Big Builders Emphasize the Positive
|
It's hard to say when the momentum turns in a ballgame. It's when a football team makes a big goal-line stand or recovers a fumble. It's when a baseball pitcher strands the potential game-winning run on third base. You can usually only tell after the fact.
In home building, momentum turns when buyers come back to the market worried that bargains may soon disappear. As such, builders have a vested interest in turning the tide of public opinion. They need to convince everyone, especially the media, that we've hit bottom and are on the way up.
This dynamic was very much on display at a meeting of the Builder 100 Advisory Council that we conducted in Chicago yesterday. Most people at the table--builders, lenders, investment bankers, land brokers, and accountants alike--brought some good news about current market conditions and how their company was doing.
David Drees, the CEO of the Drees Company, noted that his company's sales had increased each of the last five months. And for Drees, which does business at an average price point in the mid-300s, that's saying something--specifically, that people have been successful selling their first home to move up.
The question, of course, is whether the good sales news builders are reporting is seasonal or structural. The best comparisons are year over year, but even those are complicated by the status of subdivisions where sales are made. Ara Hovnanian, CEO of Hovnanian Enterprises, has done the analysis. "It's structural," he said.
When asked whether the American dream of home ownership was still alive, Tim Eller, the CEO of Centex, reported that buyer psychology has changed dramatically. Buyers, he said, are making more conservative decisions. "They are much more value-conscious," he said, adding that the downturn has created considerable pent-up demand that will drive new home sales forward in coming years.
There were other signs of light at the end of the tunnel. Bird Anderson, who heads the builder loan group at Wachovia, reported that the bank recently approved two land purchases builders had brought. Jamie Pirrello, the CFO of Michael Sivage Homes, said the company has lined up some new community banks eager to fund operations based on the company's track record. Dan Ryan of Dan Ryan Homes in Frederick, Md., reported that the bank recently reauthorized the company's credit line.
But no one at the table could say for sure whether their recent prosperity was due to the fact that so few builders are left standing. Ryan estimated that as many as 90 percent of the builders are gone in the markets his company serves--Morgantown, W.V., Charleston, S.C., and Frederick, Md. Though the estimate is on the high side, no one at the table ventured to disagree.
As the conversation turned to consolidation, Anderson noted that the small builders in Wachovia's portfolio had out-performed the larger private builders, who have been the hardest hit by the downturn. Steve Friedman of Ernst & Young believes big public companies, with their access to capital, have a significant advantage going forward. He believes that in the short run they will gain considerable market share. But he also thinks there will be a place for private companies, especially in the land arena, since publics will want to minimize their land exposure. A good play for private companies would be to buy land with private equity and do merchant building.
Much of the discussion focused on how private companies will be funded going forward. Though most of the discussion focused on finding new equity sources, a few participants expected banks to come back in the market. "Lenders will lend--that's what they do," said Larry Webb, the former CEO of John Laing Homes.