• Item: Standard Pacific was said to be in keen pursuit of offers for a buyer in the past month or more since bringing in a new chief executive. But as of mid-May, serious bids from strategic or financial players failed to materialize.
  • Item: A question in light of an soon-expected bankruptcy filing by the LandSource joint venture partnership is whether Lennar will ante up to buy the MW Housing Partners portion and put the future-perfect Newhall Land & Farming expanse back on its balance sheet. The answer: probably not.
  • Item: As we haven't even begun to see the full force of banks' real estate losses tallied up and brought to market for re-pricing, home builders' consequential distress can only be described as in its early innings. The spread between bid and ask is still too wide.

As unrelated as these three items may seem, the way they tie together has to do with the fact that credit and debt markets are closed and equity markets are open. If new-home building's darkest hour will come just before the dawn, then we've got some darker hours to endure yet.
John McManus Photo: Katherine Lambert Individuals and companies who borrowed beyond their means to cover their debt are the source of consternation right to the top of lending's food chain these days. The more immediate the need for cash, the more compromised the position of the borrower–and the more he'll have to give up.

Equity markets are open. Creative ownership structures will be all the rage, possibly keeping good operators in business even if they've scraped up the last of their cash reserve. They may be pre-mature in their belief that the bottom may be here, but equity investors continue to pump capital into the big builder sector.

So if a company has debt and can conserve and generate enough cash to cover it–probably for the better part of 24 more months–it's likely it will survive one of the severest downturn plotlines in 40 years or more. Most of those companies know who they are by now. Some may not.

If there's any question, a word of advice from the head of a company who's been around this block a few times now: "Stop spending money." Literally. An assumption almost everybody has to go by now is that their land value–unimproved–is at about zero, and improvements themselves are worth maybe 80 percent of out-of-pocket costs. The question is how to sell, liquidate, or walk away from this in a way that financially makes any sense. "Too many times, home builders keep doing things they were doing, like putting in new streets in neighborhoods that are not selling. You think you need the street, but do you really need it? You have to stop spending any money."

When all the money center bank and commercial lenders take haircuts on their real estate loan portfolios, then it will be the moment of truth. When assets–loan portfolios, lots, or homes–actually have prices that sell at a desirable pace, the correction will be over.

"When you run out of gas a mile or two before you reach the filling station, you don't ever get to the destination where you won't need that car anymore," this industry vet says. "Does it help anybody to know now that there may well be a new-home shortage by 2011? Only if you've got the wherewithal to get to 2011. Unfortunately, a lot of builders won't get there."

Standard Pacific and LandSource share a problem. Recovery will restore huge value to their land assets, but that day is years hence. If one thing is clear about the toll of this downturn, it is that it will decimate managements first and foremost, even as it rewrites the pricetags on land and lots.

When home buyer psychology and home mortgage lending converge and the million-units-a-year of real need for new single-family homes regains a pulse, it will be plausible to calculate 12 months of forward earnings based on cash in hand, cost containment, and new orders. Until greed once again trumps fear, the world's most famous caveat–"never a borrower nor a lender be"–will apply.