significantly lower than the contracted selling price? most private home builders will scotch the deal, even at the risk of having to take a home off the market for four months to comply with FHA rules and try to resell the home with a more appropriate appraisal? Will an increase in new home sales transactions solve this problem? It’s hard to know, at least while the banks seem to have no incentive to value properties at higher prices these days.
- differentiation — every community needs a story; price alone won’t do it. What are the memory points? where’s the magic? is the home going to save $1000s a year in energy costs? is there a design difference? a service level narrative that makes your homes stand out?
We’re impressed about companies like Orlando-start up Surrey Homes, which has placed most of the eggs in its basket in the move-up mid-$300s to mid-$400s market, which enable principal Jay Lewis and his team to offer a high finish product that works as a more-than-feisty competitor to a David Weekley community across the street in the Belle Isle.
What appears to work for Surrey–which closed 31 homes, with 38 sales in its first year of operation in 2010, and made money–not only is its position, not competing with all the entry-level players, but its DNA.
Surrey’s, “The Surrey Home Difference” offers a 4-year wall-to-wall warranty on all its homes, and a monthly scheduled maintenance visit for that period of time as part of the price of the home.
Lewis points out that, by and large, builders support their new homes this way anyway, so why not leverage the service in the marketing message?
Differentiation, service, credibility… these elements will eventually be the components of what we’ll refer to as the turning point in creating urgency, but only in hindsight.
More to come on our community visits in the next couple of days.
What’s clear is that builders are building. Starts will likely be up, more in the middle range than the high or low previously mentioned. But a big part of what happens with the number will be home builders’ collective and individual ability to create urgency …. where there is none.
Who’s at the International Builders Show, and Who’s Not? And Why?
The story of the home builders show, as the National Association of Home Builders International Builders Show is known, continues this year to be who’s not attending, and why.
Last year, the show in Las Vegas perched itself amidst what in hindsight can only be regarded as the great false promise of the downturn–a buoyancy bought by taxpayers for the relief of crisis symptoms that lasted as long as the adrenaline flowed and no longer.
This year, the show in Orlando perches itself amidst what can only honestly be described as on the cusp of something–maybe good, maybe not so bad, or maybe pretty bad.
Why many home building company executives are not here this year is plain and simple. There’s too much to do back at the fort. And it’s not all good either.
For as much as January 2011 will be all about tuning the engine, and getting every part of it in fine racing form for when–32 days or so from now, the weekend after Dallas hosts Super Bowl 45–the rite of Spring Selling is to begin, some builders are back home not getting ready to ramp up but to scale back.
It’s all well enough that data points are going to edge sporadically to the positive from time to time, but solid corporate profits, record amounts of accumulated cash on the books, and a pattern of sustainable end-user demand forming in the inner core of the economy haven’t much budged either the hiring needle nor the one that moves when consumers are free-spending again.
What’s more, one of the builders we were hoping to see at the IBS in Orlando this week says he’s not coming because his very busy right now trying to get his buyers qualified for a loan. “We can work and get our buyers to a 560 or even a 580 credit score, but now the minimum score our buyers need is a 620 or even a 640 and we’re just not getting our buyers to that mark in the time we have,” this builder tells us.
What this suggests to us–especially in light of the fact that the ongoing foreclosure crisis is going to massively slow the resolution and liquidation of distressed resale inventory–is that demand for new-home construction may come strongest this year not from the usual early adopters in a housing cycle–the first time buyers.
We think it’s more likely, given the credit score demands, the down payment requirements, etc. that it’ll be buyers who can bring more of their own equity to the equation who’ll be the most ripe to court.
They’re discretionary buyers whose reason for not coming off the sidelines up until now has had more to do with the sense that the moment was not right than that a life stage or life event propelled them into the housing arena.
Because lenders are going to be saddled with their foreclosure woes for months and months to come, we don’t believe the tight credit environment is going to get much better for buyers anytime soon. Nor is it likely that the universe of potential home buyers has been expanding leaps and bounds in such a poor jobs and income stretch.
What we do see is that household formations have been suppressed for the past several years, and that builders all together have produced few enough starts to have begun to create scarcity.
So, builders can and have directly impacted the part of the supply challenge that they have any influence over, and they need to do the same thing with part of the demand challenge.
What home builders can’t do–at least in a vacuum–is hire enough people to bring the unemployment rate down, the consumer confidence index up, and household debt into balance.
However, what they can do on the demand side of the equation is to invent desire. This is part of the plotline that has run through enterprise home building for as long as it’s been around… certain kinds of home building companies can bridge the often wide gap that separates aspiration from attainment. They can do it at the entry level, and much like car companies who have made luxury features much more attainable, home builders can do the same at every other price point.
A long-winded way of saying, we completely understand why there are many home building executives who are too busy to be here in Orlando for the International Builders Show. This year, at this moment, it feels as if visibility is an impossible business notion.
Ask home building executives why they’ve gone out and spent billions on reloading their lot pipelines and are overseeing hive-like disciplines at new and retooled communities around the country right now, waiting for the last whistle to blow on Sunday night Feb. 6.
They’ll tell you, “This is what we do.” If there are no buyers they can see with their own two eyes right now, that doesn’t prove to them that they’re not out there somewhere hiding.
This is why it’s critical to thoroughly understand the “pent-up” market of double-ups, children in basements; ad hoc families who’re sharing places while one gets its feet on the proverbial ground.
Pent-up demand is real demand. It’s just hiding. It may be that 2011, apartments may get that pent-up demand. But not if the for-sale guys have anything to say about it. Which is why they’re not in Orlando, dodging the horizontal rain.
The Current Buzz on Taylor Morrison Homes
U.K.-based Taylor Wimpey and its plans for its North American Taylor Morrison unit were all the buzz rolling into the holidays before the year ended.
What’s gone on, why the recent mainstream media eclat? First, on November 30, the Financial Times’ Ed Hammond reported:
Taylor Wimpey has launched the sale process of its North American business in a move that could earn the UK’s second-largest housebuilder an expected £600m (about U.S. $928 million).
Then, just after the New Year, Reuters’ Helen Chernikoff reports:
British homebuilder Taylor Wimpey (TW.L) could sell its U.S. homebuilding subsidiary Taylor Morrison to current management, a private builder or private equity firms, people familiar with the matter said.
Forget for a moment that our own publication, Big Builder had this to say in concluding a cover story on Taylor Morrison for its September issue:
Bottom line, Redfern and Palmer have four legitimate and one long-shot option—with sundry variations—to consider as the marketplace improves or gets worse on its way to an eventual recovery in the next 12 to 24 months.
From their vantage point, they may be motivated to:
Do nothing Issue an IPO Sell to a financial player (or possibly more likely a club deal) Sell to a home builder (or possibly more likely parse up the regions to optimize value) Allow Palmer to try to take the U.S. operation private via a leveraged buyout with a private equity partner It’s been noted that [Taylor Wimpey chief Peter] Redfern brought on last year J.P.Morgan Cazenove to explore alternatives, and there’s no paucity of scrutiny and criticism of the company’s every move. It’s widely thought that whatever the entity may be worth, now—while stocks of the home builders as a sector are getting hammered by the markets—is not the moment to push for a deal.
But who’s to say what might happen if recovery gains a toehold as 2010 closes out, suggesting a real-live selling season in 2011? Then, land, specifically lots in various stages of development, becomes scarce again.
Usually, this volume level of noise means either that a deal’s already in the works, or that it’s nowhere near being done.
We think it’s the latter–that nobody’s about to land Taylor Morrison this week, or this month, or possibly even this quarter.
The much more likely disposition of assets near term is the sale of the Lehman-SunCal portfolio of tracts, some of whose early recovery viability make them highly desirable to a number of the operators. It wouldn’t be surprising to see transactions on Lehman-SunCal parcels as soon as the next week or two, and certainly by the end of the month.
Still, people were talking Taylor Morrison just before the year ended, and although to hear them you might think otherwise, it’s because there’s an awful lot of interest among home builders in the Taylor Morrison “thing.”
We call it that because, among the most likely buyer universe for Taylor Morrison–the public national home builders–there are three distinct value propositions through which to assess whether it’s worth incurring the $1 million 0r so in due diligence costs and put in a bid.
Those three value propositions would be:
- The 14,000 lots that make up the lions’ share of Taylor Morrison North American assets, a pretty healthy chunk of which are raw/unfinished lots that would timeline years hence before they’d be ready to for inventory turn primetime, and also a pretty healthy chunk of which are located in Arizona and Florida, which it’s hard to see as near-future high-demand markets;
- The operation Taylor Morrison–an intensely lean overhead structure that blends a high-end land planning and design culture with a merchant-builder bang-em-out ethic–which has proven to be a feisty operational competitor in its respective arenas
- The brand Taylor Morrison, which, arguably connotes upper market quality and attention to design.
As a matter of fact, our industry sources say that the first round of invited bidders needed to respond to JP Morgan–which is handling Taylor Wimpey’s exploration of a sale–by yearend. According to executives who would have reason to be familiar with the process, about half of the organizations JP Morgan invited to bid actually put in a bid.
A few of the folks on the public home builder side tried to, let’s just say, work on the asking price a little bit by indicating they’re not currently a bidder in this round. We’re of the understanding that there’ll probably be several go-rounds of invitations to organizations, working with bidders, and making one or more of the deals stick.
Chernikoff’s article reflected what we’d heard from several of the public home builders–that the geographic footprint concentration in Arizona and Florida, the number of raw lots versus finished lots, and Canadian Monarch division, which represents a high-rise product that is a challenge or opportunity to a U.S.-based operator all its own–make Taylor Morrison an overly complex, if not too big, a pill to swallow right now.
This, we’re regarding as negotiation speak, pending what the shape of demand for new homes takes as the 2011 Spring selling fest gets underway.
In a sense, some of the urgencies and ultimately the motivations around the sale of Taylor Morrison will base themselves more on how sensitized a potential buyer is to the tipping point in home buyer demand. If it’s not going to materialize in 2011, then the raw lot pipeline and complexity around re-selling a segment like the Canadian operation become obstacles for those who have more immediate business motivations, i.e. the public home building companies.
This is why Chernikoff emphasizes the possibility of purchase by a financial player–a fund that might have longer term horizon on returns, playing time against money. Here’s Chernikoff’s analysis on that point:
Other sources said private equity firms, including Starwood Land Ventures and hedge fund billionaire John Paulson’s Rain Tree Investment Corp, are also evaluating the deal. Those firms could retain the current management team, which wants private equity backing to buy the company.
It’s been speculated that Paulson’s significant moves into land deals in the past couple of years presage a Matlin Patterson-style play into an operator platform. Actually, someone we were talking to noted that Paulson is a major–if not the largest–shareholder of Beazer Homes stock right now, which may or may not explain why Beazer took a good hard look at the Taylor Morrison book, before saying, “no thank you, not just now.”
Starwood might be thinking similarly. Starwood has a vested stake in what happens with its land pipeline, and as yet, has a relatively minor invested stake among operators. So it too might be looking for a platform such as Taylor Morrison to help it monetize its land and generate greater value in the equation.
Chernikoff ably reported that she’d confirmed that at least one private home building operating company had submitted a bid, but heaven forbid she speculate on which of the private builders could do that.
If the near-$1 billion value on the land is Taylor Wimpey ceo Peter Redfern’s line in the sand, there are not even a handful of private home builders with the capital to buy it. It might make sense that the Canadian owners of Ashton-Woods or Mattamy Homes–both of which have been in expansion mode through the downturn could assemble capital.
What we’re not counting out, however, is that after a bit of haggling and creativity vis a vis some of the incongruous pieces of this deal, plus a bit of clarity on what happens with the 2011 home buyer demand trajectory, we’ll see a legit public company acquisition.
Or we’ll see Ms. Sheryl Palmer succeed in reeling in a financial backer for an operation she’s shown a passion for and level of competence.
But if you’re looking for a deal fix, look first to the Lehman-SunCal parcels. They’re going to be a load of fun as they go down.
Builders Grow Bullish on their New Neighborhoods
As 2011 begins, we reckon there are upwards of 5,000 new-home big builder–public and private–communities active, mostly concentrated in 15 states.
The story of 2011 for Big Builder will be what happens at the 4% to 5% of neighborhoods that just have or will “grand open” to today’s new-home buyers, reduced in national terms to a trickle below 400,000 in 2010.
These new neighborhoods–we’re guessing in the range of 200 to 300 production home builder communities–most likely concentrated in the states of Florida, Georgia, Ohio, North and South Carolina, and Texas, with the metro areas of D.C., Phoenix, and Riverside-San Bernadino thrown in for good measure will serve as a proxy for the narrative that will be high volume home building’s recovery program for 2011 and 2012.
At an absorption rate of 1 per week per new home community, this sets up a run-rate of about 15,600 new-homes in a 12-month period (assuming 300 new neighborhoods) once all of these new communities open their doors for sales.
How can the sale of just under 4% of the new-homes sold in a 12-month period, a mere $3 billion or so in home building revenues, figure so importantly as to stand for example as a proxy for the big builder universe?
Here’s how.
- many of the new communities are or will open on lots that have reset in price to levels builders assumed they could sell profitably out of the gate, or at least appreciate into profitability with velocity, scale, and lot appreciation
- many of the home products in the new communities have been transformed around heat-mapped value features in the homes, design and construction features that zero in on buyer preferences rather than scatter-shot expense … i.e., perceived value is in, while
- cost engineering has taken out expense on items that consumers don’t say they prefer
- waste has been eradicated, operational efficiency optimized, and suppliers have been hammered down to shadows of their former selves on pricing
- selling, merchandising, and marketing disciplines are in take-no-prisoners mode
What happens at the builders’ new communities in 2011 and 2012 will add two more chapters to the plotline of The Great Recession–New Home Edition. One will be about market share. The other will be about demand creation.
Public home builders have worked for more than two years to get their financial houses in order and what 2010 proved is that most of them are at or close to profitability even in the sub-400k new-home sales universe. An increase in market share over the next 12 to 18 month stretch will go far to improve their profit picture because they’ll generate more revenue without needing to spend all that much more to get it.
This is why they’ve tightened their geographies and focused.
What’s interesting in looking at the kind of land purchases builders made during the Spring 2009 to Spring 2010 lot-buying spree is that one can see each builders DNA play out in their land acquisitions. Some, like D.R. Horton and NVR (in its markets) locked up everything they could. Others were selective, with an emphasis on large-tract, multi-year build-out horizons in master planned communities. Still others bought lots to turn them soon–like now. They’re not interested in pipelining lots and playing a real estate land appreciation game with them as part of their business plan; they want cash, sales, turns, and profits sooner than later.
Come Super Bowl Sunday this year, they’ll be weeding out the garden beds and spiffing up the model park to show their new communities for all they’re worth. Do they know that if they build it, the buyers will come?
Of course not. “But this is what we do,” says the CEO of one of the top 10 nationals. “We build now.”
So, the new neighborhoods in places like Jacksonville, Dallas-Fort Worth, Cincinnati/Dayton, Orlando, Ft. Meyers/Naples, Denver, and Atlanta, are going to tell us a lot about how the high-volume sector is going to work.
Publics aim now for market share, and they’re going to leverage that for profits so they can corner even greater share of markets that are responsive to new-home appeal vs. available existing supply.
What they’re also going to do–particularly if the broader economy performs as it has begun to show itself–is to try to time the inflection point on shadow inventory supply to where they will focus on demand creation.
The story at last will be scarcity. Once distressed inventory peaks this year and starts to turn, focus will shift to how little new-home supply there actually is. That much of the plotline will begin in 2011: market share and demand creation.
Stay tuned as we begin to focus on builders’ new communities–the ones big builders opened in late 2010 or early this year. We’ll see recovery math in how they perform, especially if some of the early job creation that’s taking place occurs where there are operational footprints.
Next Level for Energy Star for Homes May be a Reach for Production Home Builders
One of the handful of things that went right for a limited number of production home builders in 2010 was their strategic embrace of energy-efficient homes with a highly attractive price tag.
And why not? If they could build a house that materially differs from competitors’ offerings, plus make for a monthly payments come-on without some small-print hitch, then what better way to compete in a horrific transactions environment, where the enemy might be a dimes-on-a-dollar deal on the courthouse steps, or some variation of that on the spectrum of distress?
One industry observer who works closely with dozens of both public and privately held home building organizations noted just today, “the green home building story is one of the bright spots in the industry right now.”
Well, count energy efficiency as another one of those phenomena that makes 2010 look like “the good old days,” rather than one of the most inimical market environments ever. Crossing the thin green line may not just get tougher; it’s also bound to get more expensive in 2011 and 2012.
Energy Star certification, one of the ways home builders clawed for a competitive edge over the past couple of years, is raising the bar (Energy Star for Homes Update) on compliance in 2011, all in preparation for its Version 3.0 guidelines that become effective Jan. 1, 2012. Some of the builders who’ve made it a strategic linchpin are thinking again about whether they’ll be able to get over the more difficult hurdles.
To be fair, the EPA, which oversees the Energy Star brand for products, materials, and homes, has had its spec out for its transition Version 2.5 for months now, and has been getting input from raters, subcontractors, and home builders for a fair amount of time.
Fact is, however, lots of organizations have been so intent on getting whatever business they can get done in calendar 2010 done that they’re only now awakening to the effectiveness dates, new checklist requirements, and new standards in Version 2.5, which impacts what home builders will build starting next year.
Here, verbatim, is one D.C. metro area home builder’s red flag warning on his ability to continue to participate in Energy Star:
My name is Ken Malm. I am a top 100 home builder nationally, that builds primarily in Maryland and Virginia. My brands are Craftmark Homes and Craftstar Homes and we converted our homes to Energy Star a couple of years ago. In 2010 we received the Energy Star Leadership in Housing Award. My average HERS rating has been in the mid 70s. Unfortunately the version 2.5 software you are about to implement will require my single family detached homes to achieve a HERS rating of 51 to 61 versus the current 85 which I have always been able to exceed. My Energy Star Provider tells me this is primarily because the software has been changed to penalize homes with over 2800 square feet of conditioned space which includes the basement. I am not sure what the motivation is to penalize folks who build or buy homes of this size, but the result will be I will stop building Energy Star Homes. I will continue to try to build energy efficient green homes, but I cannot afford the cost increase of $10,000 to $ 20,000 per my typical single family detached home your penalties will force me to incur to be certified. I doubt I will be able to be an Energy Star Partner going forward because your new standards go too far too quick. Was it your intention to drive folks away from your program? …. Ken Malm. Owner
Ken directed his concerns to the EPA’s Energy Star program, and he got a response that indicated that enough home builders had shared his concerns about the immediacy of the implementation of the 2.5 guidelines that the effective date has been moved. Here’s the EPA’s comment on that issue:
First, EPA is delaying the implementation date for the v2.5 guidelines by three months. This change impacts the implementation timeline in several key ways
Single family homes that are permitted before April 1, 2011 can continue to be qualified under the current v2 guidelines until July 1, 2011 (previously, this applied only to single family homes permitted before January 1, 2011);
Condos and apartments in multi-family buildings that are permitted before April 1, 2011 can continue to be qualified under the current v2 guidelines until January 1, 2012 (previously, this applied only to units in multi-family buildings permitted before January 1, 2011)
As regards Malm’s concerns that the size adjustment factor equation in the new version will work punitively to the size of the homes his company builders, the EPA responded as follows:
Finally, to accommodate growing partner concerns about the impact of basement square footage on the ENERGY STAR HERS Index Target when the Size Adjustment Factor is applied, EPA has decided that basement areas, whether finished or not, shall not be counted as conditioned space for the purpose of determining a home’s Size Adjustment Factor. To quality for this exemption, basements must have at least half of the wall area from floor to underside of ceiling framing below grade. Note that this exemption is only for the purposes of determining a home’s Size Adjustment Factor. It does not affect the Conditioned Floor Area as defined by RESNET and used in the course of rating a home or determining maximum allowable duct leakage.
Net, net, we talked with Ken Malm after he received the response, and he says that the costs to achieve compliance with the new spec are still going to be higher than the D.C. market will bear.
And that might just be his tough luck.
The communications coordinator for the Energy Star for new homes program, Jonathan Passe, says that not all home builders are going to like it that the bar of compliance is heading up, and that that’s going to cost more.
“We are not unsympathetic to the companies’ concerns when it comes to the greater costs involved to meet these new standards, but that’s part of the brand’s promise to consumers, that Energy Star means significantly more energy efficient,” Passe says. “We are by definition an above-code program.”
Passe notes that 2009 building code compliance moves the needle closer to prior Energy Star standards, and that since the program has already achieved 25% market share in new home construction, it’s time to make the hurdles higher.
“We recognize that the new standards don’t represent a small change and there are just going to have to be more costs absorbed by the builders to comply with certification, and the fact is, we’re going to lose some participation as we increase the level of difficulty. We’re encouraging home builders to look beyond the ‘first cost’ involved in complying–often their learning curve involves an expense that, once raters and subs are more practiced in the program, the costs come down.”
For home builders who’ve built a committed strategy around Energy Star, it’s a moment of truth to turn up the energy level it’ll take to continue to meet the new spec. We spoke briefly with Leading Builders of America executive director Ken Gear about the new Energy Star 2.5 and 3.0 versions, and he says that it’s particularly harsh that the ramp-up period to comply with more ambitious certification hurdles is taking place as the housing market continues to suffer.
“This issue is on our radar, and the fact that the bar gets raised and costs are going to go up when we’re fighting to make energy efficiency more affordable will come as a rude awakening to some of the companies that have tried to make Energy Star a strategic anchor,” says Gear.
Will the EPA forge on with a program that may well cause participant attrition as it takes effect and winds up costing home builders more than they can retrieve from the market in 2011? Says Passe, the answer is yes.
“We are obligated to raise the bar of energy efficiency. That’s just part of what the brand needs to do,” Passe says.
Your call.
Horton Hatches a “Who’s Your Daddy?” Flourish to 2010
In a related story, D.R. Horton can claim the No. 1 ranking among home builders in our book. Horton sold almost 21,000 homes this year, a year in which the run-rate for home sales is somewhat shy of 300,000. Yes, so one home builder accounts for somewhere between 6% and 7% of the total in the nation.
Don Horton
PulteGroup, whose average selling price per home is almost 25% higher than Horton’s, booked more revenue during the period we’re talking about, so its management argues it’s still the No. 1 company in home building.
Decide for yourselves. We happen to think that Horton gets honors. You can kid yourself and say that it’s the Horton team’s ambition to be “biggest builder in the land,” but we’d say it’s more about winning.
With Horton in the game in any market, other competitors know this, that there’s a take-no-prisoners player in the arena, willing to do what it takes to sell a home at everyone else’s expense, as long as it’s good for their business. This is the way NVR competes in its more limited geographical footprint. Its people compete, literally on the same turf as everybody else, but they do everything in their power to tip the playing field in their favor when it comes to outselling everyone else.
These companies’ people arrive at work each morning knowing that they’ve got to outduel the market or they might as well not have shown up for work that day.
We’re not saying that PulteGroup people don’t come to work with that in mind, but we are saying the D.R. Horton does that more effectively with its people than any other company in the business.
Everything that’s unfair and imbalanced in the way Horton works a market–the way it builds relationships with land sources, real estate agents, trades, materials suppliers, etc.–Horton does with impunity, because culturally, its management believes that to win it must dominate, and to dominate in some cases means to demoralize its competition.
The assumptions Horton makes each day include acceptance that the universe of home buyers is smaller than its been–the pull-forward of demand, the scarcity and level of difficulty to obtain a home loan, the prevailing insecurity over employment, the paralysis in household formation–but does not include tolerance of performing at a less-than level.
This is managing adversity. Horton took its medicine like every other home builder and reduced headcount as painfully as the next guy. What Horton has not done–nor NVR–is to slack off on expectations of the people who kept their jobs.
Other public builders and private builders can say what they want about D.R. Horton but there’s an eerie correctness to what CEO Don Tomnitz promised in 2005, when he said the company would double in volume from around 50,000 units. In fact, in the context of the universe of new single-family homes sold, which has shrunk from over 2 million to under 300,000, Tomnitz’s promise that Horton would “double” more or less comes true in the sense of a percentage of the entire marketplace.
To us, Horton wins by staying true to its culture, which is to do right by its customers, help get them what they want, and also to do right by all the partners it does business with, whether that’s painful or not.
Horton–not coincidentally springing from the nature of its eponymous namesake–hard wires itself to winning. It doesn’t mind doing it the hard way either, being better at sales management, better at racing to the right deal, smarter at striking when the iron is hottest, unrelenting in understanding its potential buyers, and fearless when it comes to dominating a market.
Competition in 2011 will mean so many things as banks, desperate owners, people with job opportunities in other markets, and other new home builders crowd every potential buyer with the “once-in-a-lifetime” buying opportunity.
But anybody who needs a reminder of what competing in home building means–no matter what the market conditions are–only has to take a look at what D.R. Horton and NVR do. Writing them off as only wanting to be the “biggest builder in the land” is giving short shrift to the discipline, the financial management, the sense of timing, and the motivation of its workforce in the face of adversity. They’ve figured out how to sell the most and make a few dollars profit while they’re at it, which is more than a lot of the other builders can say right now.
Horton is as worthy a competitor as there is in home building because it puts winning right there in the middle of everything it is.
More on the Shift from Inaction to Action in 2011
Verbing. We like it. We think banks should try it, and more home builders too, not to mention others of the American public corporate pantheon that are said to have $1 trillion in cash on their balance sheets awaiting some optimal moment to put it to work to grow their businesses.
The W Hotel seemed to be first with the practice, and we liked it. “Sweat,” it exhorted via a little sign with a finger on it pointing to the gym. “Dine,” steered us to the overpriced ambiance of meals, and “Sleep,” “play,” etc. directives made their simple messages clear, and at the same time stripped the establishment of corporate hospitality’s onerous ennui and stodge.
Then, here in home building starting this time last year, we saw a wonderful use of the notion with the introduction of Shea Homes’ Spaces models. Mike Woodley’s flexplan floor diagrams go so far as to instruct potential buyers that in such and such a space, they’d work or sleep, they’d park, they’d eat, they’d cook, they’d even dream.
Hollywood, usually a setter of trends, couldn’t resist and picked up on the idea with the Julia Roberts movie “Eat, Pray, Love.” (Apologies to Elizabeth Gilbert, the author of the book of this title that inspired the movie, but once Julia Roberts deigns to star, it becomes a movie foremost.)
Let’s just say that like the Julia Roberts/Elizabeth Gilbert character in the Hollywood movie, you start out in a state of depression. Hmmm, not much of a stretch there.
The idea, then, would be to figure out what to do to get out of it, to recover and go on to have a semi-fulfilling life. This could work in the business community of home building.
Right now, to listen to home builders who offer their friendly perspective on what they’ve experienced, what’s been happening, and what to expect, two scenarios appear to be plausible.
One scenario embraced by many home builders with long experience — the multi-cyclers — is that this thing will end, and “thing will resume being more or less the way they’ve been” when recovery cycles occur. Same patterns of demand starting with entry level, same segmentation, slight variations on product preferences that follow the general fashion trends of the moment, and an unvarying true north around location–schools, job centers, shopping, etc.
Anecdotally, we hear often of an opposite scenario as well. This one presupposes that, this time, things are really different. Homeownership itself has lost its luster. Young adults aren’t going to want kids. Older people aren’t going to gravitate to warmth, physical amenity, active adult lifestyle, etc. Houses are going to be forever smaller. Suburbs will no longer exert appeal. etc., etc.
Certainly, as we’ve said, either of these scenarios is plausible to us. The uncertainties around whether our broader economic predicament is more cyclical or more structural, doubts as to whether policy will ever get sane control of the runaway irrationalities of housing finance; global ups and domestic downs conspire to convince us that nobody really know which camp is correct.
It may be the ones who say that, once the economy starts to recover, housing and the new-home construction segment of the housing industry, will crank back up and what was working before–from a discipline standpoint on marketing and sales, design, operations, purchasing, etc.–will essentially start working again. In other words, demand is demand is demand.
Or reality may take shape the way the others argue it will. Product would need to be retooled, land strategy re-envisioned, finance restructured, and operations management made over.
Which school are you from?
You think 2012 will bring a rising tide that will raise all ships once again, or will the then-36-year-old leading edge of Generation Y, and the then 67-year-old leading edge of the Baby Boom, as well as the then 46-year-old leading edge of Generation X have begun to change the core “who?” of your buyer segmentation assumptions?
Either way, whether things don’t change or change completely, the way to get from here to there–across a tricky 2012 landscape–is to verb, not noun.
One area of your offices should be labeled “study,” and that area should be all about every competitive and marketplace intelligence dimension you can imagine. Another section of the offices would best be called “break it” so that your best ideas one day can get stress-tested the next. A third would be entitled “start,” assuming a blank sheet approach to your firm’s capacity to meet a marketplace need; and, “sell,” “buy,” and “profit,” and so on.
All verbs. No lobby. No conference room. No office.
In an environment with so few transactions, money is hugely expensive, since every dollar is put out at considerable risk of its ever coming back. Since money is so expensive, the indulgence of the moment is you choosing how you spend your time.
Wall Street and Washington haven’t figured out how to commoditize, do a structured investment vehicle, regulate, or tax your time.
The thing is to use it for verbs. Eat, pray, and love if you want. But do.
Is Today’s $30 Million Land Deal California Dreaming or A 2013 Gold Mine?
Los Angeles-based Shapell Homes paid upwards of $142,000 per acre for 211 acres of the western portion of Carlsbad, Calif.’s Robertson Ranch from long-standing landowner the Robertson family, the company announced last week.
The deal will bring Shapell–which controls 8,000 to 10,000 lots, and develops and builds in masterplans such as Porter Ranch, Gale Ranch, and Rancho Conejo in both the northern and southern parts of the state–back to the San Diego area after a several year hiatus. An already-approved “specific plan” for the tract needs grading and infrastructure work after it’s lotted out for as many as 680 homes–in both single and multifamily variety–as well as 8 to 10 acres of retail commercial.
We caught up with Erik Pfahler, vp of planning and acquisitions at Shapell Homes, who talked about the buy. Why now? Why there? What’s Shapell’s plan? etc.
The original master plan approval was secured in 2006 and the eastern portion of the property is currently under development (after an original joint venture with Corky McMillin Cos., Brookfield Homes is going ahead with building the eastern master plan).
“If this parcel came up for sale next year, we would have been interested in it,” Pfahler tells us. “It happened to be available this year, and in spite of the interest that this parcel has had from other builders, we were able to buy it on very solid fundamentals, basically the existing market.”
The plan is to do the grading, infrastructure, and land-planning work by the first or second quarter of 2012, which many analysts say will finally mark the beginning of the upturn in the cycle. The models would go in later that year, with the first home deliveries by the third quarter of 2013. Shapell, which builds both single- and multifamily units as well as retail, plans to do all the building in the masterplan itself.
The location fits Shapell’s propensity for some of the more constrained land-positions receptive to its multiple product skill set.
“The Robertson Ranch western parcel is actually where the original Robertson homestead was,” says Pfahler. “We considered this an opportunistic buy because it specifically fit the type of geography our current projects do well in–coastal areas, near jobs, with fairly up-market communities. For these locations, there are not a lot of opportunities, so we were gratified we did what we said we were going to do when we went into contract, and we got the deal closed.”
GW Realty brokered the deal.
The good news, from Shapell’s standpoint, is that the company has a two-year runway before it plans to bring the new neighborhood online. What’s more, land prices in constrained, coastal areas of California have been tended to be sticky even in light of home prices’ decline of 30% to 40% since 2006 and 2007 peaks.
The big questions for developers and builders setting up this type of pipeline is how to lot out the parcels to the densities, designs, and product types that will strike the balance between predicted demand, prospective costs, and profitability–all these assumptions in a vacuum of present-day transactions that serve as guidelines.
The nearer term market “will depend on the outcome of federal government tax policy,” Pfahler believes. “Fact is,” he says, “the people who would be most affected by changes to tax liability in the ‘upper’ earning brackets would be exactly the segment either buying or interested in buying homes in Southern California right now.”
So if there’s clarity instead of uncertainty on that front, Pfahler infers, the market could either take another blow or get a lift in the short term future.
Meanwhile, he says, it’s more likely that the housing market will put down a foundation in 2011, and hopefully do the numbers it did in 2009 versus the back half of 2010.
Pfahler’s prediction is that localities are going to need to do some major adjusting to realities when it comes to their planning, because they appear all to be pushing greater densities than the market will profitably support.
An intensified collision of interests between developer builders and municipalities is imminent, particularly as local governments struggle under the weight of their own overspending and debt obligations.
Three predictions for home builders in 2011
It fascinates us to imagine looking backward at this time next year. We think the perspective of 12 months will not necessarily begin to have restored what we have lost, but we do think the passage of one more year will confirm a few hunches, positive ones.
- (1) Here at Hanley Wood, and Housing Crisis, and Big Builder, and Builder, we’re about to shift from doing most of our stories about what has been happening to doing the majority of our stories on what people and companies are doing;
- (2) Maybe we have been looking at this notion of the home as an investment incorrectly, and if we’re going to understand true demand for homeownership in future we have to look at the first two-thirds of this past decade not as an aberration but as a direction toward which people who form households and make a “family” are going; and
- (3) central to every home builder’s strategy and agenda for 2011–irrespective of size, geography, or business model–will be one principle and one principle alone, the capacity to strike opportunistically.
Let’s take each point, one by one, and think about it.
Starting in the early 2000s, our collective defective actions as a business community, marketplace, and society led to a state of synthetic hyperactivity or euphoria. Subprime and its sudden pandemic contagion leveled the universe by the end of 2008, turning even the most powerful of global business’ giants into supplicants and spectators. In days, we’d gone from a “money for nothing” world to one in which money was in a total limbo of fantasy value, worth nothing or everything.
In the relatively short order of 36 or 48 months, home builders lost 75% of their business, like limbs lopped off with each passing quarter, each time actuals came in at variance with sequential or year earlier data points. With each V came good-byes to divisions and markets, broken promises, busted deadlines, failed deliveries, and a protracted state of triage management to stop loss.
Having made hay in the sunshine of ritalin-laced demand, firms of all sizes turned inward, focusing on survival. Action plans consisted of cuts, mitigations, random flashes, occasional inspirations, and last February 2009 through April 2010, reactions to stimulative policy.
If the tax credits did nothing else, they allowed many companies to keep a pulse in the deepest freeze any home building veteran had ever weathered.
At any rate, deep freezes don’t last forever. This one may have begun to thaw. This is what we’re seeing in a number of technical data points that have inflected positive in the past several months, including private construction spending. An important component of Residential Investment, private construction spending, may preindicate a recovery that not only means more building, but means more spending, which turns into healthier profits, more hiring, and more household formation … which means more building and more work for builders to hire workers, and so on.
So, while 2008, 2009, and 2010 have been years that we industry and community observers have been reporting on the externals of macro economics and policy exerting themselves on internally-oriented home building organizations, we think 2011 is the year that changes.
You heard it here first. By this time next year, we’ll be covering a robust roster of story-lines that have to do with home builders’ external actions to strengthen their respective opportunities. Consolidation, innovation, even escalation of initiatives will be the bread and butter of our titles, rather than what Capitol Hill scrum is going on now.
So, prediction No. 1 for 2011 is that the industry community shifts full-bore by this time next year from spectators to players.
As for the second notion, we’ve all heard often that the problem with 2002 to 2008 is that people were looking at their homes as ATMs, as speculative investment vehicles, serving a range of interests, from elevating one’s financial lot in life (no pun intended) to hedging markets, and outrunning equities, etc.
We think this is an incorrect way to look at a mega-change. The house became an investment vehicle in the 2000s because of regulatory breakdown, a global liquidity miasma, and high-finance steroids, which conspired to make money too easy to steal and pour into the economy.
The mistake would be in not understanding essential ways that households are changing. They’re changing profoundly around new values about who makes a family, what and where work takes place and how much it’s worth, and the permeability of international borders, allowing for global migration as a fluid ongoing reality.
To understand demand–not in the future, but currently–is to understand that households have changed from the married-with-children iconic economic engine, but households today are no less economic engines than the mom-dad-and-two-children households that dominated the 1950s and ’60s.
Households that had a male, a female, and young kids had needs, and 25% percent or so of 110 million households today still have those needs, because that’s the number of two parents and a young child homes there are. It’s the other 75% that is causing some of the cognitive dissonance in home building.
Even as household formations spring free of the Great Recession’s financial ball and chain, the mistake would be to assume that more than 25% of them are going to funnel into that married-with-children segment. This is something volume home builders are prone to do, which is why many of them compete head to head to head to head with one another rather than to match their skills and motivations up to where there are unmet needs.
The point is, we may momentarily conclude that people want to buy a house to live in it in contrast to 2006, when they bought a house so that they could make money on it and sell it to a greater fool. But this is temporary, we think, a function of tight credit, and low transaction volume.
In fact, we feel the more prevailing trend is that households–particularly ones who do not center their present and future values around children–will continue to see their home as part of a holistic business plan. The mega trend still unfolding is the one that put multiple earners under the same roof, working for aligned goals. Whether or not this is a husband and wife is becoming less relevant than the fact that multiple earners want a maximum return on their combined financial resources, and the house may be one part of that. So, we don’t see a retro reversion to a time where the house, and homeownership go back to a bygone day when it is not an investment.
So, prediction No. 2 for 2011, is that winners in the next 12 months will be home builders who specialize in fluency and relationship with the “unmet need” in a market. This does not only mean a home buyer who plans to spend eight or more years in the place they purchase; rather it means that “new” or “alternative” or “unconventional” or “multi-generational” households are the ones who’ll budge from the sidelines first in this kind of market.
Which brings us to point 3, the operational imperative of 2011, to strike opportunistically. You all have forgotten more about this area than we’ll ever know. However, we’ve seen in a few exceptional places breakthroughs over the past year or so, and we believe they’re bellwethers of how 2011 will work. Understanding that each home building enterprise has its own tolerance for risk, we believe it still necessary for each to exploit its own horizon of opportunism. Or simply pack it in, because it’s not going to get a lot easier for at least a couple of years.
- Niche your way to scale
- Learn to do something before the rest
- Buy land before the for-sale sign goes up on it
- Imagine your sales team–whom you may love and respect–never sold a lick of anything in their lives, and challenge them to relearn everything from a blank sheet
- Describe three buyer types you can draw from your market that Claritas never even heard of, because they’re out there–Claritas’ segmentation assumptions are 20 years old.
- Align your team around a culture of yes, of trust, and, even of mistakes, as long as they’re errors of commission rather than omission.
Another 12 months, and we’re going to be all about what you’re doing versus what’s happening to you. We look forward to that.
2011–The Year of Market Share
From what we’re hearing among a select group of home building company leaders, they’ll take “we’re doing better than the others” in 2011.
Face it, in an under 300,000-unit, single-family new-home sales environment, 200 home building companies average about 1,500 homes apiece among them. Share, as in not sharing market share, is life. Depriving others of share, including the banks that may be on pace to take back one in every five borrower’s homes in the next couple of years, is the way to keep a home building company’s lights on.
And so we hear, that the model homes are either set or in their final stages, ready for the weekend the market’s National Football League team falls totally out of contention for a playoff spot in January (which has already happened in several markets, probably accounting for higher than average traffic to new-home communities in at least the Carolinas, Dallas, and maybe Denver).
The associates are going through their paces on sales, still trying to grasp how to capture prospective buyers in the online research loop and work them through mortgage loan approvals in a moving-target credit standards environment.
All that’s left now is to sell.
To sell, just a few years ago, was a passive matter, basically completing an order form from a line of people that appeared to be longer than the number of homes that were going up. Until it wasn’t.
Now, to sell is an active, hard-nosed, creative, persistent, mine-field of buyer trepidation and lender bait-and-switch. To sell is to achieve. To sell today is to win.
And not to sell–starting with those hundreds of new communities that public and private home building companies will grand open into the teeth of a maybe-maybe not recovery–will mean to go away, at least for a while. Disappear for at least long enough for people to forget who wasn’t paid, who got left holding the bag, who went down with you, who’s still trying to dig out of the hole with you.
This is a difficult moment for the companies we call big builders. As Jamie Pirrello’s column today notes, few builders have a choice but to ante up. They can’t keep sitting out hands and expect to be in the game. That pile of chips in front of each one of them is what it is. It’s tiny in the case of many private home builders, and it’s several stacks of every denomination for a few of the publics.
More adversity isn’t an option, and unfortunately, it’s usually just before things really start to improve that they’re at their worst for the weakest of the set.
So take the next 60 days and plot the way through the following 52 weeks to around this time next year. For good measure, make it another year of assuming the lowest range range of volume, at least while companies and individuals gather their bearings in the gravitational force-field of the government’s spending vs. revenue crisis.
Remember, there’s enough health in the money math, even of housing, to heal what ails us. Four out of five home loans are not under water and not in danger of distress. Another 26% of the 75 million owner-occupied homes doesn’t even have a mortgage on it. Between 80% and 90% of workers who can earn a living are doing so.
Recovery is happening. Even a couple of those housing analysts who have sounded most bearish during the past five years, The Big Picture and Calculated Risk, have begun to reflect a litany of ways they’re tracking traction across the board. Still, they’re careful to conclude, the improvement is modest and there’s a big hole to dig out of.
Even if you call it gloom without the doom, it’s vastly better than where things got to in 2008.
What’s more, things were very bad before those Armageddon moments in the Fall of 2008. They were rotten in 2005 and 2006; it’s just that some of us failed to grasp that.
More than likely, 2010 will serve in hindsight as the beginning of the end of the worst of times for home builders, and the mind-set this time next year for Spring selling 2012 will be a great deal more positive.