New-Home Builders Try New Tactics to Win Share from Resale Real Estate
Hardly a soul in home building’s arena needs reminding, but nine out of every 10 homes selling into this beast of a market are not newly built houses. Data’s now out on June existing home sales, and a quick review of run rates on mortgage applications for purchases and pending home sales data suggests that a 4 handle on existing home sales for July and/or August may easily come as no surprise.
One in 10 of a universe of 4.9 million can conjure bad-trip flashbacks to October 2008 through June 2009 for most new home builders. Still, most of the ones we’re talking with believe that the 4th quarter of 2010 will mark the moment housing will begin to walk on its own feet for the first time since subprime meltdown became a Google search term.
Still, how many home building company executives feel precisely the way Sheryl Palmer, CEO of Taylor Morrison describes her sense of gravity-free zone housing entered since Uncle Sam stopped using tax dollars past, present, and future to prime the demand pump?
“For the first time in my life I should be on the debate team,” Palmer says of her gut sense of what’s next for housing. “I feel like I can get on either side of the debate and win! When I try to articulate where the market’s at, I can give you all the good reasons that we’re going to start to see improvement. But I can also give you all the reasons that this is going to stay with us for a while. I think they’re probably going to balance themselves out.”
Palmer attests to being an optimist with her optimism in check.
What will go on in the market through the balance of 2010 and all the way through 2011 and likely into 2012 is an X factor new home builders haven’t needed to script into their playbooks during past downturns: seven figures worth of homes whose borrowers will reach the end of their respective tethers.
So the plot line typical for a home builder to work through periods of rough going–which is to shrink the balance sheet, triage land exposure, cut directs and indirect costs, roll back prices, and gut out the worst by generating barely enough cash to cover everything that’s got to get paid for and hope that somebody doesn’t come along and appraise the land asset at less than one thinks one can get for it–doesn’t work for this downturn.
In too many instances and too many places where new home builders make their living, the market environment is too full of current and imminent distressed sales for the usual housing slump rules to apply.
Now, the questions of whether a prospective buyer can get financing, can afford to move, can sell their current home for what they paid for it or even what they owe on it, can hang on to their job, etc. loom large in today’s economy.
New-home builders offer new-home communities, and a certain number of times–one in 10 right now–buyers want that. What about the other nine out of 10?
How many of those 90% of resale buyers in today’s market are on the fence about whether they’ll go for used or new?
Realistic home building company strategists believe that their first best plan hinges less on the housing economy getting better and more on their own firm’s ability to take share in the current market.
“There are enough of our buyers out there right now,” is the way one of the nation’s dozen largest home building company CEOs puts it. “We just have to do better at getting at them.”
Truth be told, until the jobs picture changes, and changes sustainably–which some people believe is entirely possible as an entire multi-billion person consumer class of spenders continues to take shape on the other side of the planet–adversity will remain the flavor of the day in the residential investment part of the U.S. economy.
Meanwhile, the 200 or so companies who’ve been able to stay alive through a four-year slog to this point are going to have to step it up yet one more notch to snag sales from among buyers who are on the fence trying to decide whether to buy new or used.
“We needed a tie-breaker,” says Meritage Homes CEO Steve Hilton of his decision to make affordable energy sustainability a core skill of Meritage’s recovery strategy. “All other considerations being equal, we think our green initiatives can and will swing buyers our way.”
Hilton reports that Meritage’s vaunted Lyon’s Gate community in the Phoenix market town of Gilbert, Az., has netted 1o sales to buyers with qualified financing in its first three weeks since grand opening. Not a bad absorption rate in what may go down as one of the nation’s worst post World War II new home periods.
Meritage’s Lyon’s Gate equation–exceptional energy efficiency performance and exceptional affordability–owes part of its viability to the downturn itself. The 210 lots were purchased from RBC Bank as a result of the demise of Hacienda Builders–the reset on the land price was, and will continue to be the way any home builder can shut the gap between owning and renting, and between cost of owning and household means.
Also, the Meritage Green strategy now comes in four versions, of which Lyon’s Gate represents Version 4, the most ambitious. Each version of the Meritage Green starts with a minimum of Energy Star qualified plus, and ladders up the efficiency spectrum to solar/thermal and a high performance wall system that come as standard features in new-home communities such as Lyon’s Gate.
C.R. Herro, Meritage vp of environmental affairs, explains that just as all real estate is local, all affordable green home building initiatives are local as well. Step one is the lot purchase, which ensures that a production home builder or developer can roll back home prices substantially to compete in the market with resales, including distressed sales.
Next came building science, says Herro. “We worked on building the home the right way to achieve the energy savings we were shooting for, and after that we attacked the costs,” he said.
The savings to the buyer, he said, come with the overlays achieved not only on direct per square foot building and materials costs, but via concessions among vendors, credit programs with local utilities companies, and local and federal tax credit programs. It’s a complex layering of operational savings and cost take-outs that benefit the home buyer not only on the home price point but on the operating cost of the house.
Herro says that regional and divisional leaders across Meritage’s geographical footprint are enthused about introducing Lyon’s Gate type features and pricing in the communities they open nationwide. But they need, by the same token, to make sure they’ve got the same or equal cost savings and credit benefits to bring to bear, given their different climate zones, local green initiatives, utility company programs, and Meritage’s national agreements with key vendors.
“In many ways, we’re challenging the regional and divisional people to show us why they can’t implement these programs rather than to prove to us that they can execute,” said Herro.
Looks like Meritage may have found the “tie-breaker” it’s looking for to get a home buyer off that new-or-used home purchase fence.
Do you think new-home builders can or will make any headway in their efforts to wrest share from the resale market as the downturn stretches into its final innings?
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