Sheer numbers aside, in '05 top public and private builder segments posted neck-and-neck results in rate of growth metrics. But, as privates strive to continue their rate of growth through 2006, the tactics they employ will be all their own.
Certainly, the business climate has changed for both builder groups. And despite the different financial structure of the publics versus privates, there is an underlying theme in the emerging new business model that looks similar in both. Despite the fact that land prices haven't quite fallen at a rate more reflective of the slowing demand, behemoth builder tactics are shifting away from a “get land and go build” strategy, toward more of a “only build what you can sell” mentality.
But free of the quarterly numbers pressure that shackles publics, the privates we talked to report that the slowing market offers opportunity. And as publics are forced to pare back on land acquisition and renegotiate land deals, privates tactics are bold. “We're excited,” says Dan Coture, COO at Choice Homes. “We're seeing the publics reducing their land position in many of their communities, and it's giving us the chance to get in.”
David Weekley, CEO of his eponymous company, also sees opportunity for the large privates. “Our managers can do things to make the right long-term decisions—we don't have to go and unload great lots just to generate revenue and we don't need to severely discount houses to such a degree just to generate volume. We see this kind of reckoning as being okay.”
Tony Avila, a managing director with JMP Securities, predicts that the top priority for the publics over the next six months will be to preserve margins. “I expect to see them maintain discipline. For some period of time, they will be willing to accept a lower number of homes closed in order to preserve their margins,” he says. And while the publics will still be focused on a growing share of market, Avila contends that the real measure of success in today's environment remains share of wallet. “Revenue is really what matters,” says Avila. “Would you rather sell a million houses and make a million dollars or sell one house and make a million dollars?”
Of course, to some degree, it will be a little easier for the privates to maintain their rate of growth just because of the sheer law of small numbers: Certainly a percentage of $19 million is easier to achieve than a percentage point growth from $117 million. But, for companies like David Weekley Homes, this growth is just one measure of success. Weekley explains: “If, from a bottom line basis, we have a down quarter or a down year, or even a down two or three years—that's not a big deal. One of the advantages we have as a private is that we can look at other things that are important measurements of success—like [providing] customer satisfaction, training, and being one of the 100 Best Places to Work—other than the bottom line.”
“My hat's off, and I'm sorry for the guys in the public meat-grinder. They've done well financially, obviously, but there is always a price to pay on the other side. They were heroes before, and now, they'll be something less than heroic … but they are still the same good guys they have always been.”