The challenges America's Cup teams face competing against each other are similar to competition among production home builders. America's Cup teams need to understand the environment so they can design boats that will take advantage of prevailing conditions and get ahead. They recruit and hire the best talent, and they focus on improving efficiency to gain that elusive edge.
Home builders redesigned their homes to compete well in a changing environment. Many ownsized their products, reduced specifications to drive sales prices lower, and focused on the entry-level buyer. In addition, almost every home builder made changes in personnel, and they push for greater efficiency in every aspect of the business.
In racing, as in home building, understanding an uncertain environment is critical. One challenge is predicting the changing wind direction and speed. In home building, our environment is again changing. Builders who sense the change and have made tactical adjustments will gain an advantage; those who have not will fall behind.
Mortgage availability and guidelines are similar to the changing winds of racing. With the onset of the downturn, government-backed mortgages remained a solid support for sales in the entry-level and first-time move-up market. Builders adjusted land inventory, product design, and pricing catering to these buyers. The focus was on reducing home size, reducing specification standards, and looking for land suitable for this product.
Until lately, the lion's share of demand for new homes during the downturn was in the entry-level segment as the FHA, USDA, VA, and state bond programs were a predominant source of loans. Over the past year, investors in these loan programs began to raise qualification criteria. FICO score requirements moved to 580, then 600, and now, in many cases, 640. And while USDA, VA, and some state bond programs may not require a down payment, their underwriting guidelines have gotten stricter.
USDA requires that prospective buyers have no more than one late payment in the last 12 months and a FICO score of 640; most FHA loans require a 640 FICO score; VA loans and some state bond programs may still maintain 620 minimum scores. The critical question is this: Is a buyer who hasn't saved a down payment and needs the USDA or VA program or who has only a small down payment capable of a credit score of 640?
Not likely in many cases. Individuals who don't tend to have a down payment live paycheck to paycheck. If they have access to credit, it is probably limited, and they most likely would have to use a big chunk of the available credit. Any number of instances arise that could trigger a missed payment. If you pay your bills late, it's tough to maintain a credit score of 640. Thus, the pool of mortgage-eligible buyers shrinks. Yet, it is this segment the majority of builders re-engineered to attract.
Unlike D.R. Horton and KB Home, builders such as Toll Brothers and NVR don't compete heavily in the entry-level market. They've picked the side of the course with greater wind at the moment. While the higher-end first-time buyer, such as a doctor graduating from med school or an accounting graduate joining a large firm, is capable of qualifying for a mortgage, they will want to live in more upscale neighborhoods with upscale product and design. This market along with the move-up market is not nearly as deep as the traditional entry-level market. But these buyers can secure mortgages in today's market.
Builders who can sense changing conditions before their competition can maintain a competitive advantage. We need to be asking where the next wind shift will come from.