It might be bouncy, rocky, and long, but the housing recession's bottom is here, agreed CEOs on the opening panels at Hanley Wood's Housing Leadership Summit in Chicago. The big questions home building executives are struggling with now are how to tie up the right land and find the means to buy and develop it.
"I am actually declaring the market has bottomed, and it happened last quarter," said Tim Eller, former CEO of Centex and currently vice chairman at PulteGroup, during the Builder 100 Advisory Council Roundtable on Monday.
"I think I agree with him," said M/I Homes CEO Bob Schottenstein. "I think it's going to be a long climb back, and I think reasonable levels of profit are a long way away."
Furthermore, the sentiment among these CEOs is that the climb back up is likely to be easier for the publicly traded home builders than for private ones because they have more access to the capital it takes to buy land and grow.
Even industry veteran Larry Webb, who has started a new home building company and has been a stout champion of the advantages of being a private builder over the years, said he thinks private builders have it tougher because financing has all but dried up for land purchases and, in some cases, land development and vertical construction.
"Publics can grab a giant share of the market," Webb said. "If a private guy buys lots, it comes out of their own pockets."
There are ways private builders can compete against publics, including building homes in markets where the publics aren't; capitalizing on specialized niches where the publics don't excel, such as infill development; knowing their local markets better than the thinly spread multi-market builders; and being more nimble in general.
"The inner-city opportunities are going to be large," said David Weekley, chairman of David Weekley Homes. "I don't see the large builders going into that. I see that as a good place to play for privates."
In both the Monday evening advisory panel and the Tuesday morning CEO panel with Hovnanian Enterprises' Ara Hovnanian, Weekley, and Shea Homes' Bert Selva, it was clear that finding new land at the right price to build on is a top priority, if not the top priority, for all builders.
Risk-adverse builders, many of whom were burned badly when they had too much land in bad locations when the market crashed, bemoaned their diminishing ability to option lots until they need them, rather than buying them outright, a land-light model.
Option deals have become scarcer in many markets. In addition, many developers who once supplied land have gone out of business, leaving builders with the task of doing their own development. But for some, that's not an option because they can't get the financing to do such development.
"Who are we going to go land-light with?" asked Ronny Salameh, COO for Maryland-based Dan Ryan Builders.
Prices for lots, particularly finished ones, have climbed as builders have become more aggressive buyers. Some CEOs questioned how builders can make a profit at some of the higher prices presently being paid for parcels.
Shea's Selva said his company assumes that the land will have zero appreciation before the home is built, and he guesses that other builders must be assuming appreciation will occur in order for the deals they are making to turn a profit after paying the higher prices.
Selva said he won't buy land unless it's clear it will be profitable under conservative underwriting. If he can't find enough land under those criteria, "we will be slower" growing, he added.
Weekley, who has always optioned lots versus buying land, said he intends to stand with the business model that helped his company survive not just the current downturn, but also the market crash in Houston during the late 1980s.
He said acquiring land is probably the biggest obstacle to his company's growth. "I think the days of '$1,000 down for a lot and take them when you can' are over," Weekley said. "I think that we will be putting more money down."
Weekley also said his company has had a policy that it never had more than half the company's net worth in land. "I think we are going to maintain that, but it's going to be harder," he added.
Hovnanian agreed that land is going to require more investment for builders. "The trend is going to be to have a little bit more skin in the game," he said.
The CEOs were optimistic that all the cuts they have made to staff and the fine-tuning of processes, product, and purchasing have created companies that are better coming out of the downturn than they were going in.
Selva said Shea has lopped 74% off its SG&A costs and 72% of its people. "You have the opportunity to build a dream team," he said.
Weekley added that he already has one: "We really do have the elite team left." But the remaining employees are a unique group, he noted. "Your mind has been forever scarred" by the hard times, he said. "That has great value. I think all of us will be better managed now."
Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.
Learn more about markets featured in this article: Chicago, IL.