Investor nonpareil Warren Buffett fessed up in his company's annual report this year that in 2008, he'd committed sins of “commission” and “omission,” and these sins hurt the value he wound up delivering to Berkshire Hathaway investors. Senior management of 17 home building companies whose shares trade publicly on Wall Street could probably add transgressions of their own to the list.
Each of the 17 public home builders developed guiding strategic principles for 2008—cut costs, cut down on community counts, cut square footage, cut all directs, cut all overheads, cut prices, cut expectations, and maybe, find a bit of cash here and there where no one else was looking. But, while each applied an individualized secret-sauce formula for execution, one and all were swept up in economic forces that were bigger and badder than anything they had known for as long as anyone could remember. They'd entered 2008 anticipating a tough first half, and they came out of 2008 realizing that the first half was the easy part compared with the storm they'd have to weather starting in October and lasting at least through the better part of 2009. If they were lucky.
By the last quarter of 2008, a quarter in which American consumers would get slammed by the sudden vaporization of more than $5 trillion in household—mostly home value and stock portfolio—wealth, and in which the global financial complex would flirt with systemic collapse, home builder executives of the public persuasion suspended hope of any sort that buyers would surface as the economic rout's white knights.
No where is the disaster of fourth quarter 2008 more evident than in the fact that the public builder basket of companies lost $11 billion—almost $7 of every $10—in backlog dollar value year-on-year coming into 2009. The 16 public builders in BIG BUILDER's Report Card in total have 27,464 homes recorded in backlog, coming into 2009. That's 15 percent of the business they'd had booked as they entered the 2006 peak year. (Avatar Holdings filed Securities and Exchange Commission documentation after our press deadlines and is not included.)
That's the kind of bleak outlook that portends liquidity and solvency questions for several of the companies that have had to add more expensive debt to their capital bases in return for a wager that cash flows will take a dramatic turn to the positive within 12 months or less. What happens when there's just plain too much capacity? Look at the car business.
Having spent all of 2008 on the slippery slope of falling median home prices, geysers of foreclosures in the very locales that had been the hottest new-home sales markets during the boom, and vanishing share equity value, home builder strategists threw every balance-sheet management and accounting technique in the book into full action. Land assets, weighted like sandbags, were either mothballed or cut loose, markets that showed no immediate pulse were exited, people who joined on during the hiring frenzy 36 months ago were pink slipped, trades were given a choice of slashing their rates or getting slashed—all for two purposes and one driven mission.
The two purposes are cash preservation and debt reduction, and the driven mission is most simply put this way: “getting to the other side.”
M.D.C. Holdings' CEO Larry Mizel has three words to sum up public or private company strategy for housing downturns, however adverse: “Don't go broke.”
Centex's CEO Tim Eller says of recessions that hit housing hard and migrate into the rest of the economy: “The plotline is always the same, and the only difference between one downturn and another is the relative severity and duration.”
This plotline is a classic horror story in metrics for the public home builder basket of companies. From a peak of 22 publicly traded, U.S.-based companies we analyzed in 2006, a quarter of them are either flat broke or working under Chapter 11 reorganization protection. Gross revenue for the entire basket was $121 billion in 2006 and cliff dove to $74.7 billion the next year. The 16 builders' revenues we have to look at after 2008's weak performance totaled $43.8 billion, a 40 percent vertical drop from 2007 and more than 63 percent down from a peak in 2006.