Dan Ryan, Truth or Dare
In the wake of last week’s Pulte-Centex pyrotechnics, a classic debate intensifies. Will public home building companies–with their access to and use of the public equity and debt markets–weather the ravages of the next 12 months better and jump out farther ahead in market share when business shows its first signs of strength next year?
Or will private companies–comprised of a handful of Teflon wonders who survived, plus a few who played their non-compete clauses like violins during the industry swan dive, and, finally, the ones who financially reconstitute themselves like crabmeat you’d see in the frozen seafood section of the grocery store–come out of this with the secret sauce to dominate the recovery.
Dan Ryan, Photography by Chris Volpe
Here’s a story you couldn’t make up. The Pittsburgh Ryan family of home building royalty gives us this example of why you should never underestimate the power of the private home builders, even though lenders have most of them groveling on their knees, begging for time.
Yes, publics have millions of “other people’s money” to draw down and mark down as they figure out what their footprint should be, and what their cost-base can come down to while the going is tough. And public companies have unfair accounting advantages that basically allow them to deflate the land value of all competitors as they liquidate their own holdings and collect tax carrybacks, only to return as purchasers of some of the same land at cents on the dollar later in the cycle.
Private companies’ land impairments are literal pounds of flesh extracted from real people’s pocket books, frequently guaranteed with the company principal’s own personal wherewithal, i.e. their homes, etc. When they write down the value of land, they’re kissing money goodbye–whether it’s their own or it’s borrowed–and that’s bad.
So, here’s the Ryan story, and it’s about almost getting beaten, but not.
Chances are, Frederick, Md.-based Dan Ryan Builders will make it. If all goes as planned, even the current headwinds in the market will only haircut a little over 30% of his single family new-home volume from peak through this calendar year. He can thank being in some decent locations in the D.C. metro market for some of that fortune.
But that’s not all.
He knows adversity by heart. In the early 1990s, as another home building company we’ve all heard of–NVR–was hurdling into bankruptcy, the fact that the “R” in NVR stood for the company founder, Dan’s uncle Ed Ryan, couldn’t save young Dan his job.
When he tells the story, he says, “I left NVR, and started my own company in another tough moment for housing, during the downturn of the early 1990s.” Then he catches himself. “They fired me,” he confesses. “That was a difficult moment.”
So difficult for Dan that he went over to the home of his father and mentor Jim Ryan–Ryland Homes founder in 1967–for solace and direction. They sat out on the patio of Ryan elder’s home, and each of them looked out into the forest to the southwest. Dan tells his father what he’s been told in a very sensitively handled exit interview. He says, “Dad, they said they didn’t want to let me go because they really like me; they just didn’t think I was ready to run a profit center.”
“Dan, you know that in a downturn, a good company like NVR doesn’t let go of their ‘A’ players,” Jim Ryan tells his son. “They don’t think you’re an ‘A’ player, Dan.”
That’s what Dan Ryan got for comfort the day in 1990 he got fired from his $65,000 a year job. He didn’t talk to his father for a week or so from that moment, and his father got to thinking maybe he’d been a little too candid with his son. Jim recalls the moment in his own career in home building in the mid-1960s, when his own brother Ed gave him a pay cut of $5,000 a year–which prompted Jim to leave Ed’s company and go start his own.
So, fast forward to 2007, when Dan Ryan Builders nets a profit of $35 million, both father and son know in their heart of hearts that brutal honesty was what the moment called for.
In fact, after his father told him that NVR hadn’t regarded him an “A” player, Dan went for a public speaking course and a business leadership course a la Dale Carnegie, and started the job of turning his shyness into the warm magnetism you’ll see in him today.
“You’ve got to be strong to be good; it’s something you’ll hear my dad say often,” says Dan Ryan.
There are more of these stories, no doubt. Stories that blend your biography with the business. Stories of your determination; your perseverance; your tenacity. We’d welcome hearing them, and we feel that if you’ll share them with your industry colleagues here, it would give everyone a sense of the strength it takes to be as good as you are.
Those backyard patio moments make us who we are. Backyard patio moments may be where adversity hits the hardest, but also where character and resilience get their kick start. Why not share yours with your industry?
Pulte-Centex 101
Big Builder editor Sarah Yaussi and Hanley Wood Market Intelligence SVP for innovation and products Jonathan Smoke team up for a seven-minute seminar that will clarify “Pro-Forma” Pulte’s challenges as it tries to digest Centex in the months ahead.
Turn up the volume on your audio, and have a listen.
Go Trigger
You’re hearing about prices, interest rates, and offer-you-can’t-refuse incentives that are pulling some of the past year’s pent-up demand from idle to active in on the home buying front.
CNBC’s queued up a circa 2002 style short list of tips for the few and far-between serious home shoppers in the current market. Notice the check-list includes a) a downpayment, and b) a caveat emptor that says “don’t count on selling this baby for a good long while.
Let’s go to the video:
Bottom Dollar
We don’t believe Wall Street, Washington, Main Street, nor the Economists quite get it. They don’t get the velocity of the correction of errors. Here’s conventional wisdom on the housing price correction masquerading as “contrarian” thinking.
It’s from a blogger whose mantra and tagline are “you are either a contrarian or a victim.” Given the mainstreamish rationale here, we think dude’s a victim.
For example, in a post, “Where’s That Mythical Housing Bottom?” the logic for saying “we still have a ways to go” is laughable.
Click image to see enlarged chart on Contrarian Profits.
This is a chart of the S&P/Case-Shiller Home Price Index.
As you can see, it’s plummeted over the last 18 months or so.
It shows that U.S. house prices have been spanked harder than a disrespectful 5 year old.
And, unfortunately, it shows no sign of bottoming anytime soon.
This makes sense considering the flood of foreclosures hitting the market.
In my parents’ neighborhood in Fort Lauderdale, Florida, homes that were selling for $250,000 during the peak are now going for $70,000 in foreclosure.
Repeat this scenario across the country, and you’ll see that home prices still have further to go.
“Spanked harder than a disrespectful five year old.” Thing is, there’s no reasoning in the chart nor the post that says why “home prices still have a ways to go.” This has become conventional wisdom for many observers, and is the last thing from contrarian thinking.
What contrarian thinking might be really helpful to do right now is to help everybody understand the “cliff-dive” phenomenon of change–the velocity–that seems to have everybody stumped and everybody spooked. If stocks are supposed to be the great discounting mechanism to tell people where things are headed, how come stocks forgot to discount for so immediate a future as occurred in the past 12 months.
It’s anybody’s guess, but we’d suppose a true contrariant would be the best one to assist on this question of the velocity of change from good to bad.
DC Metro Market Minder
Here’s a six-minute wrap on what’s going on across for-sale and for-rent in the Washington, DC-metro area from a local real estate analyst.
Adam Lobst of A-Team Realty, LLC explains the latest real estate trends in the Washington DC Metro area. He explains what the trends are and how these trends impact todays Buyers, Seller, Renters, and Landlords.
Not Pretty Pictures of the Housing Crisis
This article in the New York Times draws several conclusions. Unfortunately for readers of the story, the conclusions conflict, and negate insight.
- The headline revelation is that spring selling season has officially been cancelled
So this March-to-June season, when most homes are bought and sold, will be bad, perhaps the worst since the market began to spiral down in 2006.
Across the nation, 19 million houses and apartments — nearly one out of every seven — are vacant, the highest percentage since the 1960s. But only about six million of those homes are for sale or for rent. That means millions more could still flood onto the market, depressing prices further.
- The story swings over to touch on President Obama’s housing policy initiatives, and the fact that they’ll play out in an environment so inimical that the housing plans will get eaten for lunch.
On Wednesday, the Obama administration announced details of a plan that will pay banks to lower monthly payments for troubled borrowers, hoping to avert millions of foreclosures and keep more homes occupied. Despite that effort, most analysts expect the outlook to worsen.
- Next, the story asserts that even though it has cancelled the spring selling season due to consumer and commercial credit disruptions, homes are selling up a storm in markets where prices have corrected.
In inland areas of California, for instance, sales are surging now that prices have fallen sharply. But most of the sellers are not individuals but rather banks that foreclosed on homeowners who could not or would not pay their mortgages.
- We’re supposed to glean intelligence from reporting that some markets’ delcine lagged that of the bellwether bubble markets’ fall. The interpretation and analysis is not of the local job dynamics and broader business dislocations that account for the way San Francisco and New York markets have taken a recent beating, but simply that they took longer to succumb.
New York is not alone. Real estate sales have also slumped in cities like San Francisco and Seattle, which previously seemed impervious. California’s recent experience might offer one roadmap of how the housing slump will play out in other places. But the process will be painful and slow.
- One wonders which question Zelman & Associates CEO Ivy Zelman actually answered when she responded with her quote, “You are really looking at a very, very ugly outlook.”
If home sales are surging where house prices have corrected, and home sales have stalled where prices have not corrected, what is that saying?
Does it suggest that sellers of new and existing might take control of their own destiny in this dynamic? If foreclosure prices can move buyers off the sidelines, and if the second-tier foreclosure flip from investor to home purchaser can get buyers to move, why is the conclusion that there will be no spring selling season?
The conclusion could be that home builders and developers are going to have to short-sell a lot of their inventory and deal with a lot of red ink for the market to clear.
The limbo housing is in is largely self-induced, and will have to self-resolve.
The populace will be part of that resolution because the populace became part of the bubble. There’s a tax penalty for becoming part of the bubble and we’re going to learn how big the penalty is for what we began to take for granted when times boomed.
Meanwhile, April 2009 may be a low point for those who are trying to work through what they hold in assets to gain cash enough to work through more tomorrow. But it’s not because the NY Times has drawn attention to this issue. It’s because structural issues–prices, credit, job trends, household spending, household formations, etc.–have locked into a negative feedback loop or a “downward spiral” and this is part of a storyline that housing veterans have seen before.
They don’t call it “very, very ugly.” They call it a tough but inevitable part of doing business in new residential real estate.
Have a look at the Times’ ”very, very, ugly” infographic.
Click on image for larger NY Times version of the information.
This is a technical analysis. We don’t believe real estate markets obey technical analyses. We believe uncertainty clouds the bottom, but that price-correction will be the only solid floor for housing.
A Free Marketeer Addresses Housing Crisis
The crisis has spawned its econ icons, like Paul Krugman, Robert Shiller, and Nouriel Roubini, who’ve become household names… literally.
Tom Lawler of Lawler Economic and Housing Consulting might well have been one such star, but he’s tended to have appended ”oclastic” to the word icon, choosing to move outside the Beltway to farm and get even smarter.
Lawler’s outlook can be respected, since his outlook about housing in 2004 was, “uh oh!” Here’s his interview today with CNBC’s Diana Olick.
Where the Most Houses Aren’t Homes
The “negative feedback loop” is a fancy new name business folks are giving to the Catch-22, vicious cycle, self-confirming prophecy that has foreclosures, home price declines, job loss, lower consumer spending, reduced earnings, and more job loss in Brian Eno hell …
A key factor in the negative feedback loop is absolute vacancies, the number of home units capable of housing people but aren’t. This factor erodes motivation to act on the part of consumers, and stands as the distance between the recovery of demand and the eerily silent inertia that reigns o’er the housing economy.
If there’s no fear that one will miss an opportunity of a lifetime by not buying now, then there’s little trigger to jump in off the sidelines.
CNBC has pulled together a U.S. Census-based ranking of the 10-metropolitan areas with the most homeowner vacancies, and cobbled a slideshow to highlight the markets.
Have a look-see.
Who Knew Sales Were This Bad?
The Wall Street Journal has this take on freshly released existing home sales data for January 2009.
Existing-home sales tumbled to a nearly 12-year low in January, and prices took a double-digit drop.
Home resales fell to a 4.49 million annual rate, a 5.3% decrease from December’s unrevised 4.74 million annual pace, the National Association of Realtors said Wednesday.
About 45% of total sales involve distressed property transactions, including foreclosures.
Here’s a link to the National Association of Realtors release on the data.
The operative take-away, compliments of Calculated Risk, is subtract foreclosure sales and you’re at an annualized rate of 3 million used homes.
It’s important to note that about 45% of these sales were foreclosure resales or short sales (banks selling foreclosed properties). Although these are real transactions, this means activity (ex-foreclosures) is under 3 million units SAAR.
Per NAR chief economist, the same one from the previous post, not all the news is grim.
Total housing inventory at the end of January fell 2.7 percent to 3.60 million existing homes available for sale, which represents a 9.6-month supply2 at the current sales pace. Because sales were down, the January supply is up from a 9.4-month supply in December.
“The drop in total inventory is an encouraging sign because the number of homes on the market has declined steadily since peaking in July 2008, and inventory is at the lowest level in two years,” Yun said. In January 2007 there were 3.54 million homes for sale.
We thought that NAR’s note that inventory has dropped was along the lines of an “other-than-that Mrs. Lincoln,-how-was-the-play?” type of note.
But Calculated Risk spots a genunine silver lining in the inventory trend.
It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!
If the trend of declining year-over-year inventory levels continues in 2009 that will be a positive for the housing market. Prices will probably continue to fall until the months of supply reaches more normal levels (in the 6 to 8 month range), and that might take some time.
Pali Research home building analyst Stephen East also sleuths out postives.
A positive from the release today that we feel needs to be highlighted is that Single-Family inventories remained flat month-over-month at 3.11 million (down nearly 800K from April and June of last year). Possibly not a decline as investors may have hoped, but we stress that inventories increased 7.1% from December to January last year and were up 4.5% and 3.8% for the same periods in 06/07 and 05/06, respectively. A positive, it does not appear that we are getting a seasonal inventory build to date. Moreover, we would expect the sales pace to increase modestly moving forward, thereby improving months’ supply as it is our belief rhetoric about the now realized, albeit disappointing tax credit kept buyers on the sideline late last year until the legislation’s status/details were determined.
We’re not, however, convinced that winding the clock and home prices back to a certain date and corresponding trendline–connected with cost-to-rent and household income levels–is going to do the trick of jumpstarting sales at a new more affordable level. In fact, home prices will overcorrect beyond such trend lines, and keep going until stimulus programs address jobs, sentiment, and–we think–briefly effective home purchase tax credits and mortgage buy downs.
Here Comes the Yun–Or the World According to NAR
Whatever he’s smoking, we feel that after a healthy decade or two of abstinence, we’d stray to taste a hit of it. This piece appeared in the Las Vegas Sun on Monday.
The steep drop in home prices and newly approved $8,000 tax credit for first-time homebuyers will help pave the way for a recovery of the Las Vegas housing market in 2010, according to the chief economist with the National Association of Realtors.
Lawrence Yun said Monday he expects that foreclosures will continue at their elevated levels in 2009, but is optimistic that inventory will be whittled down given the increase in existing home sales in Las Vegas over the past several months. Only Nevada, California and Arizona have seen big jumps in sales. There were 38 percent more sales in Las Vegas in 2008 compared with 2007.
“You have gone through some very tough times, but any further decline, if any, would be minimal,” Yun said of median prices that have fallen $138,000 over the past two years to a price of $150,000 in January. “Given $150,000 is very affordable for such a dynamic metropolitan region, once the economy recovers, you are in good shape. But it is just getting over the short term.”
During an interview, Yun said he sees Las Vegas prices stabilizing in the second half of the year and by the fourth quarter they could be higher than the end of 2008. The median price at the end of 2008 was $157,250, according to SalesTraq.
Yun said he wouldn’t be surprised if prices appreciate more than 5 percent in 2010 but adds one caveat to his prediction – that while the long-term outlook for the Las Vegas housing market looks good, it is hard to make short-term forecasts.
If prices continue to decline in Las Vegas and the rest of the country by another 10 percent, that will further weaken the balance sheets of banks and further delay the recovery of the economy. The housing market troubles have been a driving force behind the economic woes and financial meltdown.
“Home prices are key to the economy turning around,” said Yun, who fears any further drops and their impact. If that happens, he said he doesn’t believe Americans have the will to spend another $700 billion on a bank bailout and that could lead to a deepening of the recession or a double-dip recession.
Yun spoke Monday to the NAR’s Rocky Mountain Regional Conference at Green Valley Ranch Resort.
Call us crazy, but we’re not sure why Vegas hasn’t cropped up on the builderonline.com list of the 15 weakest housing markets in the nation for 2009. Here’s the good news for Vegas.
According to RealtyTrac, foreclosure filings in Nevada decreased 4 percent in January compared with December, but the total is still 134 percent higher than January 2008. In January 3,848 homes were foreclosed – 136 more than in December. The reason filings dipped is the 6,064 notices of default filed against homeowners was 402 fewer than in December. One in 76 Nevada homes faced a foreclosure filing in January. California was a distant second with one in every 173 homes; Arizona was third with one in every 182 homes.