Toll on a Roll: Seeing is Believing
Seers just don’t see; they see around the corners of time. They don’t forecast or predict. They observe what is there now, and from that, reveal what will come later.
Business has its Oracle of Omaha.
The housing business has its Haruspice of Horsham (Penn.): Robert I. Toll, chairman and CEO of the eponymous luxury home building organization that may be the best-known brand of its kind in America.
Bob Toll founded his Top 10 home building company 42 years ago — long enough to know downturns good, bad, worse, and indifferent. Wall Street tends to pay particular attention to what Bob Toll observes about the market for two reasons.
Reason 1 is that Toll homes are not central casting for those availing of the $8,000 first-time buyer tax credit; quite the contrary. An uptick in sales of Toll Brothers homes means at least some people are finding ways to a). sell their existing homes, b). arrange for financing–often non-conforming-JUMBO and even stated-income mortgages for self-employed professionals, and c). believe that the new home they’re buying will retain its value.
Reason 2 people on Wall Street listen to Bob Toll when he holds court about the new-home market? Many Wall Street executives live where Toll Brothers builds–not only in the metro New York market, but where ever finance is high and sometimes mighty. Some fair number of Wall Street execs call a Toll house home.
Enough intro. Here’s Toll verbatim from the company’s Q3 2009 earnings release:
Click to access profile.
“Although our industry continues to face significant challenges, we are encouraged by the increase in the number of net contracts signed this quarter. This marked the first time in 16 quarters – dating back to FY 2005’s fourth quarter – that our net contracts exceeded the prior year’s same quarter. It also marked the first quarterly sequential unit increase in our backlog in more than three years.
“The increase in net contracts was generated despite our having approximately 22% fewer selling communities during FY 2009’s third quarter than during FY 2008’s third quarter: On a per community basis, our net contracts were up approximately 32%. Despite the fewer selling communities, our FY 2009 third-quarter gross signed contracts of 915 units were down just 9% from the previous year’s third quarter (compared to a 40% decline in FY 2009’s second quarter versus FY 2008’s), and up 16% on a per community basis. This improvement, coupled with our lowest cancellation rate in over three years, drove the increase in net signed contracts.
“Typically, we sign fewer contracts in our third fiscal quarter than in our second, because our second quarter, which runs from February 1 through April 30, encompasses our primary selling season. This fiscal year, however, third-quarter net contracts exceeded second-quarter net contracts by 44%; this has occurred only three other times since we went public in 1986.
“Although some of our markets are still stuck in the mud, many are improving. While we have to work very hard for our sales, it does feel as if the fence sitters are looking for reasons to jump in on the side of buying. Price is no longer the overwhelmingly dominant factor.
“It appears that those taking this step today have more confidence than one year ago. This is reflected in our third-quarter rate of conversions of non-binding deposits into signed contracts, the highest since FY 2005, and our declining contract cancellation rate. FY 2009’s third-quarter cancellation rate (current-quarter cancellations divided by current-quarter signed contracts) was 8.5% versus 19.4% in FY 2008’s third quarter. This was our lowest cancellation rate since the second quarter of FY 2006, and is approaching our historic average of approximately 7% since going public.
“While the statistics above cannot be considered determinative of the luxury segment’s recovery, or that of the overall home building industry, we believe they are more indicative than anecdotal.
“Many markets feel better than they did six months ago. The consumer interest we saw in April and May leveled off a bit from mid-June through mid-July, but has regained momentum more recently. As the supply of unsold housing inventory shrinks nationwide and, if consumer confidence continues to improve, we should see stronger demand: It has already positively impacted our pricing power as we are reducing incentives in many markets.”
Consumer confidence improve even as people continue to lose jobs? That makes Bob’s “if” a big if. Still, now that Bob is seemingly done with his “worst market I have ever seen” refrain, we can say that the Haruspice of Horsham speaks of brighter days ahead.
… and speaking of Wall Street listening to Toll, it responded favorably to his “more indicative than anecdotal” statements prior to this morning’s opening bell.
Going Green, Bleeding Red, Fading to Black
It’s going to take more than green to get home builders the leash they need to work through the dark before the dawn of residential construction’s worst era since the 1930s.
Within the past couple of weeks, we’ve witnessed the financial failure of Louisville, Colo.-based green home building pioneer McStain Neighborhoods and, now, a Eugene, Ore.-based green builder fades to black amid a mountain of debt.
Here’s why McStain capitulated in what may be the fourth or fifth inning of housing’s downturn, per a note from principal Carolyn Hoyt.
We were hit by a couple of last minute “roadside bombs” which really knocked us for a loop. We plan to finish out and sell everything in the pipeline before we close down (probably) for good.
According to “the state of the homebuilding industry” blog, McStain’s major creditors line up as follows:
McStain’s largest unsecured creditors include Scheer’s Inc. of Illinois (which is owed $10.85 million), Key Bank ($3 million), CRE400 Centennial LLC-Crestone ($2 million) and William and Associates of Boulder ($1.54 million), according to the bankruptcy filing.
Other unsecured creditors include First National Bank, GE Capital, Namaste Solar Electric Inc., Guy’s Floor Service Inc. and the City and County of Denver (sales tax).
In Oregon, the story takes place on a smaller, but no less wrenching, scale. It concerns a second-generation “master builder” Chad Ruhoff, who started working on his dad’s houses and developments in the 1980s, and ended up working for Home Depot in Portland after his mini-empire collapsed in the past two years.
Ruhoff’s showcase project was his last, a 41-unit subdivision on the old Wylie family homestead at the intersection of Garden Way and Martin Luther King Jr. Boulevard. Ruhoff paid $3.3 million for the property in June 2007.
Ruhoff not only saved the 1901 farmhouse, he sought to amplify the rural theme throughout the subdivision. He hired architect Jean Rehkam Larson of Minnesota, who literally wrote the book on the iconic American farm house design to draw up the plans for his “front porch” community.
The houses were to be his greenest yet with high-performance toilets, solar hot water heating, LED lights. He was reaching for top-rung Earth Advantage certification, said Aaron Solbeck, who was construction manager for Ruhoff for 7 1/2 years. “We were basically trying to make a super, super tight house that was eco-friendly.”
Ruhoff hired Eugene marketing firm View Design, which built a sophisticated Web site for Wylie Creek. In July 2008, Ruhoff featured Wylie Creek in the Tour of Homes.
And then sales stopped.
Green may be where home building is going, but it’s not proving to be a way to get there.
Unbelievably Great Starts Data May be Just That: Unbelievable
Starts rose sequentially by 17.2%, per the U.S. Census’s latest release, which no one can decipher. Big Builder’s report on the release is here. At 532,000, seasonally adjusted, starts beat the Street by 47,000, or 10%. Permits, at 518,000, also eclipsed Wall Street analysts’ expectations by 10,000, or about 2%.
Evidently, the Street–and its gaggle of “consensus” economists–have neither visibility nor acumen into what to expect from new residential construction.
Or it means that government data culling is suspect. As Raymond James VP for equity research Buck Horne notes in his comment on May starts, permits, and completions data, the margins for error in the government data are all important. “Material downward revisions to the May housing starts estimates are more likely than not,” he says.
Here, from HousingWire, is the nub of the starts and permits data:
The good month for housing starts comes after the volume dived 12.9% the month before. A 62% increase in new multifamily construction drove the month-over-month gain, while single-family home starts rose 7.5% to an annual rate of 401,000 units. Single-family building permits — an indicator of future starts — rose 7.9% in the month to an annual rate of 408,000 permits.
Which do you believe? The Street’s analysts are full of it or the government’s math is off.
Either could be the case, and both are true. Economists are quick to say that a big difference between The Great Depression and now is that President Franklin Roosevelt lacked a good economist to advise him on ways to steer toward a quicker recovery during the 1930s. Still, as smart as a lot of those guys are, how much are they helping us know anything before it actually goes down, and even when it does, how helpful is their commentary?
On the other hand, it could be that in this case, economists’s estimates are smarter than the data flow from the Census. But once the headlines get a hold of the data, it’s really too late to worry about what’s really correct or not.
RaymondJames’ Horne dives into the government release and turns up a number of self-cancelling and contradictory figures that lead him to his conclusion that, when we see adjusted numbers in 30 days, may vindicate The Street’s more guarded estimates after all.
Here’s a doozy of a finding from the Buck Horne analysis.
Shrinking number of homes actively under construction directly contradicts starts data: However, the most strikingly peculiar aspect of this morning’s data was found in the little-noticed Table 4 of the full release, representing the Census Bureau’s estimate for housing units actively under construction. Under normal circumstances, we would think that if single-family starts had troughed and were actually rising materially – particularly in the seasonal low point for new home deliveries – there should be a coincident increase in the number of homes actively in construction. Oddly, however, the Census data here (which carries +/- 1.4% confidence interval) shows that homes under construction actually fell 3.9% versus April seasonally adjusted and dropped 1.3% month/month on an absolute basis. In the housing recovery of 1991, we note that this statistic indeed showed a sharply accelerating increase in the number of homes under construction beginning in April 1991 coincident with the recovery pattern.
Point is, at HousingCrisis.com, we do feel that bigger, well-capitalized companies may actually roll the dice on going vertical with more homes in the next couple of months. Why? Because, in this market environment, about a third-to-half of willing and able buyers want to settle and move in quickly. That makes specs almost inevitable.
Also, as deadlines approach on both state and federal tax credit programs for home buyers, builders who can grab capital to offer ready-to-move-in new homes are prepared to gamble on their ability to nail the shrunken, moving target of buyer demand.
As we posted yesterday, we believe that home builders are hormonally range-bound between unflappable and optimistic, and they’ll look at every mixed signal as a sure sign that it’s time to start moving the dirt and opening the new models.
Ultimately, It occurs to us that as the downturn sputters and runs out of gas, it’s likely will see a knifing up and down of starts before they settle on a conviction in their direction. Two months up, one month down; two months down, one month up, and so on.
Whatever the case, somebody’s wrong about today’s starts numbers. It looks for the moment like the The Street is, but stay tuned.
The takeaway: Clip the postive headline for the scrapbook, but wait a couple of months before you paste it in as a keeper.
Thinking About Tomorrow
Meritage Homes CEO Steve Hilton tries hard not to get ahead of himself. Flashes and flickers of encouragement are surfacing in markets–especially Phoenix–that had been pulverized and stagnating seven or eight months ago, and looking hopeless. These early signs that worsening times may be running out of juice suggest that the wrenching mid-stream makeover production home builders have undergone may be taking hold.
He and Meritage chief operating officer Steve Davis plot themselves at around the fifth or sixth inning of a total organizational change begun when Hilton took over as sole CEO of Meritage in 2006. “We’ve got another year plus to go,” says Hilton. The first two-thirds of the timeline consisted of changing the cultural mindset to one of accountability–no mean feat as a corporation alters its DNA from a holding company to an operating company model.
The last third of the time–the year ahead–is about teaching and sustaining the disciplines to keep the mindset of accountability working.
“We had a bunch of people who were looking at their own divisional data and setting standards for performance in isolation,” says Hilton. “We’ve had to retrain ourselves to look holistically, and set accountability so that every division leader would know his numbers, have an accurate read on his pro forma, and draw on every tool in the tool kit for insight and action,” says Hilton.
“It’s been a tremendously humbling experience,” says Hilton, who’s often had to tread a delicate balance of using examples of excellence as well as generous dollops of of plain old fear within the ranks to effect the dramatic change of mentality and execution.
Per Big Builder editor Sarah Yaussi’s provocative and wise counsel in a post on leadership the week before last, many home builders are good companies who are in what “Good to Great” author Jim Collins would say is squarely in a fourth stage of decline: “Grasping for Salvation.”
When we find ourselves in trouble, when we find ourselves on the cusp of falling, our survival instinct and our fear can prompt lurching—reactive behavior absolutely contrary to survival. The very moment when we need to take calm, deliberate action, we run the risk of doing the exact opposite and bringing about the very outcomes we most fear. By grasping about in fearful, frantic reaction, late Stage 4 companies accelerate their own demise. Of course, their leaders can later claim: “But look at everything we did. We changed everything. We tried everything we could think of. We fired every shot we had, and we still fell. You can’t blame us for not trying.” They fail to see that leaders atop companies in the late stages of decline need to get back to a calm, clear-headed, and focused approach. If you want to reverse decline, be rigorous about what not to do.
Stage four, as it suggests, is a dire state of decline. But, says Collins, it’s not irreversible. Great companies can lose their keel pretty dramatically and recover it just as decisvely.
Where does this put home building companies eking out a week to week, month to month, quarter to quarter existence?
Median new-home prices are 18% off their their peaks, and still falling. Survival tactics for home builders have two key prongs that relate to one another. One is “sell the payment.” That means make a home that can move vs. new-home competion, used homes, cost-to-rent, and foreclosures (which will continue to expand). Selling the payment drills home to potential buyers that their moment for new is now, and their attainable dream is your neighborhood. Selling the payment makes the deal all about your customer and nothing about you, which is what you want right now.
Be the cash. That’s all.
To sell the payment, you’ve got to have a product, an honest to goodness culture of candor (see Harvard Business Review’s current issue), and a structure that cross-pollinates information from silo to silo as a discipline rather than an exception.
Headline flow–especially scary unemployment data–will continue to run negative, but if you trust some of the smarter folks, most of the worst new numbers will come from lagging indicators. The leading ones have started to improve.
Patience and cash. Cash and patience. What a difference a year will make.
Here’s what Hilton believes. “We’re going to look back 10 years from now and say that this downturn was the best thing that ever happened to us.” How many can say that?
Fix Housing Later
Unemployment is the chicken. Foreclosures are the egg. Swap their positions all you like. They’re each a self-fulfilling prophecy of the other, a negative feedback loop.
Housing leaders and housing-centric economists want to believe housing always leads the economy. Fix housing, they say, and you’re on your way to fixing the broader economy, because housing is an engine with a multiplier effect. Residential investment dollars–including construction costs for all kinds of housing–redouble and stream into many other markets and cause good things to happen in local, regional, and national economies.
This time though, a consensus is building that housing will not lead the way out of the downturn. Housing is not broken. Creation of demand is. Look at the latest unemployment data. Now, look at how foreclosures are working, i.e. 54% of new foreclosures are prime fixed and adjustable rate mortgages from among the lowest risk borrowers, per this analysis by Calculated Risk.
How about this for an argument? Housing, not only will not lead an economic recovery, it should not. Business Week economist Mike Mandel makes a case that a housing snapback would drain needed investment from other industry and service sectors that would put a more solid structure–including healthcare, education, and manufacturing–under the economy.
Here’s a few-minute video from Mandel on his Fix Housing Later theory.
Clearly, a more normalized level of demand for housing–existing, new, for-sale, and for-rent–would shape itself around less cyclical job growth in non-housing industry arenas. Businesses that got burnt badly as they met hyperbolic, investor-driven demand. In a real sense, housing’s 15 year run before 2006 used up a couple of the wild cards that would have jump started the economy, and pulled forward buyers into homeownership that it would be nice to have in the demand pool right now.
So, even as new residential construction business executives begin to populate their sound bites these days with flashes of wishful thinking, practically the only silver lining in today’s new one-family home sales data is that builders knocked 12 days of inventory off the books, reducing the ready supply of new homes nationally by 13,000 to 297,000.
In some markets, like Phoenix, home builder and developer sentiment has shifted from “you-have-to-fake-it-to-make-it” to that of genuine excitement. “They’ve turned the lights back on” in the land acquisition conference rooms, according to an executive with ties to investor and home builder land transactions.
What’s selling will have to continue to compete with foreclosures, super affordable to migrate renters across into homeownership. No contingencies. No funny business on the mortgage–it’s either FHA qualified, or at least 20% down. Delinquencies and defaults will pile up among prime and Alt-A borrowers for months and months to come, thanks to an unemployment rate expected to grow into the double digits before it starts to ease back by the end of 2010.
Get stocks to start parking in a promise of future growth, and a real economy GDP to inch back from its deep 6 to something around 0 this year, and by golly, consumer sentiment will start a real recovery.
Meanwhile, another year of trying to figure out how to do things with less people than you really need. What we all need though is an economy that can sustainably grow again, not one heated back up by housing. Fix Demand First, housing later.
Bottom Fishy
Are you the glass-is-half-full type, or a life-stinks-then-you-die kind?
A whiff of less-bad news here and there has bred with it a subtle change of expectations on the part of some economists, if not the eventualities themselves.
Clearly, though, economists are best at using two words to begin talking about even their strongest convicitons. Those two words? “It depends.”
Here’s a roll-up of economists’ opinions from the Orange Country Register’s “Lansner on Real Estate” that limbs out the Silver Liners from the Doom and Gloomers as to when that most-coveted of pieces of bottom might be in view.
Optimists
Fed Chair Bernanke:
- The worst of the recession has passed: “We continue to expect economic activity to bottom out, then to turn up later this year.”
Mark Zandi, chief economist, Moody’s Ecomomy.com:
- U.S. home prices will reach bottom by the end of 2009.
- “Notwithstanding the intensifying economic gloom, the bottom of the housing downturn is within sight.”
- U.S. home prices will fall another 11 percent on average before stabilizing.
- The Case- Shiller home price index will fall 36 percent from its 2006 peak to the bottom this year.
UCLA Anderson Forecast:
- Housing market to stabilize in late 2009, and “when it does, the contraction in residential construction will, finally, after more than three years, cease to be a drag on the California economy.”
- “As the housing market has completed most of its required adjustment prior to the downturn in general economic activity, it will not be as much of a drag on the recovery as experienced in previous recessions.”
- Orange County: Home prices stabilizing in 2009 and starting to rise in 2010. But appreciation rates remain in the single digits and prices will still be at 2004 levels in 2013.
- “This could well be the worst post-WWII downturn yet.”
- “If there is any good news in the picture it is that the correction in the housing market is almost complete.”
- “We are due for significant increases in unemployment through the 2nd quarter of 2010.”
- “Continued job loss in California is going to lead to more foreclosures and more uncertainty about the ultimate bottom in housing prices.”
California Association of Realtors:
- Recessionary conditions through the first half of 2009, “before we begin to see a turnaround in the second half of next year.”
- Prices down 28.4%. That’s revised from an earlier projection that prices would drop just 6% this year.
- Sales up 25%. CAR forecasts that 550,000 homes will sell in 2009, pretty good considering that the state was down to 347,000 sales a year in 2007. That’s revised from an earlier projection of 445,000 home sales.
Pessimists
Michael Carney, director, Real Estate Research Council of Southern California, Cal Poly Pomona:
- “I don’t see home prices leveling off in 2010. … The real reason we’re not going to see a recovery: The financing is not coming back for at least 5 years.”
Richard Green, director, USC Lusk Center for Real Estate:
- “I’d say we’re at bottom if it weren’t for the fact that the jobs picture is so dim.” … (Thinks market will turn around in 2010.)
Stan Humphries, VP of data and analytics, Zillow:
- “I’m doubtful that we’ll see the bottom until 2010, and thereafter it’s increasingly clear that we’re likely to have a long bottom before we see meaningful recovery in home values.”
Construction Industry Research Board:
- 2009 is expected to be the worst year on record for new residential building permits.
- Just 63,400 units will be produced in 2009, down 3% from the 2008 record-low of 65,380 units.
- 2008 construction was 20% lower than the lowest point during either the 1980s or 1990s housing downturns.
- The low in the early ’90s recession was 84,656 units in ’93. The worst year during the early ’80s recession was 85,656 in 1982.
Who’s Not Moving Why?
Source: William Frey, Brookings Institute, via NY Times. Click to access article
Some trends become evident before they become clear. When it comes to American households’ patterned behavior and what it means, few get it as quickly and clearly as former American Demographics editor Cheryl Russell, who runs New Strategist Publications out of Ithaca, NY.
When an astonishing data point comes out from the U.S. Census Bureau — which is almost never — you can count on Cheryl, who eats, sleeps, and breathes Census data, to help decipher how it compares and what it really says.
Her latest American Consumers newsletter takes on the latest Census shocker on household mobility trends. Here’s a direct excerpt, complete with a dollop of business wisdom at the bottom of the passage.
If you really want to know how the priorities of Americans are changing, then take a look at their reasons for moving and how those have changed over the past few years.
- Not buying: The number of people who moved because they wanted to buy a home fell by 48 percent, from 3.9 million in 2000-01 to just 2.0 million in 2007-08–the largest decline among all reasons for moving. While there probably is some pent up demand for buying a home, it is possible that many Americans are reconsidering the importance of ownership now that they know the risks.
- Moving closer to work: The number of people who moved to shorten their commute increased by 80 percent between 2000-01 and 2007-08, rising from 1.2 to 2.2 million–an 80 percent rise and the largest increase among all reasons for moving. This is bad news for the far-flung suburbs, which will be last in line for any economic recovery.
- Delaying retirement: The sharp drop in the mobility of 60-to-61-year-olds is reflected in the 38 percent decline in the percentage of people who moved because of retirement between 2000-01 and 2007-08. Retirement savings have been decimated and the age of retirement is rising, which is why state-to-state migration has plunged. This trend could gut destination retirement areas.
- Staying closer to home: The data show an ominous decline in the number of young adults who moved to attend or leave college, with the figure falling by 26 percent between 2000-01 and 2007-08. This decline is occurring as a growing proportion of students opt for less-expensive in-state public schools and is yet another warning sign for the nation’s overpriced private colleges.
- Downscaling expectations: The percentage of people who moved because they wanted cheaper housing climbed by 35 percent between 2000-01 and 2007-08. At the same time, the percentage who moved because they wanted a better home or apartment fell by 29 percent.
Americans are dropping out of the housing market, delaying retirement, and downscaling their expectations for college and home. These trends may be temporary, but the best way to survive them is to assume they are permanent.
Bottom Dollars
The Second Derivative has spoken. Or has it?
Everywhere, smart and experienced people have begun to find their own words to say that the bad news may still be bad, but is growing worse at a slower rate. Toll Brothers CEO and Chairman Bob Toll says as much in his comments about 80% of the nation’s housing markets in a “first signs of light” interview with CNBC “Mad Money” host Jim Cramer.
The steepness of the deterioration is changing to a more gradual decline. Not everything is as bad as it was. Things have to shift from nightmarish, to horrible, to frightening, to bad, to concerning, before they can flip across the gulf to okay, no?
Bob Toll contends that if you’re out in the field, you’ve already started to get a sense that things are improving, and we hear that from a number of people in a number of markets. The traffic that fell off a cliff in September and October of last year when the financial crisis crescendo-ed began to respond to reset price levels, better interest rates, and government stimuli.
But there’s so far to go.
If you are a believer in the “green shoots” theory, then you’ve got to be thinking there’s something that’s going to cause consumer spending to regain a comfortable stride despite a widening sphere of dread about job and income loss. You’ve also got to believe that residential investment will reemerge as a positive in spite of home price deflationary forces that may be expected to continue.
Calculated Risk puts it this way in comments about the President’s top economic advisor Lawrence Summers’ assessment of where things are:
The “unremitting freefall” might be ending, but what will be the source of growth? Usually residential investment (RI) and personal consumption lead the economy out of a recession – and both remain severely impaired this time. There is too much excess inventory for any meaningful recovery in RI, and the process of repairing household balance sheets has just begun (I expect the savings rate to continue to rise for some time).
Meanwhile, too many banks can’t rise above their profound technical solvency issues to do much more than sit and wait for more deposits and more cash from U.S. taxpayers, via the Treasury. They’ve crimped investment in households, in communities, in companies, and in the future–existing only in cryogenic suspension as once-prized borrowers pick a number and get on line to wait for markets to reopen.
“Green shoots” theorists have not only to believe in the resumption of consumer spending and residential investment, but the reignition of willing buyers and sellers of assets among people who’ve been paralyzed by fear to put a price tag on just about anything.
Like other things, housing downturns have phases and stages, whatever their duration or depth.
At this stage, when construction lending is for all intents and purposes shut down, and when banks are awaiting word of their fate from regulators and White Knights before they engage in the world of markets, and when buyers of homes are doing all they can to postpone the need to move before it’s absolutely necessary, one real estate player in the mid-Atlantic market describes survival this way.
“We’ve done all we can with our lenders, and all we can with our costs. Now it comes down to one thing, or we’re done. We’ve got to sell something. We know there’s not a lot selling in our market, but there is something. So our life depends on stealing a sale from somebody else–existing homes, or foreclosures, or another new-home builder. Either we’re going to steal the sale, or we’re not going to be here.”
This is what it’s like even as “green shoots” theorists talk about a “bottom” as if it were encouragement that next bank payment or two might be last ones to stress about.
Dan Ryan, Truth or Dare
In the wake of last week’s Pulte-Centex pyrotechnics, a classic debate intensifies. Will public home building companies–with their access to and use of the public equity and debt markets–weather the ravages of the next 12 months better and jump out farther ahead in market share when business shows its first signs of strength next year?
Or will private companies–comprised of a handful of Teflon wonders who survived, plus a few who played their non-compete clauses like violins during the industry swan dive, and, finally, the ones who financially reconstitute themselves like crabmeat you’d see in the frozen seafood section of the grocery store–come out of this with the secret sauce to dominate the recovery.
Dan Ryan, Photography by Chris Volpe
Here’s a story you couldn’t make up. The Pittsburgh Ryan family of home building royalty gives us this example of why you should never underestimate the power of the private home builders, even though lenders have most of them groveling on their knees, begging for time.
Yes, publics have millions of “other people’s money” to draw down and mark down as they figure out what their footprint should be, and what their cost-base can come down to while the going is tough. And public companies have unfair accounting advantages that basically allow them to deflate the land value of all competitors as they liquidate their own holdings and collect tax carrybacks, only to return as purchasers of some of the same land at cents on the dollar later in the cycle.
Private companies’ land impairments are literal pounds of flesh extracted from real people’s pocket books, frequently guaranteed with the company principal’s own personal wherewithal, i.e. their homes, etc. When they write down the value of land, they’re kissing money goodbye–whether it’s their own or it’s borrowed–and that’s bad.
So, here’s the Ryan story, and it’s about almost getting beaten, but not.
Chances are, Frederick, Md.-based Dan Ryan Builders will make it. If all goes as planned, even the current headwinds in the market will only haircut a little over 30% of his single family new-home volume from peak through this calendar year. He can thank being in some decent locations in the D.C. metro market for some of that fortune.
But that’s not all.
He knows adversity by heart. In the early 1990s, as another home building company we’ve all heard of–NVR–was hurdling into bankruptcy, the fact that the “R” in NVR stood for the company founder, Dan’s uncle Ed Ryan, couldn’t save young Dan his job.
When he tells the story, he says, “I left NVR, and started my own company in another tough moment for housing, during the downturn of the early 1990s.” Then he catches himself. “They fired me,” he confesses. “That was a difficult moment.”
So difficult for Dan that he went over to the home of his father and mentor Jim Ryan–Ryland Homes founder in 1967–for solace and direction. They sat out on the patio of Ryan elder’s home, and each of them looked out into the forest to the southwest. Dan tells his father what he’s been told in a very sensitively handled exit interview. He says, “Dad, they said they didn’t want to let me go because they really like me; they just didn’t think I was ready to run a profit center.”
“Dan, you know that in a downturn, a good company like NVR doesn’t let go of their ‘A’ players,” Jim Ryan tells his son. “They don’t think you’re an ‘A’ player, Dan.”
That’s what Dan Ryan got for comfort the day in 1990 he got fired from his $65,000 a year job. He didn’t talk to his father for a week or so from that moment, and his father got to thinking maybe he’d been a little too candid with his son. Jim recalls the moment in his own career in home building in the mid-1960s, when his own brother Ed gave him a pay cut of $5,000 a year–which prompted Jim to leave Ed’s company and go start his own.
So, fast forward to 2007, when Dan Ryan Builders nets a profit of $35 million, both father and son know in their heart of hearts that brutal honesty was what the moment called for.
In fact, after his father told him that NVR hadn’t regarded him an “A” player, Dan went for a public speaking course and a business leadership course a la Dale Carnegie, and started the job of turning his shyness into the warm magnetism you’ll see in him today.
“You’ve got to be strong to be good; it’s something you’ll hear my dad say often,” says Dan Ryan.
There are more of these stories, no doubt. Stories that blend your biography with the business. Stories of your determination; your perseverance; your tenacity. We’d welcome hearing them, and we feel that if you’ll share them with your industry colleagues here, it would give everyone a sense of the strength it takes to be as good as you are.
Those backyard patio moments make us who we are. Backyard patio moments may be where adversity hits the hardest, but also where character and resilience get their kick start. Why not share yours with your industry?
Reality Bites as Ratings Agencies Downgrade REIT Debt
From MULTIFAMILY EXECUTIVE, by Les Shaver: Single-family sneezes and the world economy, including apartment real estate investment trusts that are assumed to run contracyclical to single-family for-sale trends, get pneumonia. The reason this venue is called Housing Crisis is that the convulsion hits equally both the supply and the demand side of housing, whether you’re talking for-sale or for rent. And it’s hitting not only the balance sheet but also the daily and weekly access to normal working capital, assuming steady cash flow.
There’s an analysis on how tumbling fundamentals and squeezed access to credit have put a pall on REITs’ business and risk outlooks for the next stretch from Multifamily Executive senior editor Les Shaver.
S&P said the ratings were prompted by constrained access to debt and equity capital and concern that the struggling economy will put even greater pressure on cash flow. The agency said “heavy credit revolver usage (in excess of 50 percent), weak debt service coverage, and an over-reliance on earnings from fee-driven and/or asset sales activity are key areas of focus.” It also views the common dividend coverage as a “drawback,” given the need for REITs to preserve liquidity.
“Fundamentals in the multifamily sector are coming under pressure,” says George Skoufis, a director for Standard & Poor’s. “Their debt protection measures are kind of weak. In the previous cycle, they came in with a little bit more of a cushion. Their numbers are a little weaker, and their leverage is a little higher.”
Multifamily and commercial construction lagged the residential for-sale downturn, and many have another leg or two down as employment deteriorates and corporate earnings erode by virture of more conservative money habits among consumers and challenged consumer sentiment. Too, anecdotally anyway, demand for one- and three-bedroom apartments has decline while demand has stayed strong for two-bedroom apartments–an indicator of increased “doubling-up” among people who might choose to live with roommates to weather the downturn.