Rock the Bottom
What’s good is bad, what’s bad is good, you’ll find out when you reach the top, you’re on the bottom. — Bob Dylan, Idiot Wind
And wouldn’t that be a good thing for home builders? Wachovia senior housing analyst Carl Reichardt, who’s been heeding his “Neighborhood Watch” network of 150 in-the-field sales managers at new-home communities in 20 markets for more than a decade now makes this call. “We now believe that field conditions saw their low ebb in early 2009.”
This is carefully worded, and it doesn’t touch home price stabilization with a 10-foot pole, as it shouldn’t. But field conditions at a low ebb earlier this year–i.e. the bottom–”by any other name would smell as sweet.”
The caveats?
Clearly, upward pressure on interest rates, insofar as that force messes with monthly payment seductions that–paired up with the U.S. government $8,000-first-time-home-buyer tax credit, historically low home price tags, and any further state inducements–have ignited sales in more than a few isolated markets and gotten many home building company past catatonic despair to a state more akin to mere agony.
“In May, we had our best-selling month since June of last year,” the CEO of one of the nation’s Top 10 home building companies told us this morning. He continued, “Yes, I’m very concerned about where interest rates have headed, but our first week of June was the best one-week sales period for more than two years.”
He’s not one to count on policy’s helping hand, but he’s heard tell that during the summer, several measures that would extend–and possibly even increase the amount–the effective term of the U.S. government’s tax credit program for first-time homeowners will make their way into committee as part of either another stimulus package or as separate initiatives.
Typically, housing recoveries show up first in stocks, then home sales volumes, followed down the road by price stability. It’s widely believed now that stocks may need to re-test their lows before volume builds up support for a sustainable rally. So, if the typical recovery plays out, it’s still premature to say it’s underway.
A bottom, however, is a different thing, and this bottom may have–how should one say it?–legs.
It’s an important inflection point Reichardt has called. Field conditions hitting their low ebb earlier this year doesn’t mean there won’t continue to be a lengthening casualty list from the ranks of home building companies who can’t or don’t make it. Those companies’ ill-advised or ill-fated deals with lenders will continue to play out as the financial debacle unwinds.
How much capacity home building needs at the end of the day is still in question. How many home buyers the credit crisis has pent up vs. how many home buyers may have been borrowed from the future by easy money policy is still a healthy debate. True demand is still elusive–it’s somewhere between played-out and pent up.
However, we expect our coverage in the months ahead to take a decidedly different tack as well. Just as back in the Resolution Trust Corp. days many entrepreneurs got their start and a few power players consolidated their empires, we believe that by the end of the summer, there’ll be a stream of start-ups to offset the shut-downs. We’re already getting word of a few “come-back kids” who’ll raise an eyebrow or two once they officially hang up their shingle.
Bottom line is “affordability” for home buyers hasn’t been where it is now since at least 1993. It may need to get even better to seriously move the needle for home builders. So land, and all the other costs of labor and materials, had better get to be pretty dirt cheap.
What’s good for home builders may be bad from the ones they buy their raw materials from. But then the cycle will have begun again.
CYA, the New LTV
Home values continue to fall, caused chiefly by the swelling numbers of people who default on paying money they owe to a bank so that they can own a home. So which of the following two statements is true?
- Home prices are correcting.
- Or, house prices are in a deflationary spiral.
Has the question ever been one of strict economics, or is the debate a mix of economic theory and political leaning? An Adam Smith purist would say that a worker’s willingness, personal need, and capacity to pay to own his or her home will set house prices where they ought to be–often closely bonded with area rent trends and/or household income trends.
A behavioral economist might have an equally strong argument around the negative multiplier effect of home price deflation, which powerfully impacts how consumer spending, which is about 68% of GDP, works.
Clearly, the way that too many American homeowners treated their home’s deed and title as if together they represented a bonafide additional wage earner in the household was lunacy.
Also clear, is that unregulated financial productization set off a feedback loop of structured investment vehicles that programmatically trumped human judgment and accountability.
So it stands to reason that a once-bitten market is twice shy about resuming business with much of a normal set of rules of engagement. Everything must be hyper-vetted and de-toxified for any decision-maker to stick his or her neck out about financial exposure anywhere.
So we’ve gone from being a society that was practically telling people that owning a house was better than having a real job to being a one that is more or less saying that if someone wants to buy a house, we’re going to make it as difficult as possible for them to do that.
One of the new barriers to entry for buyers and especially sellers of new, used, and abused homes–appraisals. A) They’re going to have to pay more for an appraisal thanks to new rules that went into effect May 1. And B) Comps in every submarket are sending appraisals into algorithmic value destruction when they factor in distress and stagnation.
Who this helps other than investor flippers is a mystery.
We know appraisals were one of the phenomena that got sucked into the vortex of financial insanity. Like everything else, there were people who were doing appraisals irresponsibly because the way the system worked, it rewarded jacked-up prices and punished realistic, accurate ones. What’s more, prices had so de-coupled from their historical trends, that appraisers could mark prices up willy-nilly because the system rewarded that.
Now, the overshoot effect has taken firm hold as LTV has morphed into CYA.
- Here’s Big Builder editor Sarah Yaussi’s analysis of home builder reaction to the recent ramifications of the new appraisal code.
- Yaussi dives into the topic in her blog post today, getting at one of the key issues in the appraisal flap. “Comp-ing” real estate assets in this environment is ludicrous, and puts new-home offerings at a severe disadvantage in light of the premium value new construction offers the buyer.
- The Wall Street Journal followed Big Builder on the story with a consumer take on the same hot-button issue.
Brother Act: Chapter 11 won’t stop Raleigh-based St. Lawrence Homes from making a go for the other side
Dad was a vintage movie theater proprietor in upstate New York, whose six-day work weeks and 14 or 15-hour workdays in the 1960s and ’70s rub off directly on his daughter and sons, who consider work fun and laugh a lot on the job. The older brother starts out as an electrician working job sites for Ryan Homes’ Buffalo division in the 1970s; the younger goes into school teaching, but not for long.
They’re the Ohmanns, Bob Ohmann who founded and is the CEO of Raleigh, N.C.-based St. Lawrence Homes on a bank loan that allowed him to do exactly one spec and two pre-sales, and his kid brother Rich, who joined Bob as head of marketing after the venture got its footing.
Bob’s early experience with inhospitable housing cycles came when he’d shifted gears from doing electrical work on new houses to selling them for Ryan Homes in the Buffalo area.
“In the 1970s, they had a little thing called the gas crisis, and interest rates were up around 19%,” Bob Ohmann recalls. “Still, out on French Road [Buffalo] the Ryan Homes folks would set up a card table out in a field, and people would line up at the card table to buy a new home from them. No matter what, you got to stay in touch with what people need. Even today, a couple’s about to have their first kid, and my bet is they’re not thinking we need to move into a two bedroom rental apartment. More times than not, they’re thinking they need a new home.”
From one spec and two pre-sales in Raleigh in December 1989, the Ohmanns built their company into a $191 million powerhouse, closing 489 homes in 2006, peaking at about 600 in 2007. Then, time warp hit. The Carolinas, like Texas, withstood the worst of housing’s dislocation just about all the way through 2007 before the Carolinas market and their company succumbed to gravity.
“We started to feel it go a little soft around August ['07], but then we had a great November—sold about 50 houses that month—and we thought then that it was going to be a good snapback, but then everything collapsed,” says Bob Ohmann.
On Groundhog Day 2009, as most people began their vigil for the end of one of the grimmest winters in memory, Ohmann elder sought protection under Chapter 11 bankruptcy laws. Within five days after filing, the Ohmanns had secured Debtor-in-Possession financing from Raleigh-based community lender Capital Bank.
Their story with lenders is all too familiar. They started banking with a local bank called Pioneer, which was acquired by regional bank Centura, which was acquired by international financial company RBC. Their major lender today, SunTrust, bought the regional bank, Central Carolina Bank, they’d initially set up business with.
As their success trajectory steepened in the years 2003, ‘04, ‘05, and ‘06, they found themselves at the local and regional land dance with some new players with hugely deep pockets.
“They [the public home builders] were printing stock and printing money, and they’d come in and bid up the price of all the land,” says Rich. “We were thinking, we have to go get some land or we’ll run out, but we were paying prices that were way too high because the publics had bid it all up.”
Now, the publics are dumping that land, getting tax carryback money from the IRS, and then coming back into the land market to buy the land at enormously reduced prices. “They got their bail out,” Rich says. “They should be happy.”
Meanwhile, banks continue to exert pressure on builders who owe them land acquisition and development payments as well as construction loan project financing.
“We’re not blaming anyone for what’s happened, but the business just doesn’t work the way it used to when it comes to home building finance,” says Bob Ohmann. I.e., no one takes your call if you’re trying to get through to a big bank.
Today, their company has cut 75 percent of its staff, has turned to real estate brokers as its sales force, has renegotiated as many deals as it can with trades and materials suppliers, and has introduced new entry-level product under its BroadStreet Homes line. It’s doing its damnedest to build and sell 150 homes in 2009 to pay the bills, keep the lights on and the doors open.
Apart from the faceless, nameless big bank lenders where it’s well nigh impossible to get a returned phone call, the other big challenge they’ve had is with some of the subs that have been absorbed into big conglomerates, especially in the concrete business.
The Ohmann name’s not on the company signage, but the brothers Ohmann like to think of their name as backing the value of every St. Lawrence Home.
“Bankruptcy isn’t giving up,” says Rich. “It’s a way to get enough time to reorganize and save the business.”
As they fight each day for survival, two key “learnings” occur to Bob and Rich Ohmann, and they think other private home builders who may get sucked into the default vortex might benefit from knowing them. One is company data. The more straightforward and simple and correct all the company accounting is, the better the relationship will be with multiple creditors and lenders who’ll have to agree on modified terms and cuts. So, keep all accounts in good order and be able to understand and explain every part of the balance sheet to make things easier on yourself if you get in trouble.
The other thing is this. If you’re headed into trouble and plan to work yourself out of it, do some work on your Web site before you announce that you’re filing. Analytics show that you’re going to get an awful lot of hits on your site the minute you file, and you want all the explanations and articulation of the go-forward plans need to be there when word surfaces that you’re reorganizing.
How do they rate their odds of getting to the other side? Rich’s opinion on the matter: “My brother Bob is like a guy up in the bridge of a ship, and he doesn’t care if there’s rocks, or icebergs, or tsunamis ahead; he’ll still say ‘full speed ahead.’ Me, I’m just really good at steering.”
End of the Run of the Mills
From PROSALES, by Craig Webb: The housing crisis is beating Weyerhaeuser Co. to a pulp in more ways than one.
It’s high-quality, mostly move-up home building businesses are getting battered in some of the nation’s most brutal new-home markets; and on the building supply side, things just ain’t getting any easier. Word is the Seattle-based conglomerate has been nosing around in the financial markets for months now looking for partners or a buyer for its well-regarded home building operations.
Meanwhile, iLevel, a business whose design was practically set up for 2005-06-style capacity and velocity, is a big capability literally in search of a floor in the market. Here’s how ProSales editor Craig Webb queues up their predicament in his news flash about Weyerhaeuser’s shutting two more mills:
“Demand for wood products continues to decline due to a slowdown in the housing market,” Tom Gideon, executive vice president, Forest Products, said of the latest announcement, which will affect 307 employees. “Unfortunately, extraordinarily weak market conditions in the homebuilding industry require that we take decisive action.”
The car business and new residential construction business have two essential similarities these days. One is that nobody knows how many new ones of either we need to meet real demand. The other is that double-digit unemployment is virtually a lock if both industries stay in the tank.
Oh Freddie Mac, When Are You Comin Back?
Spring time begets lyricism.
Fraud begets journalists on a mission.
That’s what Bill Gloede is. He’s author of Big Builder Web site’s Wall Street and Maine blog, which is fast becoming a must read for those of the new residential construction persuasion.
What Bill’s got stuck in his craw is what Washington, Wall Street, and Main Street are doubled-over in pain about right now–dealing with black hole financial entities from which there seems to be no escape from insane allocations of good money after bad… Specifically the Government Sponsored Entities.
Bill, who is conservative in his DNA but liberal in his personal need for compassion, has written this about the two GSEs, Fannie Mae and Freddie Mac.
Predictably, there are few voices on Capitol Hill, and none in the White House, speaking to this. What with corporate jets and bonuses and sales junkets in Vegas providing ample opportunity for unctuous moralizing, why would the polticos want to risk offending the worshippers of these sacred cows? Very lucrative sacred cows, I might add. Guess who’s #1 on the list of Senate recipients of Fannie and Freddie campaign contributions as of this past summer? How about Chris Dodd, chairman of the Senate Banking Committee. And #3? I’ll leave a hint: he is President now.
Both Fannie and Freddie were subpoenaed in September by a federal grand jury looking into fraud at both institutions. More recently, one Republican Congressman started asking questions of a loan deal obtained by former Fannie CEO Franklin Raines from good-old Countrywide. Looks like old Franklin might have been one of those “friends of Angelo.” Like Dodd was, though he claims not. (But he did refinance the special-rate loans he got from Countrywide, oddly.)
Way, way back in 2005, I wrote a story for Big Builder about the effort at the time to re-regulate Fannie and Freddie. Builders were against it, for the most part. In retrospect, I realize I should have dug a lot deeper. There were those who warned us of the black holes that Fannie and Freddie were, and remain, but I fell prey to the comforting words of the seers of the time that the mortgages Fannie and Freddie held were high-quality and sound. I should have looked into the mortgages that they did not hold but packaged. Those are the mortgages that are in the CDOs that brought the worldwide banking system down. I apologize and admit my mistake.
So, for my penance, I forced myself to fracture the following and reassemble it to fit the politics of this era as opposed to that of Henry VIII, when the original was composed. You may sing along if you wish; the ditty works well in three part, syncopated harmony.
Two large lice, two large lice,
See how they run, see how they run,
They both gave big to the Congressmen
Who gave them free Raines with the signing pen
Have you ever seen such a con-ta-gion
As two large lice?
Miami Heat for Condo Man
Jorge Perez is the undisputed Miami condo king. What’s arguable is the viability of his realm, the beleaguered Related Group. Florida real estate, by turns, builds up rich empires and then thrashes them down, whether it’s a hurricane, a local economic bust, or a global financial meltdown.
Say this for Perez–he’s unbowed and undaunted as he fights the battle of his life to ward off financial oblivion. He spends time with Miami Herald writer Matthew Haggman to tell the tale of the rise-and hoped-for interrupted fall.
Here’s a short video clip that shows Perez’s determination in the face of $2 billion in debt he needs to renegotiate with lenders.
Video: Courtesy of the Miami Herald
Foreclosure Fluency the USA Today Way
35 U.S. counties are responsible for one out of two–or 1.5 million–foreclosure actions in 2008, per a USA Today analysis of RealtyTrak data. Great Flash infographic maps show the velocity of the foreclosure tsunami as it engulfed Rust Belt cities and bubble-market centers in the Southwest and Calilfornia in the two years from 2006 to 2008.
“This crisis was triggered by foreclosures, and a lot of those were in a very small number of areas,” says William Lucy, a University of Virginia professor who has studied the link between lenders and faltering home loans. Banks spread the risk and “it became like a car with no reverse gear. Once it starts to go over the cliff, it’s gone.”
In other parts of the country, the foreclosure wave was barely a ripple — at least until it started swamping major banks that had invested heavily in mortgages. Banking giant Wachovia Corp., for example, was hammered after California and Florida customers of one mortgage firm it bought began defaulting at high rates. The risks of such lending were spread so broadly among financial institutions that, when the loans went bad, it drove the national credit crisis, says Christopher Mayer, who studies real estate at Columbia Business School.
Banks are at the nexus of the problem because their fully compromised investment in real estate has both a home mortgage and a commercial acquisition, construction and development dimension to the startling erosion of their capital base.
The weakening and ultimate failure of many banks burns housing on the non-for-sale side even though many of the multifamily for-rent companies interacting with lenders have maintained surer footing with their construction and development loans to date.
Multifamily Executive magazine senior editor Christopher Wood maps out two indirect but nasty impacts a pulverized lending and credit environment has on multifamily housing players in his article, “Bank Failures Expected to Continue: Multifamily is likely to suffer more indirect damage as financial stabilization efforts arrive too late to save lenders with high residential mortgage exposure.”
One indirect ramification is that–despite the fact that much of multifamily’s financing need is met from government sponsored entity and Wall Street funding–any curtailment in local bank funding pipelines through as a shrunken pool of capital to draw from. The other consequential effect of bank failures on multifamily is job loss, which whacks every part of every economy.
Here’s an excerpt from Wood’s analysis.
Matthew McManus: Click for access to bio. Note: No relation to Housingcrisis blog author.
“Notwithstanding those five- to 10-unit properties where a lot of local banks might have taken on deals, the vast majority of multifamily over the past 10 years has been financed through the agencies or through Wall Street,” says Matt McManus, chairman of NAI BlueStone Real Estate Capital, a Philadelphia-based commercial real estate investment banking and advisory firm that secures debt, mezzanine, equity, and sponsor equity financing for investors, operators, owners, and developers
“I don’t think that there is enough exposure to banks that the number of banks that are failing are going to really have any impact to the multifamily industry,” McManus continues. “But indirectly, whatever bank goes under, there are a few less dollars that can be loaned out to job-creating vehicles.”
Regional unemployment figures catalyzed by bank failure are certain to hit multifamily operators already struggling with tough property fundamentals. “The broader impact is being felt very clearly in higher vacancy rates and falling rents,” says report author Anderson. “But the other 800-pound gorilla is what happens with commercial [and multifamily] real estate. So far, multifamily delinquencies and defaults have not been that bad, but they have spiked significantly upward. By our calculations, there is $210 million in multifamily mortgages coming due between now and 2011. Quite a bit of that will face some difficulty in getting funded, despite the activity of the GSEs.”
Indeed, McManus reports a wide disparity between Freddie Mac re-financing terms and what is readily available in the market for a Class A stabilized apartment property in Philadelphia. “We can’t find a bank that is within 80 percent of Freddie Mac’s proceeds,” McManus says. “That’s how conservative banks are being today. They underwrite to shorter amortizations, higher debt service ratios, and sometimes artificially high constants to make a 60 percent LTV-type loan versus a 75 percent or 80 percent LTV.”
Picking on GE
It’s the wish of many a senior executive or policymaker that a reporter or news outlet get a little bit of its own medicine.
Voila. It’s 8 minutes of Jon Stewart and The Daily Show taking it to business cable TV powerhouse CNBC, taking off from the Great Santelli’s “I’m mad and I’m not going to take it anymore” moment two weeks ago.
The point? Vitriolic blame can boomerang: i.e. we’re not laughing with you, we’re laughing at you. Hat tip The Big Picture.
Dear All-You-Smarter-People: …
We read Paul Krugman earlier today to get our obligatory blast of humility.
As Washington and Wall Street seem to be transfixed in a double-helix of negating animosity, we can only think of things this way.
What if nationalization–or as Calculated Risk started calling it, pre-privatization–is the right thing to do, like “the windows” is the right thing for a housekeeper to do, but the U.S. government just doesn’t do nationalization/pre-privatization?
What do you do if the housekeeper says, “I don’t do windows?” Do you make her/him do them anyway? If you do that, then maybe you wind up with scratched or broken windows.
Maybe not going the nationalization route is not so much a disagreement with the theory, but an admission that “we’d be really bad at this.” What about the Wall Street Journal opinion piece today by Holman Jenkins: Rethinking the Fan and Fred Takeover.
As a matter of fact, the U.S. government may have a point. It may not do nationalization well, and therefore, it should explore as many alternatives as possible. What’s more, the private sector hasn’t demonstrated a high degree of competence at doing privatization, so maybe while we’re exploring alternatives to nationalization for the banking system; we shoud explore options to privatization for any number of other dimensions of the financial complex.
How about we consider outsourcing both nationalization and privatization? It seems to us there are other countries, i.e. Sweden, that might jump at the opportunity to take on our bank nationalization program, and other nations, China, perhaps, that would do the same for free-enterprise takeovers.
Reset Reminder–Ryness Rolls a One-One
Outsourcing. Remember in-house resources were not enough to keep up with demand?
As the volume home building model re-sizes to battle 2001 or 2002 prices, questionable demand, and no access to operating funds from bank lenders, third party sales support is the last thing most operators need these days.
So, companies such as Ryness–which helped on the overheads, and flanked the internal sales resources with sales reps who looked and acted like one of the gang–are on the bubble of the real estate correction of the latter part of this decade.
Big Builder executive editor Sarah Yaussi has reported on the bankruptcy filing, with some intriguing extra detail into how tenuous Ryness’s capital structure had become during its go-go swansong years.
Click image for more info on Gary Ryness
We’re not surprised they’re going through this because it has been a difficult year,” said Steve Kaller, CEO of Ultimate New Home Sales and Marketing, a Ryness competitor in California. “You have to get people through the fear of buying, and then there are financing issues. Getting financing for anything that’s a jumbo is tough.”
However, other sources familiar with the company point to some untimely acquisitions and business partnerships. In 2004, the company expanded into Arizona, Nevada, and the Pacific Northwest. A year later, the company launched Sullivan Group Real Estate Advisors, a national market research and advisory firm. And then in 2006 came the acquisition of The Marketing Directors.
But of late, many of the partnerships have crumbled. Sources at the Sullivan Group have stated that the two firms parted ways two years ago. And other local sources stated that the parent corporation has turned some regional operations, particularly in California, back over to the original owners. Not to mention growing strains with key financial sources, leading to legal issues in 2008.
However, some of Ryness’ builder clients appear to be unfrazzled by the news of the company’s bankruptcy. One company’s Northern California group that uses Ryness for its sales staffing, indicated that it has been business as usual since the filing. In fact, management indicated that because many of the issues stem from the company’s East Coast acquisition of The Marketing Directors, it expected little fallout in California. Management also added that that it is pleased with its relationship with the Ryness team and looks forward to continuing to do business with them.
Gary Ryness, company founder and president, could not be reached for comment at press time. The industry has widely regarded Ryness as a sales and marketing expert. His leadership in the industry includes, but is not limited to, serving as an advisory board member for the University of Southern California’s Lusk Center for Real Estate, founding trustee of the national Builder Marketing Society, recipient of the Northern California home builder association’s sales and marketing council’s Lifetime Legend Award, and a 2002 inductee into the California Building Industry Hall of Fame.
