The Dash for Cash

We are still on our uncertainty kick, as it’s the only lasting phenomenon we both be certain of and need to plan around.

Consider a comment from investment guru Jeremy Grantham in an analysis The Big Picture blog’s Barry Ritholz is raving about for its keen guidance on “what we should expect over the next few years.”

“The uncertainties of the economy are so great that when the uncertainties of the stock market’s anticipation are laid on top of them, you simply must have big ranges of outcomes and hedge your bets.”

In home building, we see parallels to this principle.

The first quarter of 2009 has now made it clear that, by violently turning the screws on their gross margins, public home builders can at least stir the pot on home sale volumes, especially if it’s the right time of year and there are a couple of “x” factors like a California home buyer tax credit around to help.

Here’s how Citigroup’s home building sector equity analyst Josh Levin puts it.

While most investors entered [the just-concluded] earnings season focused on y-o-y (year-on-year) net orders, we think many were surprised by the q-o-q (quarter-on-quarter) gross margin deterioration reported by most home builders.

In the next three quarters of 2009–especially after there are no more $10,000 tax credits to hand out to Californians who step up to buy now–home building companies will be left even more to their own devices to get the job done moving inventory.

Seasonal forces, rock-bottom prices, record-low interest rates, and money back on income taxes for a home purchase have been working. 

Take away seasonality, and add back the toll of continued economic weakness leading to a weak recovery, big layoff numbers, another wave–maybe two–of credit meltdown shocks in the form of widening credit card defaults and commercial real estate implosions, and one can get a sense of genuine challenges to the kind of consumer confidence it takes to make that largest of consumer purchases.

Home building companies that have made it to this point with a truck load of cash need a plan to try to expand their “range of outcomes,” even as they hedge their bets.

A truck load of cash, a delevered balance sheet, a skeleton-crew cost structure, a few tax-carryback induced inventory turns, and few if any false moves, serve as Part I of the plan–the part that has gotten the stronger companies to where they feel they still have cards left to play.

Part II is where a broader ”range of outcomes” comes clear, because even the stronger companies can’t sit around for the next three quarters waiting for the home buyer market to suddenly tilt their way. Both public and private companies with cash will in the next several months begin to try to slide in unobserved to pick of lots that pencil to new hurdle rates. Those lots, and the business plan around them, and the product on them, will all have one mission. Generate cash from sales.

Whatever goes on by virtue of “the visible hand” of government, home building operators need just one more critical part of the downturn’s plot line to kick into effect. Capitulation. “Ask” prices need to succumb finally to new, uncertain, sustainedly weak realities. And they will, but first only discreetly.

So, what we’ll be observing, even as clouds of uncertainty continue to sit over residential construction’s landscape, is the beginning of chapter that will see home buyers pop in and buy land, hoping finally that it’s cheap enough that they can put a home on it with one of their existing or new products that will get them inventory turns at a greater than one-or-two-a-month pace by the end of 2009.

We invite you now to jam our comment box with questions and challenges for leading home building executives, either about their companies, about the markets they operate in, or about the business environment ahead. who’ll gather in Chicago over the next several days for the 2009 Builder 100 Conference.

We hope to see you there, but if not there, then let us know here what you want to have these folks address in the days ahead.

May 11, 2009 | Filed Under Financial Crisis, Home Builders | 3 Comments 

Bottom Fishy

Are you the glass-is-half-full type, or a life-stinks-then-you-die kind?

A whiff of less-bad news here and there has bred with it a subtle change of expectations on the part of some economists, if not the eventualities themselves.

Clearly, though, economists are best at using two words to begin talking about even their strongest convicitons. Those two words? “It depends.”

Here’s a roll-up of economists’ opinions from the Orange Country Register’s “Lansner on Real Estate” that limbs out the Silver Liners from the Doom and Gloomers as to when that most-coveted of pieces of bottom might be in view.

Optimists

Fed Chair Bernanke:

  • The worst of the recession has passed: “We continue to expect economic activity to bottom out, then to turn up later this year.”

Mark Zandi, chief economist, Moody’s Ecomomy.com:

  • U.S. home prices will reach bottom by the end of 2009.
  • “Notwithstanding the intensifying economic gloom, the bottom of the housing downturn is within sight.”
  • U.S. home prices will fall another 11 percent on average before stabilizing.
  • The Case- Shiller home price index will fall 36 percent from its 2006 peak to the bottom this year.

UCLA Anderson Forecast:

  • Housing market to stabilize in late 2009, and “when it does, the contraction in residential construction will, finally, after more than three years, cease to be a drag on the California economy.”
  • “As the housing market has completed most of its required adjustment prior to the downturn in general economic activity, it will not be as much of a drag on the recovery as experienced in previous recessions.”
  • Orange County: Home prices stabilizing in 2009 and starting to rise in 2010. But appreciation rates remain in the single digits and prices will still be at 2004 levels in 2013.
  • “This could well be the worst post-WWII downturn yet.”
  • “If there is any good news in the picture it is that the correction in the housing market is almost complete.”
  • “We are due for significant increases in unemployment through the 2nd quarter of 2010.”
  • “Continued job loss in California is going to lead to more foreclosures and more uncertainty about the ultimate bottom in housing prices.”

California Association of Realtors:

  • Recessionary conditions through the first half of 2009, “before we begin to see a turnaround in the second half of next year.”
  • Prices down 28.4%. That’s revised from an earlier projection that prices would drop just 6% this year.
  • Sales up 25%. CAR forecasts that 550,000 homes will sell in 2009, pretty good considering that the state was down to 347,000 sales a year in 2007. That’s revised from an earlier projection of 445,000 home sales.

Pessimists

Michael Carney, director, Real Estate Research Council of Southern California, Cal Poly Pomona:

  • “I don’t see home prices leveling off in 2010. … The real reason we’re not going to see a recovery: The financing is not coming back for at least 5 years.”

Richard Green, director, USC Lusk Center for Real Estate:

  • “I’d say we’re at bottom if it weren’t for the fact that the jobs picture is so dim.” … (Thinks market will turn around in 2010.)

Stan Humphries, VP of data and analytics, Zillow:

  • “I’m doubtful that we’ll see the bottom until 2010, and thereafter it’s increasingly clear that we’re likely to have a long bottom before we see meaningful recovery in home values.”

Construction Industry Research Board:

  • 2009 is expected to be the worst year on record for new residential building permits.
  • Just 63,400 units will be produced in 2009, down 3% from the 2008 record-low of 65,380 units.
  • 2008 construction was 20% lower than the lowest point during either the 1980s or 1990s housing downturns.
  • The low in the early ’90s recession was 84,656 units in ’93. The worst year during the early ’80s recession was 85,656 in 1982.
May 10, 2009 | Filed Under Financial Crisis | Leave a Comment 

Tick, Tick, Tick

Remember weekends?

Weekends once consisted of a palpable leavening of stress somewhere between Friday evening and Sunday dinner, with Barron’s thrown in there to offset the blissfully narcotic effect of the TV remote lying near one’s nose on the couch. At best, there were a couple of tap-in birdies, a robust red wine with a good nose, and a romantic encounter or a modicum thereof. At worst, the honey-do list and other chores ate into Saturday afternoon meltdown time, and cleaning up the emailbox stole some attention from Sunday’s NFL proceedings.

Weekends went away altogether toward the end of the end of September, when Hank Bazooka Paulson and Ben No-Doz Bernanke, made TARP-and-ZIRP the duck-and-cover of our economic Armageddon.

They were there on Friday nights, pre-indicating that something else big and unprecedented was running amok in the financial system. They were there Sunday mornings, announcing their latest tactic to rescue the economy from, we guess, the fate it’s suffering now.

As the lame-duck weeks have increasingly enfeebled the pulse of soon-to-be former President George W. Bush’s administrative reign, weekends made a bit of a resurgence. Transition has become mostly a spectator sport. We’re stuck in a limbo of economic and financial deterioration, and we’re reduced to applauding or decrying the Cabinet and Administrative staff appointments the president-elect has announced with chess-master calculatedness and aplomp.

The moment nears. A week from Tuesday, we’ll witness the raised right hand and look of perfectly modulated gravitas. Then, a stroke of the pen later, another trillion dollars will be sent into two years of service. Forms in triplicate will abound, and we can only wonder what the watchdogs will say about the accountability and effectiveness of the funds.  

Weekends as we’ve known them, like Wall Street as we’ve known it, are gone.

John Burns on What to Do

A productive way to use weekend time during the waning lame-duck days is to have a look at a provocative Web seminar real estate consultant John Burns has put together, called “Unlocking the Housing Market Recovery.” The analysis ties together an astute sense of how the residential market trends and capital access trends weave together into a compelling case for a four-point program to stabilize lenders and stimulate spenders.

The U.S. is undoubtedly in the worst financial and economic crisis since the 1930s. Home prices are falling rapidly across the nation, which has resulted in more than $2 trillion in losses in the last two years. The declining stock market has wiped out trillions more. These tremendous losses have created a vicious downward spiral that requires government intervention to avoid a 1930s-style economic collapse. This problem is affecting both Wall Street and Main Street.

We have done a ton of research, talked to a lot of important people and come up with an independent and objective set of recommendations to fix housing, backed by facts. In our new research-driven report, we assess the current situation and provide our recommendations to save the U.S. economy from collapse.

John’s dulcet vocal chords will make this time almost as soothing as lying prone on the couch with the remote in hand.

January 10, 2009 | Filed Under Financial Crisis | Leave a Comment 

Bears and Bellwethers

As the first week in January goes, so goes … what? January? The Year?

No one knows.

We know that data trends are run amok. Spending’s the only way out of the gloom, but no one save our Ol’ Uncle Sam is fixing to spend right now.

Accelerators of recovery–consumer spending, municipal spending, corporate earnings, income and hiring growth, credit expansion–are in a deep freeze. Federal expansion and spending, necessary though it is, push back the horizon of organic economic growth to some greater indefinable distance. Market forces, devoid of self-esteem, play possum. Forms in triplicate to satisfy regulators visit everyone’s nightmares.

Except for this. No body really knows. So-called fundamentals fooled people when times were unsustainably good, and they may well mis-predict unsustainably negative trends as well. The market turn may have destroyed wealth and dislocated business strategies, but there’s not much evidence it has dissuaded people from adoring their own biases as to technically why things are as they are.

What happens each day and each week affirms bears as being right all along. With everything else going to hell-in-a-handbasket, being right is flaunted as the new being rich.

So what happens in residential real estate as the next 36 months track through a course of varying intensity of pain, redoubled by the headline-risk of reports on last-month’s pain in data releases?

Companies operate. KB Home, for instance, knows that whether it’s six months from now or 18 months from now, an eventual blush of recovery will mean the company will have needed to make itself over. It has been one of home building’s bellwether companies because of its geographical footprint, its brand-centric culture, and its emphasis on massifying customization.

What was the American dream–which put home buyers and lenders into a trance state that convinced everyone that aspiration and attainability had merged into one easy-money solution–was having a lot of say in the design of a new home. When it returns as as realistic goal for those who want to join the ranks of homeowners, the American Dream will be about buying a home that one can afford, and one can get to work from, and one can raise kids in and send them to good schools.

KB Home 1/10/09

So, KB, whose fiscal earnings schedule and its strategy makes it a home building bellwether, says here are our numbers, but more importantly, here is our story. Our numbers–performance for the 4th Quarter–make abysmal seem like to elegant a term to apply. Our story, though, that we haven’t stopped trying to find the right product for what will be the marketplace sometime down the daisychain of events set in motion with the incoming presidential administration’s 24 month Barack Barrage of stimulative programs.

Morale mojo–who’s got it and who’s missing it?–will be the business story of 2009. Another 24 months of cost-cut heroics will be a barrier-to-entry, of course. Will management consultancies continue to be able to get away with conceptual niceties like “cultures of innovation” in times like these?

January 9, 2009 | Filed Under Earnings, Financial Crisis, Home Builders | Leave a Comment 

You Heard it Here at Housing Crisis First

We’re opening a thread here, looking for your list of three to 10 housing predictions for 2009. Care to call the bottom? Now that private equity has put a value of about $14 billion on IndyMac, will there be takers for real estate related assets of other banks at asking prices that make the deals pencil? How many home building-related companies, trades, manufacturers, and distributors will need to close their doors as they run dry of resources to keep operating?

Prophets who got it wrong in the old days had something to lose when they messed up on the job. Like their lives. Today though, if you’re wrong about what you say will happen in the next 12 months, you’ll probably be right about it within the 12 months after that. The bears after all were dead wrong for two or three years before they were absolutely right, proving the bulls wrong for a year or three.

Reader-generated content is taking other business sectors by storm, and the flow of wit, witticism, insight, and cynicism has sparked new ideas and budding relationships galore. Imagine, you could start something in residential real estate and share in the pride of your authorship, which we’ll be glad either to publish or keep quiet, as you prefer.

Maybe the following list of 10 relatively playful predictions for 2009 will help prime your prognostigative pump. Remember, you heard these here first:

Your list goes in the “comments” area below.

January 5, 2009 | Filed Under Financial Crisis | Leave a Comment 

The Operative Term–Total Insured Unemployment

Precision and the end of the Great Depression are widely regarded as mutually exclusive concepts. The end of the 1930s arrived, and the economy in the United States was still reeling. The start of World II ignited a burst of spending on borrowed dime; industry cranked up to arm troops and operate a wartime society. Call it distraction, or the illusion of prosperity, but this period of a few years during the war finally put an end to a decade of economic woe and job stagnancy.

Although we’re now getting used to anomalies at every turn, there’s no reason to think the current economic crisis will end at a single definable moment any more than downturns of the past. Right now, focus is justifiably on the “second derivative” of trends in unemployment claims and housing prices.

Once the rate of deterioration slows–sustainably–there can be reason for hopefulness around a bottoming of the flows and forces that most impact consumer confidence and sentiment. Government spending can serve as a band-aid.

Consumer spending at a healthy, responsible clip will be the real sign of an economy on the mend.

December 31, 2008 | Filed Under Financial Crisis | Leave a Comment 

‘Twas the Night before FY

‘Twas the Night Before FY

(Beware CFOs with open tabs… apologies to Clement Clarke Moore)

‘Twas the night before FY, we’re now at the bar.
Our guidance is dreadful; we’re no NVR.
And fresh off a WebEx with dame Ivy Z,
We’ve spun metrics, pro formas, even fibbed a degree.

First-time buyers are mirages, our banks are a mess,
And privates are all creaking with signs of distress.
The free-markets free-fall, the jobless claims mount,
FCF’s but a trickle, backlog’s down for the count.

We’ve right-sized and downsized and hammered our trades,
Zeroed out our revolver, still our gross margin fades.
We’ve taken out talent, cut our costs to the bone,
Still we can’t move the houses; there just aren’t the loans.

When Ben lowers Fed rates, it scarce makes an impression.
We seem headed straight for much worse than recession.
We’ve combed through our inputs, we’ve slashed costs and burned,
We’ve walked, and we’ve mothballed, and to impairments we’ve turned.

We’ve reset all our prices, again and again,
‘Til a dollar’s worth pennies in just a stroke of a pen.
We’re waiting for bottom, for signs of a trough,
We need the absorptions, we’ve had quite enough.

Now Dreier! Now, Mizel! Now Dugas! Now Miller!
Hovnanian! Hilton! Mezger and Eller!
On Tomnitz! On Toll, McCarthy, and Schar!
On chairman of StanPac, whoever you are!

For we are the publics, the world needs our good health,
We’ve sworn off our bonuses, toned down our wealth.
Our community counts are but half what they were,
We’re exiting markets so fast it’s a blur.

I’ve worked spreadsheet magic, I know my job well.
Just look at our leverage and the huge NOL.
We’ve got tons of dry powder, we’ve cut down our debt,
Not an analyst doubts, we can weather this yet.

We’ll miss old Ken Neumann, Dunmore, Legend and Trend,
Royce, Village and Barratt, and all our BK friends.
We’ll bet they’re not done; they’ll be back around,
From OldCo to NewCo, when fresh capital can be found.

Until then, you don’t have to guess where we’ll be!
Right here at the pub, I run t&e!
We’ll hope for good earnings, we’ll pray for the jobs,
We’ll pray people buy Fords, Chevys, Volvos, Hondas and Saabs.

We’ll raise our glass too, to the men of Wall Street.
So gracious in triumph, so gallant in defeat.
They’ll find new employment in less well-paid posts,
Then they’ll buy up our houses on East and West Coasts!

For Barack is coming, just wait ‘til you see,
A non-stop flight, Honolulu to DC.
He’ll head to the Oval, all rested and tan,
With a dream team Cabinet and a trillion dollar plan.

He’ll rebuild the bridges, he’ll repave the roads,
He’ll wire all the schools, even add wi-fi nodes.
He’ll start in on health-care, and insure one and all.
For New Deal Number Two, no order’s too tall!

With Geithner, and Volcker and Rahm at his side,
Obama won’t give in ‘til he’s turned the tide.
So let’s toast the new Prez. Let’s hope we’ve seen the worst,
He’s still got to learn, we’ve got to fix housing first!

December 29, 2008 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

Timothy Time

Friday’s bear rally came in the nick of time to rescue a pre-Thanksgiving holiday weekend from painkillers and paranoia.

Geithner for Treasury

Geithner for Treasury

The Barack Obama plan–change from what’s just been back to a little more of what was [under Bill]–is taking shape decisively. With Timothy Geithner, Treasury will be able to play offense in a cross-the-aisle way necessary to build both consensus and conviction. The New York Times reports:

Mr. Geithner, 47, for weeks has been the subject of speculation for the administration’s top economic post, a job that has gained out-sized stature as the economy has weakened and the Treasury secretary has been put in charge of a $700 billion financial bailout program. His chief rival was his former boss at Treasury, Lawrence H. Summers, President Bill Clinton’s final Treasury secretary.

Check in tomorrow for a look at a “whew” moments from the past week worth reviewing.

November 21, 2008 | Filed Under Legislation | Leave a Comment 

Taboo Topic Two — Down But Never Out

A report in today from Zelman & Associates’ home building guru Ivy Zelman notes that home builders–normally optimistic on a bad day–have met their match at last. 

A landscape rent into two unequal and unfair parts puts what can not be controlled into a dark, limitless stretch of peril, and what can be managed into a tiny sliver of high ground reserved but for a few who played their cards with the utmost conservatism well before the game changed.

Zelman’s litany of worsening conditions maps out a pall over the present and a storm clouded future on every mentionable front, from home builder sentiment itself, to credit conditions that affect both supply and demand of new homes, to real economy tailspins in jobs and earnings, to policy agendas on Capitol Hill, to share valuation trends that are supposed to be a bellwether of brighter fundamentals for the home building sector.

Our October homebuilding survey results came in at the lowest level of the downturn. In our opinion, the continued deterioration in fundamentals witnessed over the past two months indicate a new leg down, fueled by a tsunami of rising job losses and eroding consumer confidence. Each additional month of deterioration makes it increasingly likely, in our opinion, that some sort of housing stimulus will ultimately be passed to address these issues. However, despite continued heavy lobbying by the industry, discussion of a housing stimulus package has not received a significant amount of media coverage or public discussion on Capitol Hill. While we continue to believe that some form of stimulus is inevitable, the lack of recent discussion makes it less likely (but not impossible) that a plan will get passed in the lame duck session before President-elect Obama takes office in January.

Ivy’s data and sources that more than one in five private home builders have capitulated amid banks’ existential identity crisis regarding whether to get back into the lending business and whether to begin marking real and paper assets to a value that can be transacted.

So, as one industry observer remarked at a conference in the past two weeks, “My guys are dropping like flies! It’s not even funny.”

There are but a few options, none of them really palatable. One is to develop a winddown plan that would allow principals in the company to escape with their shirts, the better to put one on and come back to work in the business in two to three years when capacity is needed once again. That will take careful and painful corporate law and taxation planning, and it’s better to be active about it rather than have it happen to you.

Another option, find capital fast. Cash is sitting on the sidelines among professionals who’ve taken a portion of their investment portfolio out of the stock market, and it’s possible that you can reach out to the doctors and lawyers groups to buoy your outfit through what will be a 48-to-60 month storm of unprecedented fury. NewCos may get capitalized as OldCos get mothballed, but the pounds of flesh in equity and control are going to be piling up like a meat packing district.

See a previous post on “Taboo Topic: Going Broke the Right Way,” to improve odds that you can resurface in this business with your name and trustmark in tact. It may be the only move that makes sense.

If home building’s “Permabear” Ivy Zelman can forecast a bottom in 2010, we might have to start considering that the best news we’ll hear all day.

November 10, 2008 | Filed Under Finance, Home Builders, Legislation | 2 Comments 

Meet the Prez

For President George W. Bush, it’s about a legacy. For president-elect Barack Obama, it’s about all the work ahead. The twain meet amid a confidence crisis that has riddled the domestic and global economies alike with uncertainty, doubt, and the devaluing of assets caught in a gravitational spiral. With signature attention to detail, Obama and his staff are said to be poring over hour-by-hour, day-by-day annals of presidential transition periods past in order to get as much positive traction as possible for programs and strategies that will define his first months as the nation’s chief executive.

Geithner in the spotlight

Spotlight Geithner

This passage from the WSJ story: “Mr. Paulson will be leaving, but Mr. Bernanke, whose term extends to 2010, will remain. A key player will be Timothy Geithner, either continuing as president of the Federal Reserve Bank of New York or as Mr. Paulson’s successor. Mr. Geithner, one of the Fed’s key crisis managers, is among a handful of people on Mr. Obama’s short list to run Treasury.”

The new team is obviously the president-elect’s first agenda item. Still, the mounting urgencies–consumer spending and confidence, company earnings, a credit market slow to thaw, jobs disappearing, homes foreclosing at a rate of 16 per hour–make it so that a strategic approach to the crisis would be an extravagance.

November 10, 2008 | Filed Under Finance, Legislation | 1 Comment 

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