A bricklayer who worked back in the day for a guy who's now gone on to become chief executive of one of home building's publicly traded enterprises is remembered for one of his quotable quotes: “I see a hole, and I fill it.”
So, is “housing” an industry sector made up essentially of companies that profitably provide for-sale American dreams come true? Or is the housing industry a holistic solution to the nation's need for shelter as its population grows, ages, and becomes more diverse, culturally and financially?
Housing has two critically important trends going in opposite directions. More people are renting; less people are buying. Most of our core audience and its solar system of partners believe that talk about home building companies dipping their toes into any number of for-rent business models is just that, talk. For some, it's worse, a distraction from the everyday focus needed to keep it simple and be the best home building company one can be at a time when patience and cash preservation are the principal virtues.
Still, as rental housing's vacancy rates shrink, as foreclosure's mass of refugees grows, as banks' willingness to lend tightens, and as consumers get more and more squeezed as to how they put their hard-earned investment capital to work, serious questions arise about the future of homeownership and the fate of companies whose eggs are all in that basket.
Should home builders do rental? Would it be a poor use of capital?
There's another well-known quote in the business—credited to who knows who—that says, “When things are good in home building, we get to thinking they can never get bad again; and when things are bad, we're sure they'll never get good again.” A corollary to that, when things were booming, in they boomed for so long that builders thought they'd cracked the code of the business cycle. Now that things have been bust for well onto five years, builders are starting to believe that maybe the business cycle, like everything else, is broken.
So, to correctly respond to whether the for-rent business is a real opportunity or a red herring, the big question in front of home building companies—large, medium, and small—is this: Is this housing downturn cyclical or secular? If you know the answer to that question, you should tell the president.
If your assumption is that housing's downturn is entirely cyclical, then you likely believe that once the economy, consumer confidence, jobs, global currencies, global energy supply, and global debt all calm down and behave, housing is going to snap back to 1.7 million or 1.8 million single-family, detached, for-sale housing starts to accommodate a corresponding number of new household formations at a homeownership rate of about 65 percent or thereabouts.
But what about the secular changes we're looking at in the world of housing finance, demographic preference, and, very importantly, the moving-target nature of jobs creation and employment locations?
The challenge for home builders right now, in the throes of the most painful contraction the industry has witnessed for as long as anyone alive can remember, is to answer that question: Cyclical or secular?
If the answer includes a structural change, then the 65 percent to 35 percent ownership to rental equation changes. If that equation is changing beneath our feet right now, there's a hole for home builders to fill, and it's not building more for-sale homes.
Our CEO friend told us his company is actively researching for-rent models that go back to the roots of many home building enterprises in this country, before modern government-sponsored enterprise housing finance began to tilt the balance of housing so favorably toward homeownership. “We're in the shelter business,” he says.