We Don’t Care About Washington. Repeat. We Don’t Care About Washington
Two significant reports on factory and manufacturing demand have come out this week, one from New York and one from Philadelphia. They’re closely watched as previews to a national barometer of demand–the Institute of Supply Management report on manufacturing, which comes to light next month.
Thing is, the New York report tanked and the Philadelphia report soared off the charts. Emphatically different directions, which you’d hardly imagine especially given the geographical proximity of the regions.
Since the Philadelphia release is more recent, the market seems to be buying its indication about the direction of the economy rather than looking back to the NY Fed’s gloomier-and-doomier prognostication.
Why do we care? Well, we’re looking–like you are–to where fundamental indicators may be leading to try to understand where we are right now, and what we should prepare for.
It makes us remember vividly Yale economist Dr. Robert Shiller’s remark to home building executives at Hanley Wood’s Builder 100 event in Chicago, in May 2009. “If anyone says he knows where the economy is going to go right now,” said Shiller, “he’s lying.”
It’s still true.
Today, the stock market is up dramatically after session upon session of capitulation, and the reason for the exuberance today is either the bailout in Ireland, or the robust response to the GM IPO, or deferred support for QE2, depending on which media platform you choose to look at.
Is the stock market responding or reacting? Are we heading toward inflation, or deflation, or stagflation? Is it a flight to safety or a toe-dip into higher-return investment land? Will global growth pull domestic activity out of the doldrums? Are consumers waking up from a two year torpor of financial restraint?
Depending on how good a debator you are, you could argue either side of all these questions–and many are doing just that–and win.
We care about these economics releases for good reason. Demand for factory output may pre-indicate jobs, which may pre-indicate income, which may pre-indicate household formation, and may pre-indicate absorption of new homes in any given market. That would be a virtuous cycle, no?
But other than to vote politicos in or out of office who may have the industry’s interests at heart, and who may work to relieve the industry of onerous regulations or taxation and finally make some sense of the nation’s housing finance policy, that sphere of activity is out of most home builders’ control.
What’s in a home building enterprise’s control still ranks as the most important set of skills to be both thankful for in this season of thanks and intent on improvement.
We’ve seen the latest financial reports from the publics and we’ve talked with a number of the mind-bogglingly resilient private company executives.
The teeth-clenching drama of the past several months–within the broader context of fits and starts economic traction–is that orders fell off, backlog is down and that puts operational capacity a risk of being excessive, money-losing, and a drag on the enterprise.
In a below-500,000 new-home sales environment, agility alone won’t count for enough for another go-round through the capital reserves.
Thrashing for market share; trench gains against distressed sales; a pristine, manicured model home and streetscape; shell games with lots; getting a buyer over the 640 hurdle; any precision tactic that can get you just enough of an edge in a submarket will be how 2011 will work for some home builders and won’t work for others.
One of the mid-Atlantic region’s leading home building executives, Dan Ryan, puts it to us this way.
“John, they can have all the meetings they want in D.C. to tell us what’s going to happen with housing, and I think they’re very smart, and know what they’re talking about. But, damn it, I don’t care about Washington, and I’m not going to go to those meetings. I care about Martinsburg, for God’s sake. I have to know what’s going on in Martinsburg, West Virginia, if I’m going to be around next year. I have to know who’s moving, what people are doing and thinking, what’s happening with the jobs there, who’s building what, and what else is for sale. That’s my world.”
So let the economics and manufacturing and currency and IPO market reports flow as they may, home building on home building’s terms will be a Darwinian story, and the ones who are adapting fastest to reality probably have that mantra in mind: We don’t Care About Washington.
If Hope Can’t be a Home Builder’s Strategy, What Can?
With GDP hanging around between 2% and 3% for the next couple of years, unemployment stubbornly notched between 8% and 9% for foreseeable future, and one in five extant home mortgages in early or advanced peril, it’s not hard to grasp what D.R. Horton CEO Don Tomnitz means when he says, “I don’t see a lot of hope for the Spring [2011] market.”
Thing is, if you’re Horton’s Tomnitz–and, face it, there’s only one of those–it’s practically the only thing to say a year after the only thing going for your home building sales velocity was a re-upped and juiced up home buyer tax credit, and that’s one for the history books.
Saying, “hey, our sole tail wind for spurring sales in a significant way is bye-bye, and now we’re left with an absolutely hostile lending environment for our kind of home buyer, an economy stuck in park, and a hemmorhage of supply spurting into the market,” is probably about the only way to put it.
The only thing between now and Tomnitz’s being absolutely correct that 2011 will make 2010 look slightly better than one would imagine is possible is psychology.
Whether or not the recent positive retail numbers signal buoyancy among consumers, and that that spending will continue through the holidays is questionable. Most analysts would say that consumer spending behavior could go either way.
Home buying “Animal Spirits” are, of course, a horse of a different color. Tomnitz can’t predict exactly how “fundamentals,” “technicals,” and “psychology” will weave themselves into the narrative for 2011 any better than he could predict with certainty that D.R. Horton would double in sales unit volume between 2005 and 2010.
[It shrank by about half during that time period, which could be said to be an enormous accomplishment given the circumstances.]
So, clearly, for 2011, the smart thing to say is, it’s going to be harder, slightly slower, etc.
And the smart thing to do?
You see, now it’s time to ice budgets and sign off on business plans for 2011. We don’t imagine there are too many executive leadership teams tolerating a sandbag strategy from unit chiefs. In other words, operations have a lot at stake, and giving up volume compared with 2010 is not going to make for a persuasive story among stakeholders who are invested in home builders.
So home builders will need to continue to fight the laws of submarket gravity and take share not only from one another but conduct guerilla warfare against sudden foreclosure syndrome on their respective turfs.
Private builders, if they’re blessed with another 12 months of fight in them, need to take a chance right now with some hard dollars placed on just enough lots to get them through another 12 or 14 months. They can’t sit out, and they can’t get their cash commitment wrong.
That’s why intelligence–any little extra help a builder can get to match up the budget, the product, the competitive arena, the home buyer target, and the program–is not an option.
Right now, two streams of money ache to make their way into land purchases. They’re symbiotic insofar as each depends on end-user transactions–home sales–to make senses. Strategic lot buyers are looking to wring a few more cents off the dollar to get what they need to start communities with products and prices that mesh with their new retooled portfolios; and financial players in the “buy and hold” mode are leveraging desperation for tomorrow’s profits.
This is why it’s more important than ever to put intelligence tools into action, whether the program is a tactical survival plan to build through 2011, or its a strategic master play that puts 2011 into the context of a five year cycle that will ultimately favor builders.
Hanley Wood Market Intelligence has recently introduced a its Housing Intelligence Pro, which can help home builders match up opportunity with resources in most U.S. markets.
Also, in a couple of weeks, Land Advisors Organization will be hosting a conference aimed at deciphering what’s next for one of America’s most enigmatic markets, Phoenix. For the second year running, will convene the Metro Phoenix Land and Housing Forecast conference Dec. 1, a one-day symposium featuring Tim Sullivan, principal at John Burns Real Estate Consulting; Jim Belfiore, president of Belfiore Real Estate Consulting; and Mike Orr, a principal of the Cromford Report. The venue is the Sheraton Downtown Phoenix. All net proceeds will benefit Friends of ASU Real Estate Programs.
Don Tomnitz is not holding out a lot of hope for 2011, but home builders and developers learned in bygone cycles that hope is not a strategy. Being smarter is. See you at the Sheraton Downtown Phoenix on December 1.
Lesser Expectations, More Expectations Management for Home Builders
As the data added up a year ago this time, it called for a different narrative, drew upon a different set of adversity management skills, and created a vastly different predicament for home builders.
Remember a year ago, home builders both private and public were feverishly trying to calculate how much spec to put out there in the first half of 2010? In October and the first couple of weeks of November 2009, if you asked a community sales manager how many specs he or she could sell a month, the response often enough at that time would have been, “how many can you give me?”
Everyone knew that momentum would end. Everyone knew that after the tax credit for home buyers–extended and expanded one year ago this week–things would slow down.
But as a home building executive we talk to from time to time told us, the anticipated slow down was for the summer months following the April 30th sunset of the credit. Not too many builders would have done a business plan to account for the depth of the fall-off in sales from a year ago–25% to 35% in many markets–and not too many of them would have signed off on a budget to assume that fall-off would extend through September and October, well into November.
So, private builders, practically locked out of the ability to obtain project financing, scrambled to cobble together capital to go vertical, while publics accessed their treasure troves of resources to ramp up their spec building production to accommodate the great pull-forward that they anticipated would occur in the Spring of 2010.
Psychologically, moods rose as earth movers got busy in the dirt and houses started going up in the neighborhoods again. It was kind of like getting back up on a bicycle, as operations snapped into action with shrunken square footage, streamlined materials and product sourcing, reduced building cycle times, and strict trade timelines.
Every unit had to pencil to contribute what it needed to in “new normal” financial management disciplines, and all was beginning to be well as organizations discovered their leaner inner selves.
Now, the adversity management challenge has changed.
What it going to happen next includes this inevitability. Since lower house prices, low, low interest rates, and low new-home supply levels thus far have not succeeded in drumming demand out of the land, and can’t turn off the gusher of distressed supply on the existing homes side, it means simply that there’s still too much home building capacity.
Even when money was funny, and anybody who could fog a mirror could get a loan, scarcity played a part in the climb to the mid-2000s peak. People camped out at grand openings spoke of scarcity. People counteroffering 15% above asking prices spoke of scarcity.
Scarcity is gone. Exactly nobody is afraid they’re going to miss the opportunity of a lifetime to buy a home–at least nobody who can qualify for a loan these days.
No scarcity, no visibility.
That makes it hard to budget for 2011. One senior level executive from a large regional private home builder said to us, “it’s just very hard to model what we’re going to do next year.”
Post tax credit for home buyers, a political, social, business, and cultural reckoning flash point has surfaced as the government tourniquet is removed from the nation’s financial system.
After all the work households and businesses have done to clean up their balance sheets and begin to deleverage, people are looking up and seeing that towns, counties, states, and the country are the last ones to have to bring their outlays and revenues into a saner balance.
So, supports for housing, the ones that stand for outlays that give home buying or home owning a tax advantage are going to be at risk. Assumptions that have been the bedrock of government finance–who pays for what services and how–are under a politicized microscope.
For the moment, many people who would have qualified to obtain a home loan a year ago under their current financial circumstances now no longer qualify.
A home building executive said to us that almost every one of the company’s cancellations these days are the result of buyers not being able to obtain financing.
In one such instance, a builder lost deal because the prospective buyer lost his 640 FICO score in the final month before settlement because of missing a less-than $20 monthly credit card payment.
It seems that scarcity will only rear its head again when Animal Spirits take a positive turn–when people realize they’ve weathered yet another wave of layoffs and start to see and hear that companies are hiring again.
Practically the only good news is that any surprise in 2011 would probably be to the positive, as opposed to the deflating, dismaying, shocks to the system that the past couple of years have provided.
Right now, leaders face a 2011 that has adversity management written all over it, yet again. The thing to learn and remember from 2010 is not to exhale too soon. In adversity, the temptation is strong is to allow expectations that have been battered down for so long to start to elevate.
Don’t let expectations begin to get grander until you’re looking back at a multi-seasonal cycle and seeing the campers at your grand openings. Then maybe you can exhale.
Where there is Smoke
Jonathan Smoke looks far too young to be the father of two kids. He looks like a kid, even in a business suit, way too young to have been in the home building business for 16 years. But he says he has, and you have to take him at his word for it.
Jonathan Smoke, Senior VP at Hanley Wood Market Intelligence
But then, when you hear him talk about home building and home builders, and home building markets, and home buyers, it’s a whole other story. When Jonathan talks about the home building business, he goes into this Jesse Eisenberg-as-Mark Zuckerberg trance mode, and out of his mouth come data points, variants, observations about mythical assumptions, facts, conclusions, ramifications, and high-beam brilliant insights. All in about a minute, starting from scratch. It’s beyond his years kind of insight, and it’s always well worth listening to.
Jonathan is of a rare breed in home building. He loves operators, deal junkies, land sharks, project managers, specifiers, superintendents, and putting on his boots. But his brain is also fluent in the algorithms and code that meld land, nails, tradesmen, cycle time, and spec to bottom line balance sheet performance. He’s tamed his mind to co-exist with dumber types, such as us. But sometimes, he can’t help flashes of thought and intelligence that leave us smoldering with envy.
Jonathan is also a pleasure to work with. He’s give-a-busy-person-more-to-do incarnate. He’s the head of product development and innovation at Hanley Wood Market Intelligence, and among other things, we have the pleasure of working with him annually on an insight piece for our Big Builder Virtual 2010 event.
Starting Monday, you can hear Jonathan Smoke at his “Jesse Eisenberg-est” best, minus, of course, the snitty condescension that so-well conjured Facebook’s founder. All you have to do is register–for free–for the seminars we’ve created as part of our Virtual Event. There’s a green button on that landing page that says “Register.” You press it. It won’t ask you for your status or what you like, but it will offer you the chance to hear people like Jonathan talk about what they know is going on in the home building market right now, and what to look forward to in the year ahead.
Interesting that today, NVR releases Q3 earnings that show a $44 million profit, despite a drop year-on-year of 17% in revenue for the period. Would somebody please tell those folks in Reston they’re supposed to be sucking wind like the rest of the home building business?
Jonathan Smoke, in his presentation entitled Home Builder Concentration: Tomorrow’s Landscape, has an entirely contrarian theory that helps illuminate why NVR is so successful right now, when other public home builders are struggling to keep out of red ink territory.
Over-simplistically, Jonathan believes the fundamental drivers are at work right now to make the next couple of years a tipping point for home builder concentration among the largest players.
Here’s what he notes about the implications of the biggest builders finally reaching the level of dominance in the new-home market that they’ve long been expected to by some analysts.
But it would be a grave injustice not to listen to Jonathan do his Jesse Eisenberg impersonating Mark Zuckerberg impersonation.
To hear him do that, all you have to do is to click here, and then click on that green button in the upper right hand corner of the screen that says REGISTER.
Opportunity Waits
A housing market expert speaker on a panel we hosted recently put it this way: “We’re in the throes of a recovery.”
A former boss, whose sadistic glee seemed to soar off the charts the more stressed his staff was, would say, “you’re in the throes of an opportunity.”
Steve Preston, who served for a cup of coffee as HUD secretary under George W. Bush, said yesterday during a roundtable of housing VIPs at the Urban Land Institute conference in Washington that what government policy on housing has done to the market is create uncertainty, and that what government housing policy needs to do is to remove that uncertainty.
I don’t think so, for two reasons.
If there’s anything we learn from the last two decades is that government housing policy is not that at all. It’s as some architects we know in home building would say, a “lick and stick” hodgepodge of ideas, pet projects, accommodations, and reactions to consequences, intended and unintended.
The other thing, we’ve learned that we haven’t set up government to be so good at what many of us ask them to be good at in this day and age. Of course, government’s competence matters little to some few, and it would appear to be the envy of many to be among those few.
What we’re beginning to understand, in a general way, is that, contrary to what Preston and many others would have us believe right now, government is not the source of the uncertainty that pervades our national mentality right now.
Uncertainty, after all, is a tactic, not just a condition.
Businesses use uncertainty to gain competitive advantage. The uncertainty of an injured athlete’s appearance in the next game increases the difficulty opponents have in preparing for the game. The secret sauce a company puts into its plan, or its product, or its process, or its platform makes it a more potent opponent.
However, Preston argues that uncertainty over government’s intentions and executions hinders private sector engagement in the markets, which stifles healthy business and commerce.
But many times, the reason there’s this pervasive sense of uncertainty about what government will do next is that businesses’ motivation is not to care about anything except making money for stakeholders–senior executives being some of the key stakeholders. So, part of why no one can predict what government’s going to do next is that no one can predict what businesses are going to do next that crosses the lines of propriety, legality, fairness, etc.
Free market folks want nothing more than for homes that we’re “bought” by people who should never have bought them to flow back through the markets, exert whatever effect that has on house pricing, and restore equilibrium to housing.
Now, we–i.e. Main Street–need the offending banks to pay an appropriate price for the damage they’ve created and do it fast. We have the same sense of foreboding about all that we had about the prospect of BP digging a relief well really fast, but safely, and with precision to arrive within nanometers of its appointed destination.
That’s what we, as a nation, need for supply and demand to make any sense when it comes to used, new, for-sale, for-rent, etc. So, we’re left holding the bag on that, as housing corrects or doesn’t correct taking its own sweet time.
The greatest unfunded strategic imperative of all time–that all American’s should have a safe and decent place to live–informs most of what we call housing policy today.
Still, big financial players, the big mortgage servicers, put their promise to stakeholders of more money before everything else. Whether it was corporate venality or idiocy is almost irrelevant. Are those who at first were TBTF now TBTFW (your imagination can serve to fill in the words)?
If uncertainty is the problem, then in this case, it was the private sector, not government that introduced it in a big way. As we mention above, we haven’t set up a government that’s been competent at dealing with this sort of thing, so Main Street takes the hit again.
In all of this, the throes of the opportunity that we appear to be in is this. Whoever figures out first how to be trusted is going to have quite a leg up on what passes for power and influence these days.
The “missing sense of urgency” is the talk of many of the home builders and developers we spoke with around and about the ULI in Washington the past couple of days.
Importantly, if where the United States is headed homeownership-wise, is back toward 65% and beyond, the new-home market can still be a strong business over the next decade as soon as jobs, household formations, and ultimately, trust return to form in the economy.
We don’t agree with Steve Preston. It’s not the government’s role to remove uncertainty. It’s the government’s role, perhaps like the rest of us, to do less with less, but to be really good at that.
But whoever in home building actually becomes and/or sustains being trusted will have a competitive advantage, and should be able to secure the sense of urgency that’s been missing as consumers remain uncertain of both big business and the government.
NAHB’s David Crowe: Housing is the Cafe Car of the Economy
We had the opportunity to ask Dr. David Crowe, chief economist for the National Association of Home Builders, a question yesterday during a conversation we had with a few housing economists and research analysts in Las Vegas.
After all, we asked him, is housing the engine of the economy or the caboose?
We asked him that mostly because of the Steven Gjerstad and Vernon Smith paper that came to our attention about a month ago, which more or less says that just three out of the 14 recessions dating from the time of The Great Depression have occurred without housing’s leading the way in and the way out, i.e. the engine.
Our own Hanley Wood Market Intelligence’s brain trust asserts that The Great Recession of 2007 to 2009 has turned the train of recovery around on itself, stating, ”If employment is the locomotive, housing has become the caboose; the days of home building being a primary economic driver are behind us, and for housing to recover, job growth must lead the way.”
Still, you don’t get to be chief economist of anything, let alone the home builders association, without having some clever tricks up your sleeve when somebody asks you an unfairly unsophisticated question.
Without missing a beat, Dave Crowe responded that housing is probably neither end of the train right now, given that its bit of stimulus induced oomph in 2009 and early 2010 failed to do the job of pumping life into the broader economy. Nor, however, would he say that jobs, employment, and GDP growth could entirely get back on track without housing playing a pretty significant role in the rebound.
With a classic economist’s hedge, his reply was this: “it’s probably the cafe car, not in the front and not in the back.”
What a good answer to this trick question.
Dave’s point is that at this given moment, the orbit of every business assumption and wager is around jobs, specifically, the cadenced monthly Bureau of Labor Statistics employment report that comes to us tomorrow morning. In that one neat package come the inputs for countless models of fundamentals, technicals, cyclical, structural, quantitative, psychological, etc., etc. all the ways of predicting what will happen next, based on where the latest figures park themselves into the trends.
Fact is, nobody still knows whether housing will wind up being more like the 11 of 14 recessionary economic cycles that Gjerstad and Smith looked at, or more like the three exceptions, or an anomalous exception to both patterns.
It’s all a guess, but after all this duress, unless you start to see something positive take hold on the jobs front, it’s going to be impossible modeling much of anything at all.
When you cut through all of the ideology based noise, what appears to going on is that the economic pendulum is shifting – at least from a lay person’s stand point. In late 2008, and for the first part of 2009, there seemed to be nothing so much as a prevailing sense of dread and doubt. Everything that had been working in its house-of-cards way had been destabilized, unhinged.
Then, gradually, collective sentiment seems to have shifted from utter doubt to uncertainty, a period where signals were mixed, signs were choppy, fragile evidence of things being okay started to crop up, and behavior seemed to move cautiously sideways amid few transactions, and lots of volatility.
Then we got almost giddy from markets moving so strongly off their lows last year, and at the beginning of this year, it seemed for a bit as if we could zoom back into the lives and expectations we once knew. But something was different–there was all that stimulus money working in the markets, and who knew what was what as far as what was real and what was fueled by Uncle Sam’s intervention?
Now, every time we have a piece of good news on the economics front, there seems to be a counter punch of bad news – just yesterday morning, we get a good number on the housing side, with purchase applications jumping up a bit, but we have that offset by private payroll declines of 39,000. Today, we had a positive number on the jobless claims front, but the market is reacting poorly to resurgent worries about inflation linked to a likelihood the Fed will resume monetary stimulus.
Look at all the polarities, the opposing forces we’re dealing with as we try to understand what’s happening now, what’s going to happen, and what to do about it.
We have cyclical vs. structural issues, we have risk aversion vs. urgency for better investment returns, we have fundamentals vs. technicals, expectations vs. inspiration vs. harsh realities, we have stimulus vs. austerity, we have arguments for policy vs. free enterprise dynamics; we have the for-sale vs. for-rent debate, and on and on.
In pre-mid-term election limbo, we seem to be a adrift, hypersensitive to every reading from every nook and cranny of the global economy, and still waiting for that inflection point of fundamentals to make themselves known. The ones who say they’re certain of doom or certain of imminent recovery are using the same predictive models that led to the catastrophe that the economy has begun to extract itself from.
We’ve still got basic questions about the two grails of economic insight 1) what is the consumer going to do, especially vis a vis household formations? And 2) what level will real estate asset values settle in at to start trading again with some pace and conviction? How can we act sensibly without visibility into these two critical forces?
We’ve gradually begun to shift from talking about the depth and duration of the downturn to the timing and trajectory of the rebound, but until there’s some sound insight into these areas, the path from uncertainty to prosperity can be treacherous. Fortunes will no doubt be made or lost as the nature of the game is all about timing, negotiation, playing the margins, and opportunism.
Which is probably why we’re all taking a moment in the cafe car.
Home building’s hat trick—2011 budget tactics for making it through another tough year
A first wave of public home building company third quarter financial releases tells us this: KB Home and Lennar show they’ve adapted to “stress test” conditions, and have proven that they can tolerate marketplace adversity with agility. This is no mean feat, and every company—public, private, national, regional, local, single-market or otherwise—that continues to turn the lights on every morning deserves credit (in all ways) for holding up so far under the stress.
We’re thinking we’ll hear roughly the same story as KB’s and Lennar’s from the dozen or so other publics who’ll be reporting quarterly performance in the weeks ahead.
These companies shrunk themselves by 60%, re-charted their infrastructure, ridded themselves of asphyxiating assets, re-tooled product offerings, hammered their supply network of materials and labor to a dazed submission, and have begun telling investors their new selves work just fine for the moment.
Private companies—especially the ones who don’t have an all-in investor-benefactor like Shea or MDK or some few others—have done the equivalent, and they’ve needed to. Many have transformed into virtual-office-based building incubators from the grandiose marble-tabled, tinted-glass, corporate park enterprises they’d briefly been until 36 months ago.
Arguably, the timing and trajectory of recovery—which has been the obsessive focus of this industry at least since the 2008 failure of Lehman Brothers marked The Great Recession’s scariest moment—appears to be both distant and ever-so-gradual.
We think this scenario means that in their way, companies likely will need to undergo change almost as dramatic as they have in shrinking by 60% or more. Only this time, shrinking and other cost initiatives won’t be the option they were in 2007, 2008, and last year.
Particularly now, as companies reach the finish line on budgets for 2011, leadership needs to look hard at what his or her organization needs to be to make it down the next stretch.
The change—or improvement—will occur in the next six to 12 months, and will be as radical as downsizing for survival to end the past decade. But clearly, there isn’t another 60% to cut from payrolls, and an already-pulverized supply chain of trades and materials suppliers can scarcely be counted on as the sole opportunity area to capture costs.
The Harvard Business Review’s October issue features one of its classically torturous analyses of what “leading companies” do so that their talent base and culture sustain themselves at a high level. Fact is, many home building companies don’t have the luxury to pull in sophisticated human resources analytics to recruit, retain, and grow people.
Still, beneath the academic and consulting company jargon, there’s something to this “Competing on Talent Analytics” story that home building organizations can learn from.
The HBR piece focuses on six applications for data and metrics in H.R.: to understand how to properly populate a workforce, match up retention to performance, size the company, measure impacts of staff engagement and satisfaction, become aware of structural deficiencies, and get a sense of the overall health of the business culture.
Actually, though, you can throw away all the data and metrics, but still identify that the same challenge remains—home builders very likely won’t have the luxury to ride the coattails of a cycle toward viability and profitability in the next couple of years. They’re going to have to get there some other way.
Being a good builder is just part of what home building organizations will have to do to weather the next and probably final stretch of the slump.
- They will need to zero-base their organizations once again
- They will need to act quickly on where their core skills can runway up to financial feasibility
- They’ll have to redefine “generalists” and get them on board if they’re not already there, and keep them engaged if they are
- They’ll have to spot and motivate “morale” boosters, the ones who are human multiplier effects that heighten focus, and at the same time relax teammates on the bench
- Believe it or not, they’ll have to relearn the rules of location, value, and customer experience, because there’s nothing that illustrates a rapidly changing business environment so much as the newly adjusted means and intentions of the home buyer base
In some ways, the talent mix, head count, the commitment and enthusiasm factor, the growth and opportunity trajectory, the sustainability of the culture—these matters will have more bearing on whether your company’s still around to offer well-constructed new homes than the construction process itself.
Bob Toll tells a story of his early days as a “builder,” when Toll Brothers was a Philadelphia-area private home building company.
The story dates from when he was courting his wife to be, Jane, and showed up one evening after work to spend some time with her. A practical type, she’d gone out and bought interior half-shudders for all of the windows of her single story bungalow. Jane figured that, considering his livelihood, it would be a snap to install the accordion-style shudders on the dozen or so windows around the house.
Jane points to the tool box and says to him, “you start with this window, and I’ll start over here, and we’ll each work our way around the room and meet half-way on the other side.”
The smart thinking divide-and-conquer approach.
The two of them set to their respective tasks, and after a few hours, Bob’s fiancée reaches the point where she’s worked her way entirely around the house, and gets to the window where he’d started several hours earlier.
She says to him, “hey, what’s going on here?!?”
He gives her the Bob Toll shrug, and says, “You don’t understand, honey. You see, I don’t build with tools from a tool box. I build with the telephone.”
Mergers, morphings, failures, rescues, redemptions, resurrections, and resignations will characterize this rapidly changing business landscape for the next couple of years.
There may not be a lot of home building to do for a while, but that doesn’t mean there isn’t a lot to do.
The best trick will be to get folks who’ve adapted to wearing two or three hats to add one or two more.
Fourth Quarter Eve: Notes to Housing’s Leaders
Should have known it would come to this, a banality. Risk aversion is the new risk.
The words “is the new,” sandwiched between two mutually exclusive notions is, after all, so 2000s. Still, isn’t that the point?
Against the best of wise counsel from another of history’s economic moments of reckoning, consumers, lenders, small and large business leaders, policy makers, have become truly afraid of fear itself.
- Since June, investors have withdrawn $70 billion from mutual funds, and moved them into everything from bonds to Sealy Posturepedics. They’re scared of losing their hard-won earnings.
- CEOs have lost confidence; they thought that 24 months spent amassing troves of cash and goosing margins by axing workers would deliver them by now to the grail of end demand. Guess they had another thing coming.
- Too, consumers, who by nature account for two-thirds of GDP, are frozen in choreographic opposition to CEO employers, with the lowest level of confidence since February.
- Banks hefted themselves onto terra firma with ZIRP dollars, gladly received, reconstituted, and re-invested, not in lending, but in barely breakeven reserves.
- People, per this New York Times graphic, are even fearful of the basics.
Any and every safe haven got clogged with more money coming in, and gold–the inflation and disinflation hedge of all hedges–glimmered. Every flight to safety is oversold.
And all that risk aversion, that phobia of fear itself, is finally announcing that it too has a pricetag.
What history will very possibly remember about this moment is this. Predicted health care reform, predicted financial services reform, and an unpredicted oil disaster in the Gulf of Mexico together flowed into the veins of the economy and changed it.
Since about May, strategic action item No. 1 for corporations, banks, Main Street, and Capitol Hill has been “wait.”
Witness the power of inaction, of collective strategic default. Waiting occurs to consumers, to company leaders, to bankers, and to government as the smart thing to do. It self-fulfills one prophecy, waiting does, and that’s that the price to pay for an asset will be less. A daisy chain of effects goes in motion.
Many are enchanted by belief that a partisan make-over in Congress will shift the gear from neutral to drive. A new balance, or a remix of powers on Capitol Hill, will at the very least, stall tax programs in the pipeline, and tie-up any further government intervention in the ways of commerce. Congressional impasses feel like breaths of clean fresh air to businesses.
Still, whether or not a near-term limbo period comes to an end, structural, fundamental, essential challenges underlie a place that builds upon paying less for more so that fewer can take home more at less cost.
We say this about risk aversion. Be as afraid as you want, but don’t let fear stop you from working to get through this.
Housing is asking a lot of its leaders these days. As leaders in the housing industry, you face challenges likely to be remembered one day as historical, and questions that have either no answer at all, or an answer that is painful to the ears.
In October of 2010, the nation’s economic recovery is halting, and may be in need of more measures, more costly initiatives and commitments to get it back on track. The nation’s jobs picture looks bleak, with one in 10 able-bodied workers unable to find employment, and nearly two in 10 unable to earn an income adequate to cover his or her family’s needs. That’s not even counting the souls who’ve slipped off the nation’s employment radar, too despairing to even try to find work.
Meanwhile, the nation’s housing finance system—a complex of public agencies, private sector investors, foundations, and myriad other organizations—is in a state of profound dislocation as owners, sellers, developers, borrowers, renters, and dozens of middlemen and women in the equation attempt to quantify the value of residential property and who then owes what to whom. People have lost and will lose their homes. People are displaced, both owners and renters.
Casting housing’s crisis as a battle for power and resources between the homeownership versus the home-rentership industry communities is cynical, unrealistic, and unhelpful in light of the possible gains holistic approaches could achieve.
Housing’s leaders face hard questions that seem to pit deep-seated values and rights of all American citizens against prevailing principles wielded by either corporate or government policy makers. The very horizons and boundaries that delimit housing’s private sector stakeholders from government agencies, local and regional entities, and Capitol Hill bureaucrats seem to be in flux, a confused and uncomfortable mash-up of economics, politics, and societal polarities.
The only thing that’s getting clearer, it seems, is the daunting, perpetually spiraling tally of what will be owed, even as the means and motivations to pay off what we owe become cloudier. No predicament for any of housing’s leaders has become more important to solve than recognizing what is out of one’s control and determining what one can do that is within his or her control.
Forget fear. The last thing we’d ever believe about the personalities of leaders in new residential construction is that they’re prone to fear-based paralysis. A two- or three-letter word may be all that’s left to dig out of housing’s yawning hole: Do. Act.
Why Home Builders Need to Get Even Better
KB Home and Lennar Homes are, one could argue, better companies today than they used to be. They have shrunk their balance sheets, and taken a pipecleaner and powerwasher to their operations, processes, and community costs of doing business. That’s not even mentioning what they’ve captured in direct costs on redesigning product and renegotatiating terms on anything that moves.
They may have to get even better than they are now, and then better than that.
This is the case with most or all of the surviving publicly-traded companies. The publics are just plain better companies than they were in the mid-2000s, when volume and a frenetic pace trumped every other consideration. So are the private companies. With only a quarter of the amount of demand that existed a few years ago, everybody’s had to get not only smaller and less expensive, but better. As in more productive and more financially sensible. Smarter. Braver.
But also more strung out. Private companies, which live on shorter money reins, and most public ones, which subsist on grander financial horizons, are making whatever numbers they’re making on the backs of fewer, harder working, talented folks.
That’s a reality. Likely, the choice will be to get used to it or go somewhere else to make a living.
Doing more with less because you have to is a state of business mentality a generation or two may have been spared of for the most part. A particular kind of adversity competence, along with handling it with a modicum of equanimity, will become part of home building company cultures, just as adjusting to that cyclic roller-coaster ride of up and down periods stamped itself into the DNA of many families and firms tied to home building and development.
But even if KB and Lennar and the other dozen or so publics and the other 250 or so production home building organizations left are better companies than they were, will they be around when “this thing” is finally over? Very likely, KB and Lennar will be, but if demand keeps playing possum and it takes supply to keep the lights on, how many others will be around in their current form?
The question now is the model, and the question will always be the business model.
The model is actually a misnomer, because the model, historically, has worked in flux. It has expanded and contracted in either short or long cadences. The model assumes motion, reducing or increasing the distance between one’s current position and a nadir or a peak in the market cycle.
The model may look like a snapshot, but it never works that way. Most residential real estate companies are either flush with growing cash, or gushing cash towards an endgame.
Cycles have traditionally served as a kind of market-driven bailout. Like layers of paint, bigtime demand covered a multitude of sins.
All of the business cycles in the past 100 years–not to mention pre-industrial eras–have taken place with a consistent factor that is currently a big question mark. On its surface, it’s a demographic question mark, but it’s certainly deeper than that in terms of national and global cultures.
Take any debate–owning vs. renting, austerity vs. more stimulus, Wall Street vs. Main Street vs. Capitol Hill, right vs. left–and place the debate in the context of the answer to this question. Will Generation Y adults become a married-with-children cohort or not?
If they do, at a rate of say 25% or so, then many of those debates will reflect the ballast of people who need to raise children in a safe, sustainably healthy place.
Until there is a beginning of a trend there one way or another, the economy and its need for capacity of various kinds may be spinning its wheels. If the married-with-children household resurfaces as a going concern in this society, it will change need, capacity, and demand in a fell swoop.
If U.S. households continue to work roughly as they do, with two-parent and children households representing close to one-in-five, many home builders might best think of something else to be good at, which no doubt they will.
Demand, or lack thereof, will be the story of all the home builders’ financial reports for the balance of the year, public or private. They’ll have either learned to live with the lack of it, or they’ll be fixing to exit with as much dignity as conditions will allow.
They’re better companies now than they were. Midterm elections will come and go, but the limbo Lennar, KB, and all of the other companies dwell in will continue. When there’s evidence that more households start cropping up with two married people and their children, then jobs, household formation, consumption, and demand will take its genuine shape.
So, the only option, then is to get to be a better company tomorrow than you are today, because you’re going to have to be.
Housing starts beat the Street as gradual stabilizing takes hold
Housing starts and permits, and single-family starts slightly beat consensus for the month of August, according to the Census Bureau release this morning. A series of recent data points has begun to show stabilizing conditions in new-residential construction. What has yet to occur is an inflection in home buyer and home builder sentiment, probably thanks to a slow response to very gradually improving fundamentals. Technicals and psychology continue to fuel market behavior as the jury remains out on the ultimate strength and sustainability of a broader rebound.
Here’s the statement on total starts.
Privately-owned housing starts in August were at a seasonally adjusted annual rate of 598,000. This is 10.5 percent (±11.9%)* above the revised July estimate of 541,000 and is 2.2 percent (±9.7%)* above the August 2009 rate of 585,000.
Per Ticonderoga Securities analyst Stephen East’s Census report preview, here’s how expectations stacked up for housing starts:
Consensus estimates call for a 1.0% increase in Total Starts to 550K from 546K in July.
That’s an almost-9% beat of housing analyst consensus, although next-month adjustments will likely take the total figure down.
Let’s look at building permits. Here’s what the Census reports today:
Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 569,000. This is 1.8 percent (±2.0%)* above the revised July rate of 559,000, but is 6.7 percent (±1.4%) below the August 2009 estimate of 610,000.
This, again, beat analysts’ expectations.
Per East’s preview on permits, here’s where the Street expected the level to be.
1.0% decline in Total Permits to 560K from 565K last month
Here’s the Census Bureau single-family starts statement:
Single-family housing starts in August were at a rate of 438,000; this is 4.3 percent (±12.4%)* above the revised July figure of 420,000. The August rate for units in buildings with five units or more was 147,000.
Comments East on single-family starts:
With Single-Family Starts averaging 447K for the post tax credit months of May (459K), June (451k) and July (432K) and the addition of 100K Multi-Family Starts, the consensus looks to be in line. The sequential decline in Single-Family Starts, however, has not been lost on us. We have not entirely ruled out our prior estimation of 400K Single-Family Starts or 500K Total Starts. While we believe the likelihood of such a posting is diminished, the potential for such a reading should not be completely dismissed.
One has to think that since 400k S.F. starts would not have surprised, 438K might come as a favorable surprise, which could influence some housing observers to begin softening on their most bearish scenarios.