THE PRECIOUS HOUSING TIDE, WHICH FOR THE LAST SEVERAL years has deposited ever-increasing riches on builder shores, seems to have turned. Traffic counts and sales slowed almost imperceptibly during the final months of the year as interest rates rose into the mid-sixes and prices rose beyond the ability of many to afford them.
“This is the beginning of the end of the housing bonanza,” said David Hill, CEO of Kimball Hill Homes, sounding a note of caution during a panel presentation kicking off the BIG BUILDER conference in Las Vegas last month. Kimball Hill operates in markets throughout the Midwest, West, Southwest, and Southeast.
With building material prices continuing to climb and price increases moderating, builder margins are being threatened. “I'm worried,” noted Larry Webb, CEO of John Laing Homes, a second member of the panel, adding that the shifting tide wouldn't change the way he operates his company. John Laing Homes presells all its units. “We're always running our company as if we're preparing for a disaster,” he noted.
The final member of the panel, David Weekley—chairman of David Weekley Homes, which operates in 15 cities—reminded everyone that the situation varies by market, and some markets are doing well. However, he's advised his divisions to figure into their pricing an 8 percent increase in materials next year. Said Weekley, “I'd be surprised if the market [for starts] is off by more than 10 percent next year.”
SHORING UP OPERATIONS Even so, 2006 is shaping up as a tough year for builders, one in which many eyes will turn to improving operations and returning to sales basics. There's little doubt that the industry's ability to raise prices in recent years has masked operating inefficiencies.
Even as the rising tide has lifted nearly all boats, it takes some builders 50 days to build a home, while others toil for 100. Some builders achieve gross margins of 25 percent, while others get by at 10 percent. Absorption in similar communities, practically selling across the street from each other, can vary from four to seven a month, depending on expertise in sales and marketing.
Considering that the current housing is rife with managers who don't have experience in a downturn, who may not know when to shed land or to cut costs. Many salespeople new to the market in the last five years have no idea how to prospect, follow up on leads, and close.
To be sure, the best builders have used the bull market of the last five years to prepare for the day when sales may slow down. They improved customer service, which will build precious referral sales in a tough market. They value-engineered their plans and specs to cut cycle time. They culled weak land positions to generate cash reserves.
WHO'LL BE LEFT STANDING? Within days of the conference, Toll Brothers cut its delivery forecast for 2006, citing soft demand in “a number” of markets, including Las Vegas, Washington, Chicago, and Florida. The announcement pummeled builder stocks.
With 7 percent to 10 percent fewer starts next year, the weakest builders may get crushed. “We'll find out who the A builders are in a downturn,” said Ivy Zelman, housing analyst with Credit Suisse First Boston at the conference. “We have our ideas [of who they are].”