Judging by the number of wine glasses that are usually decorating the tables in hotel lobby bars during an industry conference, it's a safe bet that a good number of home builder executives know a thing or two about wine. And given that appreciation, many have probably seen the 2004 flick “Sideways,” about two good friends who take off on a wine-tasting road trip, a last hurrah before one of them takes the plunge into marriage.
In the movie, there's this great scene in which Miles, played by Paul Giamatti, tries to explain to Maya, his love interest in the film, why he's so into pinot noirs. He says:
“It's a hard grape to grow. As you know, right? It's thin-skinned, temperamental, ripens early. It's, you know, it's not a survivor like cabernet, which can just grow anywhere and thrive even when it's neglected. No, pinot needs constant care and attention. You know? And, in fact, it can only grow in these really specific, little tucked-away corners of the world. And only the most patient and nurturing of growers can do it, really. Only somebody who really takes the time to understand pinot's potential can then coax it into its fullest expression.”
Sub housing demand in for where Miles says pinot and builders in for growers, and you've got a perfect description of what life was like for home builders in 2010. Like pinot grapes, housing demand ripened early in 2010, with home sales swelling up to the expiration of the federal home buyer tax credit in April. But that demand proved thin-skinned and temperamental, as sales volumes sunk to historical depths in the back half of the year. Against the landscape of an improving economy, the new-home market remained mired in the vicious cycle of negative housing trends, with low sales volumes begetting declining home prices begetting more foreclosures begetting tighter mortgage lending standards—and, well, we're back at the top of the cycle.
For the 14 public builders included in BIG BUILDER's annual public builder report, it was a knockdown-dragout fight for every sale, and, as such, they were able to close collectively just 1 percent fewer homes in 2010 than 2009. And when you compare their deliveries against the total number of new-home sales for the year, the group took share in 2010, capturing 28.7 percent of the market compared with 24.8 percent in 2009.
Sure, some of that share growth came from having fewer players in the field as smaller private home builders continued to struggle to access capital. Some privates just threw in the towel for good while others played possum, waiting for the market to reignite to uncurl from a financial fetal position. But even so, a big chunk of that doing was of their own accord.
“The builders started to play offense rather than defense,” says Stephen East, a home building analyst with Ticonderoga Securities of the publics' performance in 2010.
IN THE PLUS COLUMN Like the patient and nurturing growers of the pinot noir grape, the public builders paid constant care and attention to their businesses and their balance sheets. In general, the group leveraged every sales advantage they had to try and grow what nascent demand was hiding out in little tucked-away corners of the market. In the first half of the year, that meant having entry-level appropriate inventory ready for first-time buyers taking advantage of the federal home buyer tax credit. Homes had smaller square footages, more flexible floor plans, fewer frills, and were more energy efficient—all things that added up to an economical value proposition.
However, post-tax credit expiration, many builders have reworked their product yet again, re-amenitizing, upping square footages, and repositioning product to appeal to move-up buyers who were neither as reliant on a government incentive nor as sensitive to a tightening mortgage market as first-timers in making their purchase decisions.
But getting the wax out of their ears when it came down to listening to consumer demands wasn't the only way most publics were able to cut their losses from 2009. Whereas a machete was appropriate for hacking out excesses, redundancies, and inefficiencies in 2007 and 2008, it was all about using the scalpel in 2010 to rid balance sheets of more costs when it would seem they were already down to bare bones. Collectively, these 14 builders cut nearly $2 billion out of the cost to build their homes.