If You Would Not Start Your Company Today, Think Again About Trying to Stay Alive
As we finish up our March-April print edition of Big Builder, a world outside of home building concatenates profound, seemingly chain-reactive transformations–shatteringly new political, cultural, and economic forces and directions that sweep housing and its divisible industry parts into a tidal wave of moment.
On a map, North Africa and the Middle East may look like a world apart, but in life they are as intimately part of the here and the now as any feature of quotidian living that comes to us by way of our fossil-fuel economy can be.
As we write, of course we’re not privileged to know what the ultimate reset of leaderships will be for Tunisia, Egypt, Bahrain, Libya, Algeria, Morocco, and any number of other sovereignties shifting in the tides of change. We know only that in our Western way of life and climes, we’ll deeply feel and immediately see what develops, for that is how geopolitical dramas unfold nowadays. We hold speed-of-sound new of revolution in the very palms of our hands.
Like it or not, history has picked this time and this place to occur. We don’t get a lot of choices as to what’s going to happen; all we really get to choose is the attitude with which we experience it.
Volume home builders who trudge determinedly forward into the months that some distant fantastical era–five or six years ago–earned them the label Spring Selling Season can relate. They too have felt the ground beneath them buckle. They too have awoken to the slap of reckoning that their legacy—however noble, powerful, and entrenched—is now in many ways their most lethal enemy.
Four years into and hopefully 12 or so months out of a hell that has literally lopped off 80 percent or so of the livelihood of an industry, we’d be so bold as to say this: If you can’t start with a blank sheet of paper and validate your company today as if you were starting it from scratch, knowing all that you know about current conditions and future headwinds, the likelihood is that your organization will fall into the category of excess capacity in the tough months ahead.
Anyone who’s graced enough to have been active in any number of recovery programs knows this about them: they’re never pretty.
This explains, at least in part, why we’re focusing on Atlanta-based Ashton Woods to run metaphoric interference for all of those organizations in home building—public and private–that are capable and willing to make a go of it for this last stretch of darkest hours before the dawn of a rebound. To succeed, it’s going to take not just cash, not just patience to await an eventual rising tide, but an out-and-out skill at dealing well with what the market offers in little doses. This means “deals with lots of hair on them” that require more than throwing money at the challenges.
This is one of the reasons Ashton Woods could justify its existence starting with that blank sheet of paper in the gloomy days of late 2009, as it created its plan to multiply itself by five within five years.
Ashton Woods CEO Ken Balogh
Central casting for Ashton Woods had to pick its leaders with care, and has done so. With a current run-rate of about 1,200 homes and just over the $300 million mark in revenues, the masterminds at majority owners Toronto-based Great Gulf Group are fond of an Ashton Woods senior management that allows for exactly 17 corporate positions in the company’s Roswell, Ga. headquarters.
That rounds out to about 70 homes and $18 million in revenue per corporate overhead position, so it helps that the CEO has more experience with leadership and responsibility than his 40 years would seem to suggest.
Jerry Patava, CEO of the Great Gulf Group says, “When someone’s handled significant responsibility without having significant years of legacy issues clouding the picture, usually that person proves to be talented beyond his years. That’s what we’re finding with Ken Balogh.”
Notes from the Selling Season Trenches
We know you’re busy these days. We thought we’d break in to let you know a little of what we’re hearing from behind the lines (the headlines) of a time known as spring selling season 2011.
Is there one happening?
We’ve been told that the selling cycle to bring a prospect from start to finish through a new-home purchase has accordioned out from two to three months a few years ago to more than double that now–at six or seven months. Even then, there’s no such thing as a fixed price. So even one sale makes you twice as busy.
“From the get-go a prospect will come at you and ask what you’re willing to take off or add in for incentives,” says a division chief for one of the public home builders in a tough market. “If you say you’re not throwing in such and such, they’ll name you a builder down the street and say, ‘we’ll they’re giving us this for free, so maybe we’ll have to go back over there.’”
To get the anticipated 350,000 units into the new-home sales pipeline in the 11 months starting in February means that builders will need collectively to convert a little more than 1,000 a day from now through Christmas.
The forces against continue to be jobs instability, tight credit, a self-perpetuating real estate value destruction, continued high levels of household debt to deleverage, and wily excess supply poltergeists. Those forces against are entrenched and numbing.
The forces for are recession fatigue, changing household needs, new families starting up, job promotions (yes, they still happen), retirements (some of them early and forced), a birth in the household, a finally saved down payment, or a new job in a different market.
Job metrics and consumer sentiment measures haven’t become sustainably positive to a point where anyone can be certain of any specific direction, especially for home purchases, the biggest buy people make.
If anything, market conditions have hammered people with reasons not to decide that now is the best time ever to buy and new is the best way to buy home ownership. And now, since distressed real estate is so common in so many markets, any home buyer with an ounce of intelligence would have to include short sales and foreclosures as part of his or her house hunt or would be doing a disservice to themselves.
So, it’s not home builder competing with home builder. It’s home builder competing with every brand of residential property out there.
Here’s some intriguing topline themes emerging as we continue to talk with folks about their spring selling efforts.
- Would-be buyer prospects are in a “crisis of lost home equity;” many, particularly in bubble markets have houses that have lost as much as 50% of their value since the downturn started. They’re without equity, and yet some of them have an instinct to move into a new home, get out of their underwater situation, and start over …
- Prospects are fixated on price (perhaps in light of dramatic shifts in their access to and limits on credit) rather than on value. A buyer will be unimpressed with a greater value per square foot in many cases, versus a home in the same submarket that is marked at a lower absolute asking price.
- The foreclosure tsunami is at full force, with no expectation that it will let up given that court dockets are so full of them that they can’t get cleared in less than 12 months in many cases.
- Appraisals are, for the most part, still being comped to distressed sales in spite of guidelines to the contrary.
- Most markets are still specs-driven, and the sale will go to the one with the ready-to-deliver inventory rather than the contract-to-build builders. We’ve heard that in some markets, an increasing number of buyers are shifting away from spec purchases to build-to-order ones to get more of what they want in the home.
- All added up, says the division president of one home builder we were talking with about the selling season, a new day of negotiation.
“It used to be that resale was where buyers came in and made an offer and that started a negotiation, but that’s increasingly the way in new-home buying,” says our division president source.
What huge implications for divisional structures so stripped down that local support and management layers are no where to be found in the infrastructure. What it means is that for each one of the potential sales that now cycles to about six or seven months through the process, the sales staffer (and/or real estate broker) is in direct contact with a division president who’s added practically a full-time job to get buyers through to settlement.
We checked in with John Burns, whose John Burns Real Estate Consulting is running an ongoing telephone survey of home builders on their spring selling narrative. If you want to participate in John’s survey and hear all the local and national results, you can e-mail jkahn@realestateconsulting.com and let them know you’re in.
John gave us some topline observations from his round of calls in the past few days:
We contacted more than 85 builders yesterday and have concluded that the usual post-Super Bowl bounce isn’t much to get excited about. National and regional builders we spoke with reported they were on plan last week, but their sales were nothing to be excited about. While this confirms what most of our home builder clients have been telling us will happen, it is slightly worse than we were expecting and far short of consensus expectations on Wall Street and in D.C.
We also confirmed that the national builders are discounting and running special marketing campaigns to drive the early spring season sales, even in stronger markets like Washington, D.C. They simply can’t afford to miss their volume targets, and will not wait to see if “organic demand” rises week over week.
Market Conditions This Week (from 85 building execs)
Strong week: Ft. Lauderdale, Denver, Washington, D.C., West Palm Beach
Good week: Charleston, Orange County, Orlando, Phoenix
Mediocre week: Atlanta, Austin, Charlotte, Chicago, Dallas, Durham, El Centro, Fort Worth, Fresno, Houston, Lakeland, Las Vegas, Maui, Nashville, Oahu, Philadelphia, Portland, Raleigh, Richmond, Riverside-San Bernardino, Sacramento, Salt Lake City, San Antonio, Stockton, Tampa, Wilmington
Slow week: Bakersfield, Hanford, Jacksonville, Minneapolis-St. Paul, Modesto, Oakland, San Diego, San Jose, San Luis Obispo, Sarasota, St. Louis, Visalia-Porterville
This pretty much matches what we’ve heard from various market sources. Minus federal tax credits, home builders are pumping whatever form of stimulus into the market they can to just get the spigot opened up a bit. They’re nearing a months’ supply flash point that could change the complexion of the market once there’s a national data point of less than six months’ supply.
Still missing in action is what real estate pros euphemistically say is a “sense of urgency.” In fact, we think the emotion that will galvanize sales is fear, and there are at least several balls up in the air right now that could release fear into the nearer term, even if there are several million foreclosure, short sale, and highly motivated sale homes to clear through the market over the next few years.
Fear motivators could be:
- Rising interest rates, perhaps ignited by rising inflationary pressure
- Scarcity in new homes in specific markets and submarkets
- The prospect of more expensive, more restrictive home finance, pending gradual and eventual reforms to the GSEs
- Missing the low point of the market on a monthly cost-to-own basis
Meanwhile, while it has been noted that house price declines have vaporized zillions in household asset wealth, the stock market gains of the past two years have restored many people’s financial assets back practically to where they were before the trouble started. This, some sellers of active-adult and move-up product have noted, can be a tailwind in itself, especially for older people who had been in homes so long that all they’ve lost is paper profit on them rather than hard cash equity.
The point in the early going is this. All is negotiable. What’s more, we’re hearing, it’s brutal out there on the Realtor front. If you tell them what you’re paying and it’s not up to snuff in their minds with the commission levels other home builders are offering, “they’ll drive right by your community without a second thought,” says one of our builder insiders.
Negotiability is right down to the homeowners association fees. Some buyers want to pull costs for items such as lawn maintenance and cable out of the association fees because they’d rather cut the grass themselves and get a dish than to face a monthly cost they think is too high. At the same time, “people are spending gobs of money on options because they want to get them into the mortgage” rather than to have to try to borrow later on to pay for improvements to the base house.
We’ll continue to update you on the themes of spring selling season 2011 as we talk with more builders in the weeks ahead. Meanwhile, the comments box is available below, and we hope you’ll add your observations on the market from your point of view.
“What We’re Seeing” on Spring Selling–Embrace the Reset
Traffic is up. Quality traffic is up. Despite bad weather in some parts of the country, traffic is better than it was at this time last year.
Sales are coming, but each one comes with work across all fronts: price, qualifying the buyer, meeting or beating the competition, and, ultimately, educating the buyer on the value.
The folks we spoke with about the first weekend of spring selling were hesitant to say they’re more than “carefully optimistic.”
Clearly, home buyers have begun self-identifying as that now, and they’ve got the message abundantly clear that there hasn’t been a moment better than this one to buy a home in a generation. As interest rates nudge up, there’s a double edged sword of motivation and disincentive. Rising mortgage interest rates certainly sparks a few people to move off the sidelines, but for those contingency buyers who may have locked in a below-5% rate, it’s getting dicey–they think they may have missed their window on a move into “new.”
Here are some of the themes that come across as a number of home builders book sales in what may or may not add up to this spring’s modest turn toward a recovery cycle.
- sales are extremely price-sensitive … says one of our sources, “the deal gets the sale, and this is partly due to the Realtor traffic that’s coming in. People are coming in with crazy low offers, and we’re doing a lot of ‘teaching value’ negotiating to try to make something work. We ask these folks, ‘are you thinking about this purchase as if you were buying stock, or are you thinking about it as a place your family’s going to be living for a while.’ In about three out of four cases, we can find a price we can live with, but that fourth case, we lose.”
- In spite of indications that move-up and even active adult may play an outsized role in this recovery, one builder says, “we’re still seeing most of the action in the price-sensitive low end.”
- To that point, one of our home builder sources says that some of the “bargain land purchases” they’ve been able to make buy paying cash at the banks lately translate into a “competitive edge” on resale in some of the more conservative, middle America markets. Real estate plays–paying cash for land great land positions at a highly favorable price point–will be many a private home builders’ ladder out of the muck of absurdly tight terms on their own acquistion, development, and construction loans and home buyers, as well as hesitant lending to consumers for mortgages.
- A subtle shift is occuring as builders’ concentration of sales begins to shift from spec to contract-to-build. Many of last years’ buyers preferred a ready-to-deliver spec house to one that had to be ordered to build. This year–perhaps because buyers believe that prices and values are stabilizing–even the home builders that specialize in pumping out specs are finding that people are opting for more of the home they want.
- Home builders need “appraisal strategies,” as homes more often than not won’t appraise for more than the base price for a given square footage. For buyers who are going to go for upgrades, builders need to work with them on putting more skin in the game on their down payment to pay for the options, and need, for the most part, to avoid FHA and VA-backed loans in order to keep LTVs in banks’ comfort zones.
None of the builders we talked with would go so far as to say the 2011 Spring Selling Season will even match up to the home buyer tax credit-fueled paces of 2010. But they’re encouraged.
If home builders could wipe the slate clean and start their company in today’s market with capital and a business model, what price points would direct costs, land-base, and SG&A come in at? And what value would that provide a home buyer who’s loathe to compare her purchase to the nightmare that was the middle part of the last decade?
That would be the right mentality, although realities are different than that, since home builders have to commit on the raw material land often before they know where demand is. One of the factors that gives builders who are on a solid footing confidence is that new-home supply is “dwindling.”
One more short year on the supply side may be what it takes to clinch “new’s” ultimate role in this recovery.
For New-Home Builders, Tomorrow’s Super Friday, and Sunday’s the Kickoff to Spring
Last year, as Super Bowl Sunday approached in the days ahead, two thoughts prevailed among home builders (especially those who were neither Colts nor Saints fans).
One was, “Have i built enough?”
The other was, “Have I built too much?
The extended and expanded, Sen. Johnny Isakson-authored, home buyer tax credit was set up to offer a cushion of psychological support for the month of December 2009, and then kick into gear in January.
Those who championed it banked on a theory that it would not just stimulate sales, but that it would, as had been the case in a prior recession, actually catalyze a daisy chain of economic reaction responses that would eventually ignite a broad-based rebound.
Now, we know. When a huge percentage of residential properties sold in a few-year period returns to the marketplace as a tsunami of distress, the theory of home buyer tax credits kickstarting economic traction goes soundly out of policymakers bag of tricks … at least until Congressional amnesia does its thing.
At any rate, what the home buyer tax credit didn’t do for the broader economy, quantitative easing 2.0 is doing. Nevermind that housing, and new-home building needed to take a step or two backwards before it could regain its own footing.
So, the two prevailing thoughts of last year–”have I built enough?” and “have I built too much?”–this year have blended into one thought. “Have I built what I can sell?” or “Can I sell and build enough to make money?”
Oversimplistic as this may sound, we believe this characterizes home builder sentiment every bit as helpfully as a number drifting in the mid-to-low teens month after month.
We know this. Any builder who can put their hands on the capital plans to do more building in 2011. Among the dozens we’ve met with and talked with, community counts will increase on an average of from 5% to 20% on a net operating basis in the next 11 months or so.
With absorption rates of just under 2 homes per month per community, you can do the math however you want, but you’re going to come up with an increase in the number of neighborhoods actively selling homes.
Last year, the three stars that stood in alignment that played a mind-game with home builders strategies were 1) home pricing was favorable, 2) interest rates were favorable, and 3) a federal tax credit was going to yank people out of their torpor and get them into the transactional marketplace.
This year, there are three stars aligned again, but one of them is different. Prices and interest rates are still favorable. In place of the tax credit, however, jobs numbers are beginning to stabilize.
Now, providing that seemingly endless stream of global or environmental “Black Swan” events doesn’t wreak havoc with this “little recovery that may be able” to sustain itself, jobs and income stability are going to lead into an inflection point. At this tipping point, whenever it occurs, we’ll see the household formation that has not been occurring for two years start to occur in earnest.
Then, scarcity, especially in new homes will become a factor. Maybe that won’t be this year, but we don’t believe that tipping point is factored into any of the technically designed housing economic models that draw on fundamental drivers of supply and demand.
Supply will continue to be a mess for a couple of years, and why not. If for four or so years straight 20% to 25% of home purchases new and used were by either speculators or people who were financially incapable of reasonably following through on their mortgage commitment, then there’s a lot to clear.
Too, though, the U.S. has been adding roughly 2.5 million living souls a year to its population for the past few years, many of whom haven’t made their way into their own households at all.
There’s got to be demand. Much of the absolute demand pent-up out there will be fore rental housing. But once jobs and income start to stabilize; once that fear of getting laid off starts to come off the table, people will want to start buying again.
This image is Calculated Risk’s illustration of a weekly indicator from the Department of Labor that tracks initial claims for unemployment insurance. When the fever line tracks downward, it’s good, because it means fewer people have lost their jobs and are looking for unemployment benefits. The running average has been gaining positive traction, as have private payroll job creation data points over the past few months.
Tomorrow’s monthly employment report from the Bureau of Labor Statistics will likely move the equities market one way or another. Still, positive is welcome, but it’s not the juggernaut needed to bring down unemployment rates fast. Almost one in 10 potential workers being out of a job is still a heavy weight on the economy. But a slow turn to the plus-side is necessary before anything can improve. The question of the moment for home builders is, will mere stabilization on the jobs front cause qualified buyers to move off the sidelines and buy, even as pricing softness prevails due to distress? Jobs and income confidence on the one side and low prices and interest rates on the other could be the market’s elusive balanced equation.
Check out the new neighborhood models come Saturday, Lincoln’s birthday.
Home Builders’ Plan to Narrow the Gap Between New and Used Homes
In Orlando the week before last, we confess that we didn’t spend a whole hell of a lot of time on the exhibit hall floor. The reason is that we wanted to spend time with home builders, and, by and large, a lot of them weren’t spending time on the floor either.
It seemed to us that what a lot of the builders wanted to do was to spend time with other builders, finding out how it’s going in regions other than the ones they operate in, etc. A remark uttered in one of those informal compare-notes sessions from one of the builder executives there is haunting still.
He referred to the fact that banks were still not opening the spigot of lending to private home builders for new construction, and that Federal policy wanted it that way.
“They’ve got seven or eight million foreclosures to clear out somehow; as for us [little private home building companies], they’d like a lot of us just to go away.”
Quite a few conversations, as a matter of fact, centered on the question of whether we thought that more home builders would head into obsolescence in 2011, or having made it this far through the troubles, would see the light of day at the other side.
It’s hard to say, and we have to admit that while we’re relatively sure this Spring is not going to ignite a rebound, we’re far from sure what the “selling season” that gets formally underway in about three weekends will hold.
As for home builder casualties, we believe there will be some this year, but that they’re probably going to be more a function of the ownership or management’s age demographics and less a byproduct of an inability to find some means to stay solvent.
The sad but true statement from the home builder above reflects a common sentiment. Multiplier-effect or no on jobs, consumer spending, local tax revenue, government policy support for new construction has more than worn out its welcome. And now, if housing is going to shift from being a link in the middle of the economic train to being the engine, it’s going to have to do it on its own two feet.
So, we have what the superb housing and economics online gadfly Bill McBride refers to in his Calculated Risk Web analysis as “The Distressing Gap.” Simply, it’s the ratio of the number of existing homes sold for each new home sold.
For about the past 15 years, SAI Consulting’s Fletcher Groves points out that the “Distressing Gap” has averaged one new home sold for every six resales. In 2010, Groves notes that that ratio has morphed into a multi-headed monster– 1:16. This means 16 resales for every new home sold. The fact that many of the resales are distressed sales — either short sales, duress sales, or sales in some stage of foreclosure — is the reason for Calculated Risk’s name for the infographic, “the Distressing Gap.”
Here’s the picture of it now:
with premission from Calculated Risk
Economically, this information means one thing, which is that, under present circumstances anyway, there is an overcapacity of home building in the nation. This is the context for our friend in Orlando’s sentiment that “they’d like a lot of us just to go away.”
However, within the framework of the industry sector, the Distressing Gap is part of what benchmarks opportunity for some home builders, most likely at the expense of others.
Why is it that when you talk with the strategic management of a home building company–whether they’re small or large, private or public–they always say they want to have access to capital like a large public company but they want to work and care for customers in their markets entrepreneurially like a solid private company? In other words, if you’re a public, you find yourself emulating NVR, and if you’re a private, these days, you kind of want to take after Shea.
Neither of these two companies perfectly captures the public capital access with private entrepreneurial culture, but they’re probably as good as home building can offer.
Now, as for the Distressing Gap, the fact that it’s taking 16 resales to get sold for every new home relates to one of the anomalies of this downturn versus others. We wrote in Builder Pulse this morning:
In downturns past, foreclosures never amounted to much in the plot line of recovery. New-home builders could roll back their pricing to beat resales sellers, and that would reignite an economic daisy chain of positive effects. With estimates of as many as 8 million foreclosures to clear from this point, the government, lenders, investors,etc. don’t want to hear from added new-home capacity. Still, consumers vote with their feet, and they’ve wanted new when they can get it. The “normal” ratio of new-homes sold to resales is about 1:6. By the end of 2010, the ratio spread to 1:16. We’d peg survival for the top 200 home building companies in 2011 as reliant on getting that ratio back down to a 1:10 run-rate by the end of the year. Or else there’s just too damned much capacity.
The operational opportunity we’re talking about has to do with the stars-aligning moment that brings new, low price, low interest, lower monthly energy cost into a fleeting, don’t-miss-it instant.
Fear of losing this window of time when all of these advantages converge may be the spark of urgency buyers need.
Now, the buyers who’ll put the new-home community on their back for the next several months may not be the ones production home builders have customarily depended on, especially in the past decade.
Builders’ got competent at ushering the borderline credit-worthy aspiring home buyers across the crevice of spotty credit histories and insufficient resources.
There’ll always be buyers like that, although getting prospects from a 540 to a 640 FICO is going to elongate a lot of timelines for closings. The early-recovery buyers that home builders need to do a better job at courting are ones who have better credit, more cash, and traditionally have looked for already established communities for their families in locations with proven track records of providing what they’re after.
Some fair amount of that Distressing Gap is people finding the resale house of their dreams for a foreclosure song. Some of it is investor buyers buying up homes in bulk for another flip as the market gains a little bit of traction.
At any rate, builders need to close the gap. They won’t do that by competing on a national scale, but within submarket arenas that have eclats of opportunity to buy right and sell fast.
What we came out of Orlando with was the sense that there are builders who feel confident that although the new-home environment will be characterized by distress, there will be a one-two punch opportunity to get just the right real estate deal and offer just the right product to push the ball up the field. This is how they plan to narrow the gap.
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.
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.
From Big Builder to Big Builders–Happy Thanksgiving!
We’re here, we’re grateful to be here, and we can’t help but wonder, with all of those Thanksgiving recipes around, does anyone have one for a perfect herb-roasted lame duck?
Oddly, what 75 million Nov. 2 midterm election voters appeared not to clamor for as they teamed in and out of the election polls a few weeks ago is clarity.
We say oddly, because we believe one would have thought that as events and perpetrations wove themselves into a knot of epic uncertainty and doubt, a kind of collective coping mechanism would have kicked in and opted for simplicity, conviction, and straightforward intention.
Instead, by swapping a bunch of new lawmakers into Capitol Hill’s daytime reality show for those who were the incumbents, voters seem to have bet that the inertial force of ambivalence would be better for the nation than a clear direction and an assertive action toward one objective or its counterpart.
It’s as if the admonishment to our now imperfectly roasted lame-duck Congress is, “Don’t just sit there, do nothing!”
We’re sure that Americans will feel much better about their elected officialdom after two more years of contentious, truth-averse, paralysis.
Still, we’re grateful. We may not have voted in clarity, but we vote with our feet every minute of everyday, and it seems that while Capitol Hill denizens may lock themselves in multi-layers of stalemates, society is ready to move on.
We’re grateful that the laws of people, needs, and values don’t necessarily obey either economic theory nor political expedience. We see local economies improve as people work to strengthen the fiber of their communities. When they do that, things happen, workers get hired, household income goes up, and there’s demand for homes.
We’re especially grateful at the abundant evidence of three very powerful forces in home building that have, if anything, intensified as adverse times stretched across the months: resilience, discipline, and ideas.
Now, we’ve heard of home building–in Ara Hovnanian’s apt borrowing of an old axiom–as 200 years of tradition unimpeded by progress.
Clearly, though, what the past four years have led us to, as industry observers, is awareness that progress has now impeded. The tradition no longer works if the tradition is either too expensive, too generic, or too energy-wasting from a cost of operation standpoint.
What you new-home builders have begun bringing in force to the table is the sense that you are part of the answer to the necessary transformation of the American Dream to an affordable, sustainable community that brings incomes, ages, occupations, interests, education, and health into a proximate balance, built on financial structures we may or may not even know about right now.
We know that this transformation is not an overnight process. While flash crashes and financial implosions can occur in hours, spreading harm and pain internationally, most of the healing and restoration needs to take time, time to emerge, and time to take hold.
Expectations management will be one of the vaunted skill sets of the next couple of years, and we’ll see it in all its colors, both in business and policy.
But we’re most grateful today because of the character we get to see at work in the home building business community. There’s no quit, there’s no quarter spared, and, to the best of our knowledge, there’s no recipe for the perfect roasted lame-duck.
From us to you, Happy Thanksgiving! We’ll talk to you next week.