Chuck Shinn minced no words when presenting the 2008 results of Shinn Consulting’s annual finance and operational study Friday. “This was the worst performance since 1970” for builders, said Shinn, with average net profit plunging from 7.96% in 2007 to less than zero (-0.75%) in 2008.
It surely must have made Shinn, who with his wife Emma constantly counsels builders to improve their profitability, wince.
But as he detailed the results during his two-hour Webinar, Shinn presented perhaps the clearest explanation of how the housing boom went bust and how it was affecting home building financials long before “downturn” ever appeared in a headline. Most useful for builders who want to get out of the red and stay in the black, he also noted what builders could have done differently—and when—as the housing market slowed.
Shinn, with his decades of experience, saw warning signs earlier than most: in early 2005, when housing starts hit a 21-year high. “I looked at it and thought we’re living on borrowed time … but the industry was in denial,” he said. “I don’t blame builders for not paying attention to that, because we were busy building houses.” Besides, he added, economists were forecasting “soft landings” for housing. Builders had long backlogs, preventing them from seeing any slowdown in demand as they rushed to finish the homes under contract. National builders were suggesting that the days of housing cycles had ended.
As Shinn, the 325 respondents to the 2008 survey, and everyone else in the industry knows, housing obviously still does have cycles, and the current one has been a nasty one.
Part of builders’ financial troubles in 2008 came from their operating expenses, which were too high for their slowing sales activity. Shinn Consulting recommends a benchmark of 18% for operating expenses, but in 2008, that had grown to the mid-twenties or even the 40%-range at some builders. “We held onto staff and operating expenses longer than we should have,” Shinn said. “There was this reluctance to trim the organization, probably because we had industry experts saying we weren’t going to have an industry downturn … There was no hope for these builders to survive as sales cratered.”
The late-breaking realization that a housing recession was truly happening quickly forced many builders into panic mode, making them liquidate inventory at discounts, hoard cash, and reduce debt with little or no planning. “Our philosophy changed from being a profit-oriented builder to being a survivor,” Shinn said. “We weren’t paying any attention to profitability. We were just trying to survive.”
It shows in the average net profit margins for 2008, which break down as follows:
Builders with up to $10 million in sales: 1%
Builders with sales between $10 million and $25 million: -3.19%
Builders with sales between $25 million and $50 million: -2.46%
Builders with sales of $50 million-plus: 0.37%
These figures contain a number of lessons for builders. First, bigger isn’t always better. Second, neither is holding land always the right decision for your business. “Our study showed that custom builders (with an average positive 1% net profit in 2008) are doing much better than production builders with land,” Shinn said.
In his presentation, he also showed charts that graphed builders’ profitability against their volume and their product types. “In any one of these [groups], you can make money and you can make good money,” he said. “It all has to do with how you run your business."
Alison Rice is senior editor, online, at BUILDER magazine.
Want more information? To order the full study, which benchmarks builders' financial and operational performance, contact Emma Shinn at Shinn Consulting. The study, which also discusses compensation packages for 37 different home building firm positions, costs $200 for study participants and $450 for non-participants.