Builder executives speaking at Building & Building Products CEO Conference in New York City didn't have sure-fire plans to keep their company afloat in a stormy market. But they put forward many ideas to patch their operations.
KB Home CEO Jeffrey T. Mezger says his company is refocusing on the fundamentals. Beazer Homes plans to dedicate more marketing money to the Internet, which gives the builder a better idea of who its customers are. Chad Dreier, CEO of Ryland Group, is diversifying his assets, investing no more than 10 percent in one market.
Other builders, such as Centex, are reducing their footprint. CEO Tim Eller said the company is withdrawing from Columbus, Ohio and North Carolina's Triad region. One of the lessons Eller learned from prior corrections is knowing when to stay and when to go. Other strategies employed by Centex include cutting its floor plan count by half and offering massive discounts.
KB Home is also jettisoning some floor plans. The result: The average sales price of a KB Home unit has fallen from $295,000 to less than $260,000, the company says. KB says its only adversary is the existing home market and price cuts will make their homes more competitive with resales.
Several builders--KB, Centex, and Hovnanian--acknowledged that they are cutting prices to move inventory. Which drew criticism from real estate consultant John Burns. Until they agree to end fire-sale style marketing, he said, builders will continue to be their own worst enemies. "You will continue to beat each other up," warned Burns, president of John Burns Real Estate Consulting.
Balancing People and Cash Flow
Layoffs are occurring throughout the industry. According to data compiled by MarketWatch, MortgageDaily.com, and Challenger Gray & Christmas, companies in the housing and mortgage sectors have cut more than 109,000 employees to date. As companies continue to tighten their budgets, it doesn't appear that the staff reductions are going to end anytime soon.
Beazer expects to save $30 million annually from a 25 percent reduction in staff (650 people) in October. Since March 2006, the Atlanta-based builder has trimmed its payroll by 50 percent. "With recent industry data suggesting that market conditions may deteriorate further before a recovery is underway, we need to adapt and further align our cost structure and investment levels to expected lower volumes. While these decisions are not taken lightly, they are necessary in order to maintain our sound financial position," said Beazer CEO Ian McCarthy.
WCI Communities Inc. recently pink-slipped 575 workers; a move that is expected to generate annual savings of $46 million in salaries and benefits. The builder is also reaching into the deep pockets of its board members - six of them are choosing to forgo all director compensation for the balance of calendar year 2007 and for all of 2008.
The Power of a Strong Brand
The CEOs reported that customers are still shopping their communities, they just aren't buying. "Demand is there," said Mezger, sounding a common refrain. In just two days, more than 1,000 people visited the recent opening of a KB Martha Stewart community in Denver, he said. The co-branding effort has been so successful that KB builder recently added Disney to its stable.
"In times like this, it could be easy to move away from branding," says Mezger, adding that KB Home can't afford to do that. "We innovate and execute better than anyone in the business," Mezger notes.KB's line of Martha Stewart-branded communities has generated enough buzz - and sales - since beginning the collaboration two years ago to justify expanding it to as many as 36 markets. And, Mezger has said on more than one occasion that consumers respond to a powerful brand name, regardless of market conditions.
The new Disney collection will offer consumers design choices in flooring, window coverings, lighting, and more. The designs will feature most Disney characters and franchises, including Cinderella, Disney/Pixar Cars, and the Pirates of the Caribbean. And similar to the Martha Stewart-inspired homes, the Disney collaboration fits in with KB Home's "built-to-order" business model.
Playing it Safe
Builders have learned many lessons from the housing downturn. As Larry Mizel, the CEO of M.D.C. Holdings, put it, "Everyone forgot that there are cycles in housing." The question now is how they will apply these lessons when the market bounces back.
Burns recommended that builders follow four basic business tenets when the market recovers:
- Instill a less aggressive business approach;
- Pour profits into process efficiency;
- Maintain low debt, which requires a lot of discipline; and
- Seek option land deals only.
These rules, Burns added, won't make a builder exempt from a downswing, but they certainly will cushion the fall. Mezger agrees, saying KB is currently staying away from land deals altogether by "keeping their hands in their pockets."
But Burns' advice can't help a number of builders who are facing the dilemma of being unable to pay their lenders now. As some companies face the scenario of filing for Chapter 11 bankruptcy, Burns says the fewer lenders a builder is dealing with, the better. Generally, one lender will want to work it out with the builder, but dealing with multiple lenders is more difficult.
As for focusing on the here and now, Burns suggests that builders generate cash flow by selling homes, even at a loss. Selling them at a loss is better than not selling them at all.
Pointing the Finger
Negative press about the housing sector, Mezger says, has eroded consumer confidence. "The media have been our worst enemies," he adds. Other builders have said that the media is unfairly piling on. M/I Homes CEO Robert H. Schottenstein recently cited "negative media coverage" as one of the reasons the industry is finding itself mired in "challenging conditions." And, at a recent conference, Stuart Miller of Lennar Corp. said that when the press grabs hold of a negative story, they are not willing to let it go.
The finger pointing wasn't limited to the media. Burns says the Federal Reserve "totally missed the housing downturn." Although the Fed has cut the target rate twice over the past five weeks, Burns doesn't foresee it providing much more help.
"Any further cuts are going to be because other markets are suffering," Burns told builders at a conference in New York City recently. "I don't see a Fed bailout."
In the meantime, what signs can builders look for that the market may be coming back? Burns says it will hinge on...downpayments. "When [current] renters can save up a downpayment, [to buy a home] then we will see the end."
Learn more about markets featured in this article: New York, NY.