Imagine a diagram that looks somewhat like this one, only the word “Projected” would go on top of this split personality figure, and the word “Actual” would appear at the bottom. On one side are the factors within a home building company management’s control. On the other, externalities, or forces that lie outside any individual’s influence. Welcome to big builder 2014 budget planning, which we’ll call the year of “being better, or else.” Are you projecting a 25% increase in sales, with profitability to match, as some home builders are? Or, given the current slowdown, are you paring back your projections? This morning, BIG BUILDER will explore the alternative scenarios from reports around the landscape.
Also, check out our top-10 glossary of most common four-letter words used in the 2014 budget planning process.
Standing between the two words "Projected" and "Actual," there’s a great big “V” shape that stands for “variance.” For many organizations, the size of the V depends on skills, judgment, and leadership, and all importantly, access to money, … big, patient, cheap money.
On the right side of the “V” is a column under the heading “What I can’t control” and on the left side of the “V” is a column that has the heading “What I can control." This is what your check list looks like.
Budget 2014 Strategy Check List:
What I can control
• Skill-sets that blend domain expertise with new technology-driven time and cost savings
• Relationships built around trust, credibility and effectiveness
• Moving-target management in ongoing environment of uncertainty and fluidness
• Building information modeling
• Big data sales optimization
• Big data neighborhood, land strategy programming
• Big data procurement and strategic sourcing
• Construction automation
• On site ops management
• A & B location programs timed for 2015 Spring through 2016 end of year
• Closer in positions proximate to job centers
• School districts
• Transportation access
• Natural amenity
• Cost-base that pencils IRR without appreciation
• Input costs pressure margins
• Where are the cost offsets in velocity, scale, market efficiencies?
• What does it cost to program more benefit for less money?
• product differentiation memory points
• operational cost differential
• creating urgency around new-home communities
• Accountability among associates
• Prospecting yes, maybe, no
• discipline around who’s buying and why
What I can’t control
• Debt/Deficit/Budget Capitol Hill circus
• Fed monetary policy accommodation
o Cost of money
o Interest rates
• GSEs: federal guaranty of secondary mortgage markets
o Home buyers’ access to credit
o Home builders’ access to credit lines for A&D
HOUSEHOLD INCOME & DEMOGRAPHICS RISK
• Wages stagnate
• Jobs offshored and automated away
• Student debt suppressed household formation growth
• Labor force participation shrinks
• Multigenerational households
CONSUMER CONFIDENCE RISK
• New FEMA flood plain maps
What will follow, during the course of this morning and over the next couple of days, will be a series of informed reports on how home building company executives are weighing their prospects and guiding their teams vis a vis land commitments, design programs, positioning, and sales.
Uncertainty is the given. Success is not. Still, every submarket will have a winner, or maybe more than one. The challenge for 2014 is to be one of those winners.
Here are 11 telling verbatim quotes we're hearing from well-placed high-level sources around the country:
- "Clearly the market has slowed in the second-half of the year, more than most builders are saying. They're hoping it's little more than a seasonal thing, but nobody's really sure."
- "If they think all they need to do is roll back prices a bit to get people buying again, they're mistaken. It doesn't work that way."
- "If you lower your prices, now you've got to at least ask yourself the question, do you lower the prices for the buyers you've got in your backlog?"
- "When there's the kind of policy uncertainty you saw leading up to and including the government shut down, is it going to affect people making the biggest financial decision of their life? You're damn straight it will."
- "We've seen a slowing, but I'm not letting anybody in my company know there's an issue. I don't think people function well when there's uncertainty in an organization. You don't want people going into 2014 with a lot of nervousness."
- "We've gone for better-located deals, and made surgical strikes, so when there's a slowdown in a market, the shift is to the more desirable places. We're looking at a pretty strong 2014."
- "What we do to protect ourselves in a market is to put more distance between what we're offering and others in the arena: we put more into marketing, into the landscape and the streetscape; we make it a 'must' neighborhood."
- "We don't do 10 subdivisions in a market; we laser focus on one and make it the best."
- "We have to plan our business both for phenomenal growth as well as to protect it to the downside. It's a reality of the market."
- "As a regional home builder, we're seeing an opportunity in the slow down. Some of the big publics got their bellies full of land, and now they're spitting some deals back out here and there that they picked up six or nine months ago. This is an opportunity, because some of these are good locations."
- "The recovery that's happened, and will continue to be most important in 2014, is in the 2nd-time and 3rd-time move-up segments. They're more discretionary, and have better access to mortgage credit."
As a backdrop to budget planning, metropolitan markets--with the exception of a handful of Texas and Carolinas metros, and a submarket or two many other markets--have reacted adversely in the past few months to forces that have left observers guessing and theorizing. None of them--ranging from overly aggressive seller pricing, to interest-rate sensitivity, to seasonality, to political uncertainty leading into the October 1 government shutdown, to renewed employment insecurity--seems far-fetched. Neither, however, does any of them seem to account for what's happened in some places, and not in others.
Normally, a first-blast of interest rate increases off a low point tend to goose activity among people who realize they're not going to do better, and therefore must get off the dime and move. There was a little bit of that in post-Ben Bernanke taper talk days, but not much to speak of.
Also, the over-aggressive pricing explanation doesn't quite add up either. Yes, mean and average sales prices rose quickly in the past 10 to 12 months, but when product and segmentation mix factors into what's been transacting, some fair percentage of the median and ASP increases owe to the types of product lines that are selling due to who it is that can qualify for loans.
So, if second- and third-time move up buyers are dominating the market, because it is they who can land a loan and they who are perhaps less susceptible to interest-rate volatility, then it would make sense that median and average selling prices would be going up quickly. Not necessarily an apples to apples over-aggressiveness when it comes to telling certain levels of buyers, "we're going to jack up our prices to the point of stretching beyond your monthly payment capacity."
Effectively, however, if builders have--en masse--failed to attract lower-end, entry level buyers into the market, then that may indirectly exert a negative drag on demand. For if there isn't a transactional, high-functioning market for lower-priced homes that are people's for-rent exit strategies, then demand for higher-end homes can only take place in highly discretionary mode. In other words, if people are first-time buying entry level homes, then people are selling those homes (at least the resale ones) and they can move-up to the next level of demand.
That's one organic wave that has not gotten kick-started in the current recovery environment, and it's where there's the greatest amount of continued uncertainty.
Bank regulation in the form of Dodd-Frank risk management, housing finance constraints in the form of ongoing questions of government vs. private sector investment in secondary mortgage markets, macroeconomic vice-grips in the form of ongoing structural automation, offshoring, and rightsizing the workplace impacting household composition and formation, as well as student debt loads, need for greater flexibility, and less ability to amass downpayments are among the known impediments to a smooth, surging housing recovery.
The fact that historically-averaged numbers persuade us of a large and fast-swelling pent-up demand for for-sale housing in new communities is hardly comfort to companies who remain out on a limb with big money invested needing short term wins. If 2013's early going months exposed a deep, motivated pool of fundamentals-driven demand, what the latter going has exposed is that there's a fickle, tenuous, conditional nature to this demand.
That leaves just two strategies for 2014: be better, or be very lucky.
Sure, some, by virtue of their sphere of operation will find themselves inadvertently in the way of success.
Not many though.
Most are going to have to be better in a number of ways. One top 50 multi-market regional building company executive tells us he's pegged 2014 for a 25% increase in sales year on year with 2013, but he can almost as easily imagine either flat or down with this year if what seems like a seasonal lull steamrolls into a full-on pull-back in demand.
Three strategic keys seem to underpin the 2014 plans of the most confident players. They're obvious sounding, but no end of repetition seems appropriate:
- Get the product right--surgical precision vs. everything-to-everyone seems to be the way to put the biggest delta between what one is offering and that which others, both new and resale, can match. Value today is the distance you put between what you're offering and the rest. It's what buyers expect as a cost-of-entry into their consideration set. What's more, a reality of the market is that--although there are exceptions in entry-level, first-time buyer markets for companies like LGI Homes--most of the action now is in second- and third-time move-up buyer pools who are less susceptible to interest-rate and price blips.
- Don't scrimp on land position--Almost every market in 2014 will expose the thoroughbred horses vs. the dogs. Money and all the leverage you can put on a relationship with a well-positioned land-seller is going to be what it takes to stay in the game through 2014.
- Talent--the business is not what it was folks, although you might disagree. A certain number among your talent braintrust needs to be disrupting everything, ... the finance model, the construction cycle model, the strategic sourcing model, the customer identification, acquisition, and referral model, etc. You need people who'll be willing to tell you that to keep working the way you always have is a sure death sentence.
2014 budget strategy hinges on being better than the rest. The knowns, the known unknowns, and the unknown unknowns together stack up as a bunch of uncertainties and external factors in the way of modeling our businesses with any degree of confidence for 2014. The proxy, then, for visibility, is what Black Swan author Nassim Taleb calls "antifragility," which he defines as a property of organisms that can and do grow stronger with adversity (and uncertainty).
This is something every home building company executive believes is in his or her DNA, and this is a year that will prove it out. We're relatively sure that the year will go down as part of the prolonged and protracted recovery trajectory out of The Great Recession, but we're just as sure that casualties will be abundant during this stretch, mostly do to the inability of many to put their hands on the kind of money necessary to stay in the lot acquisition dance.
If this recovery were Snow White, the seven dwarves' names would be Bumpy, Lumpy, Choppy, Grumpy, Iffy, Sniffy, and Fitful.