As times get tougher, nothing becomes clearer from our vantage point than the simple fact that big builders are not a homogeneous collective. Far from it. For one, when we describe home builders, we use the term “big” quite loosely. The descriptive covers just about every company that builds in the nine-digit-dollars-worth-of-homes range and up each year. That's quite a spread—from $100 million to $12 billion or so—to group a few hundred companies.
While the good times of the recent past— to return inevitably at some future date—tended to have made one home builder look like another, whatever the magnitude, difficult market conditions do more to separate one company from another.
Take a look, for example, at how Credit Suisse analyst Ivy Zelman has begun to parse out one public company from another based on her recent “Wonderland” analysis of her builder universe's land strategies. In an incredibly granular and incisive piece of research on who paid what for lots over the past several years, Zelman and her team subject each individual builder to stern judgment on how smart, or how vulnerable and risk-prone, each is today based on the pricing, structure, and timing of their land plays.
So, while D.R. Horton stock gets a Credit Suisse downgrade for having so aggressively pursued its “double in five years” strategy with expensive land acquisitions in a euphoric environment over the past two or three years, M.D.C. Holdings and Standard Pacific Corp. get upgrades on their stock as well as high marks for “astute” lot purchases and land inventory conservatism.
An important assumption underlying Zelman's remarkable and valuable report is that all her indicators show a real estate market that's bumping back to around 2003 in land pricing, punishing anybody and everybody who paid higher than those prices for land in the past three years. She has been correct—if premature—in calling the downturn and its drivers. But, imagine the money many investors would have left on the table had they heeded her earliest warnings, starting in 2004.
It's hard to know, though, whether land prices will slip that far. Ranchers and farmers, despite taking the brunt of options walkaways among big builders, won't be in a huge hurry to drop their price tags on parcels, except maybe if there's a specific estate planning circumstance at work. Financial groups may have a shorter fuse on land holdings, and might look to move out fast and cut their losses. Land bankers aren't likely to cave on their prices fast because their respective investors insist on high returns.
So Zelman's assumption of an almost 30 percent plummet in land prices to 2003 levels, with the impact that would have on the value of home builders' land assets, is pretty far out on a limb. I think it cynically imagines that home builders, collectively, will stumble further before “scarcity” returns to the new-home economy.
But as Teresa Burney's feature—“One Man's Ceiling is Another Man's Floor” on page 28—indicates, opportunism and conservatism are merely two opposite routes to the same destination: safe passage to the other side of the downturn. “Boring” is Larry Mizel's euphemism for safe, given that his organization M.D.C. has shied away from both the rewards and the risks of land arbitrage in the past few years. Buying is Jim Bagley's word for smart, given that he can add prime acreage to Park Square Homes' footprint even as other builders look to offload unwanted lots.
Whether your “GS&A” is you writing checks from a checkbook with your family's name on it or a CFO tapping into a multi-billion dollar finance infrastructure, the right answers about how to manage through the mire are as varied as the number of companies in our “big” builder universe.
There are wrong answers, too. One of them, as Tom Ryan advises in his Big Picture column (see page 21) is not to play your own game.