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.
Will Private Home Builders Cut it in 2011? We Think the Answer is Yes.
Something funny’s happening on the way to public home builder domination of the low-pulse, anemic housing recovery.
Without question, public companies have made big strides, not only in their own operational disciplines but in the way they flex their muscles in the markets they have chosen to fight out the early stages of a new cycle competitively.
It’s Darwinian reality at this stage for the publics not just to make their numbers, but to make their less-well capitalized private brethren go out of business while they do it.
And public companies aren’t the only well-resourced menace to the well-being of private home building companies right now, either. Clearly, national political expedience favors saving the banks in favor of saving new-home building capacity, so government will sooner and more emphatically look to support the disposition of the 8 million or so properties in the foreclosure-distressed financial asset bucket than to promote the kind of economic well-being that would lead to demand for new construction.
Private home builders, in other words, have cyclical, structural, competitive, and political currents to fight upstream in; it’s no wonder so many of them have gone under in the past four years, a loss not only in capacity, but in the character and culture of home building. No one can deny that while publics have leveraged their heft, the patience of their capital, and their growth in professional disciplines to a competitive advantage, many of their home building operational innovations have come by way of private home builder acquisitions along the way.
Meanwhile, private home building companies, the incubators of much of what is “better practices” in home building–for arguably, best practices will be a phenomenon of some future stretch for the industry sector–are facing their steepest challenges yet, even after four years of cleverly surviving the teeth of the worst downturn ever since housing became its own industry sector.
Still, we talked this morning with Dan Ryan, the eponymous leader of Dan Ryan Builders, based in Frederick, Md., and operating in six states–Maryland, Virginia, West Virginia, Pennsylvania, North Carolina, and South Carolina.
There are three essential bullet points to Dan’s report on his 2010 performance:
- Settlements increased from 397 in 2009 to 502 in 2010, a 26% rise
- Although operations in Raleigh didn’t make a profit, outlier markets like Morgantown and Charlestown, West Virginia more than made up for the losses, bringing the company into the black for the year
- The market dynamics allow Ryan to “grind through” challenging land holdings to diminish the pipeline of less profitable lots
For 2011, Dan Ryan–whose father Jim Ryan founded Ryland Homes; whose Uncle Ed Ryan founded Ryan Homes of NVR; and whose cousin Bill Ryan founded and runs William Ryan Homes, a builder in the Chicago market, as well as Florida, Arizona, and Wisconsin–is pushing. He sees his company–thanks to an expected contribution of 80 homes out of the Raleigh operation, which has five decorated new models raring to go for Spring Selling Season traffic–doing another 30% quantum leap to 650 homes.
We’re hearing equally sanguine fast-growth scenarios from our friend Eric Lipar at LGI Homes in Texas, from Ken Balogh at Ashton Woods out of Atlanta, from Jay Lewis at Surrey Homes out of Orlando, and from a number of other private mini-powers.
Where do they get their moxie, especially when everybody knows bankers are essentially loathe to use the ink of their rejection stamps when it comes to lending to home builders.
Unless.
Unless what?
Well, unless there’s not only moxy but a clean, well-positioned, reliable plan to turn money into more money. That’s what some private home builders have been able to demonstrate, and that’s why they’re still in the game.
And when they’re able to shift gears from “survival” mode to “let’s kick ass” mode, they’re a force to be reckoned with.
Surrey Homes does it by careful segmentation. In both buying land and building and selling homes, Jay Lewis believes Surrey should steer clear of the fray of first-time buyer, entry level homes, a ferociously fought battle in the land of Disney magic. Instead, he’s positioning Surrey as a move-up and second move-up offer, where his rather unique twist on customer care–a five-year full warranty and a designated service and satisfaction follow up program–can actually help him move the metal.
For Ryan, it’s about keeping the fire in the belly he feels as a principal lit among his trusted associates. Word is, Ryan spent one weekend day recently going out personally to the home of one of his best sellers in the West Virginia market because he’d heard she was feeling burnt-out and frustrated. After his visit, she arrived back on the job and has been rocking the sales in the pre-selling season weeks.
Ashton Woods offers another part of the story of how privates can and will compete with publics. It’s called the land committee, and private companies don’t have them in the same sense as publics, whose land committees are a necessary part of a deal to acquire parcels opportunistically. Some times this slows them down.
In one case, recently Ashton Wood scored on a parcel that was sought-after by several publics in the Atlanta area–Madison Park, off Old Alabama Road in the Roswell area. Ashton bought it out of the banks by virtue of their ability to close, and their knowledge of the value.
Because they didn’t have to put their bid before an underwriting committee, Ken Balogh and his team landed the deal, and blasted through 45 of the 49 homes in the community in 2010. Here’s a few photos showing construction on some of the few homes left to be settled, at 3,200 square feet and ranging in the high $300s to low $400s.
We commented on what an uplifting sight all the actual home building activity on the site was, and a sales manager commented, “Yes, we’ve had folks from other home builders come over just to hear what it sounds like.”
Rumors of the death of private home building companies are premature.
We have one idea to offer that maybe they haven’t thought of as such. Why not develop a “pent up demand” home? One that intentionally recognizes that young adults and/or aging parents will be part of the household. We think there’s a future for this as a new product.
Add This to the Flashes of Positive News: Traffic is Up
A leading indicator that’s turned solidly positive for construction is the American Institute of Architects Architecture Billings Index (ABI) for December, which hit its highest level since 2007. A lagging indicator that has turned positive, existing home sales blew through consensus estimates by a run-rate figure of 430,000 home resales in a 12-month period.
What’s more, pending home sales have cobbled together a run of positive reporting periods, initial jobless claims are tacking together a four-week moving average that is encouraging, and most of the regional economic measures of demand for goods and services reflect expanding structural demand building momentum across the board.
Now, take away from the positive tidings the fact that the European nations’ debt minefield could set off a global daisy chain of financial white light moments, and the fact that domestically, we’re seeing local governments writhe under the tyranny of past and present misguided capital planning, and closer to home, the fact that the pig in the python of foreclosure clearance seems to be stuck somewhere between the paperwork the lawyers and common sense.
Clearly, with still nearly one of every 10 employable adults out of work and both the tangible and psychic ripple effect of that phenomenon, there’s still big questions hovering over the 66% of the economy that comes from consumer spending. Don’t forget all that household debt that’s still there to be dug out of.
On the other side of it, big questions hover over the appropriate balance of for-sale versus for-rent housing, as well as the appropriate balance of government versus private sector investment in housing finance, as well as the appropriate way to securitize loans and make them safe for slicing and dicing into global structured investments.
When it comes down to it the two big question areas have to do structurally with how people can earn a living in society today and how valuable the property is that they would buy to reside in if they so choose.
Big questions.
Which brings us back to the news. The news is that amid the burgeoning signs of life in the broader economy and a feint pulse-beat in housing, we’re hearing reports that traffic numbers are up, specifically in California, post the holiday-season torrents of December.
According to our sources, traffic data is spiking normally for this part of the seasonal cycle. This is noteworthy because last year’s business was artificially stimulated, and this year, it’s working on its own two feet. Demand is simply demand.
We asked our sources two things. One is whether they thought that the 50 basis point spike in interest rates was playing a part in the motivation of potential buyers, and the answer was “probably.”
The other is does anything in the traffic in the neighborhoods suggest that people are turning to new because of any anxieties they might sense over who actually owns the title for a distressed property deal. The answer here is less clear. The broad sense is that people are tiring of the rigors of trying to purchase homes out of foreclosure. But there’s no one expressing an explicit anxiety that has arisen from the mess in the processing of foreclosures by mortgage servicers.
Still, the news is that traffic is up.
This is but a two-week moving average, and therefore not a true real estate trend. We’ll have to see how this tracks into the more formalized Spring Selling Season, should it actually evolve this year.
One thing we’re hearing many builders express is the delight they’ll have as they reach mid-year, and they can stop comp-ing their performance to months where the home buyer tax credits were playing havoc with prospects’ timing.
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.
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.
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.
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.
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.