Gone is the good-humored bravado that sparked debates past between public and private home building company chieftains over whose business model works better. When both bank loans and shareholders' equity investments made money hand over fist in residential real estate, operational executives could poke fun at one another, each claiming that his–not the other's–corporate capital structure was the basis for a stronger home building enterprise. But today, playful is out; pulling no punches is in.
Arguably, a four-year drudge through excess inventory of new- and recently-new homes turned back over to banks now lies between the present and the moment of actual recovery. Meanwhile, that vast wedge of overbuilt inventory now defines a marathon–not a sprint–for survival. Publics' capital reserves are millions upon millions of dollars of shareholders' money that can be managed, written down, and tapped into during each leg of the marathon ahead. Privates' base of capital draws more directly and extensively from the pocketbooks and bank accounts of the principal stakeholders–often including company executives – and, in turn, to a regional and commercial banking complex that is undergoing a spasm of pain to get its accounts back in balance according to Federal Reserve guidelines.
Publicly traded home building companies can afford to take no prisoners as they continue to court equity investors to buy in at the low end of share prices for an opportunity to ride the next upswing. On May 1, Centex CEO Tim Eller tells investors and their representatives that "some markets feel like they are getting better," due to the decrease in competition thanks to private builders' demise.
Eller says of private failures. "For us, it reduces capacity. It reduces the overall number of neighborhoods. The market just feels better because we get more of those sales and our pricing power is supported."
In 2006, the Top 20 privates closed 67,266 homes by unit counts, which was up 2 percent over the previous year. But in 2007, that number fell by 12,893 units, or 19 percent.
Today's private home builders are undisputedly living with uncertainty on many levels. At its most basic, the biggest, scariest unknown is the value–or lack thereof–of land. Equally daunting is the inability to see when demand for new homes will return.
Given the incapacity to predict a turnaround on either of those fronts, the most recent wave of pain to drop on weary companies is the intolerance seen among banking partners.
In the meantime, while the limbo associated with a massive land valuation reset drags on into 2008, conditions find private builders sharply divided into two camps: those who need cash and those who already have it.
Private builders who preserved a conservative course find themselves with enough cash reserve and generation to continue to pay bills. But most are sitting in a strategically different position today. At the mercy of their yield per community, many private builders are hemorrhaging cash. And with earnest money in play, it's not always simple to just step away.
So the question is: Which survival tactic will work?