"The day is coming when we we'll be making a lot of money, and I think it's coming soon."
So said John Burns, the market researcher, kicking off his session, "What's Next: A Housing Market Overview," at the PCBC conference on Wednesday.
"It's easy to get bummed out," Burns said. "But things are starting to bottom out."
Burns' two panelists--Richard Dugas, president and CEO of Pulte Homes, and Bert Selva, president and CEO of Shea Homes--agreed that better times are ahead. "We're going to make a lot of money again," said Dugas, who calculates that despite a bad year for his company's stock performance in 2007, Pulte has averaged a 13 to 14 percent annual return to shareholders over the last 20 years.
Both leaders said they spend a big portion of their time meeting with local divisions, trying to rally the troops and looking for operational improvements. "Every day we battle it out is one day closer to recovery," said Selva, known for his inspirational leadership.
Burns pointed to the availability of great deals on land right now, which are bargains that always appear near the bottom of a market cycle. He suggested that builders may have to "start fresh," with new companies and new equity partners, to avail themselves of these opportunities.
Burns, who is president of John Burns Real Estate Consulting, pointed to other positive trends in the home building market. His proprietary builder survey shows growing optimism. And he pointed out that listings of existing homes are declining in most major markets today, despite the all the news about foreclosures.
Because home builders are dropping prices so quickly, Burns expects the new home market to improve before the existing home market. He expects new home construction to begin improving next year.
What will the industry's composition look like in the future? Dugas indicated that once the market stabilizes, builders will see the rate of acquisitions pick up. He expects more future consolidation as companies with more cash on hand and strong balance sheets will take market share. National market share, he said, isn't that important. But by having a 10 percent share of a local market, compared to a 4 percent share, you "can make exponentially more money."
Selva added that national builders are likely to continue shedding marginal markets in favor of core markets. Dugas agreed, saying that if Pulte can't do a minimum of 300 homes to 400 homes a year in a market, its business model doesn't make much sense.
The panel spent a big portion of its time discussing land. Selva said that public builders seem enamored by the NVR model of optioning most land, a less risky strategy that lowers returns in upcycles. But many believe the national builders will eventually return to buying land because the returns are higher than in home building.
Dugas doubted that many builders would adopt the NVR model. "National builders vertically integrated a long time ago." He added he didn't understand why a home builder would sell off land at 40 or even 10 cents on the dollar, when they may wind up buying back the same land for more money later.
Selva said that builders really need to separate their home building and land businesses. He said it's not having land on the books that kills you; it's paying the interest on the debt. Shea, he said, didn't load its balance sheet with debt during the upturn "and that's really helped us during the downturn."
Selva's best advice to builders during the downturn is to focus on things they can control. In Shea Homes' case, that's managing inventory and taking care of the customer. "Customer satisfaction and a low-cost structure will win the day," he said.
Dugas added that everyone in the industry, Pulte included, could be building homes more efficiently. Had builders focused on this during the boom, they would be in better shape today. "We want to do more business with fewer people," said Dugas, telling the story of a recent meeting with a subcontractor. He offered to provide labor-only and do work typically performed by three trades. The arrangement would lower Pulte's material costs and potentially take five days out of its cycle time.
The panelists agreed that some markets would come back earlier than others, some perhaps as much as a year earlier. "I definitely think some markets will recover sooner than others--but I haven't seen it yet," said Dugas, who believes the key drivers will be strong job growth and strong overall market dynamics.
"Colorado has been one of our better markets," added Selva, saying that he's starting to see signs of stabilization in Phoenix, with resale inventory declining. Also, sales are picking up in some Orange County communities. But conditions in the Inland Empire, Northern California, and Sacramento have been "much tougher."
The panelists agreed that the federal government needs to enact a tax credit for home buying to avert major damage to the economy. Dugas suggested that the one being debated by Congress, between $7,000 and $7,500, is too small. He's like to see one for between $12,000 and $15,000 that would apply to all home purchases, but that was only good for six months. "That would get people into the market," said Dugas, whose company has a full-time lobbyist in Washington D.C.
Green building is here to stay, the panelists asserted. "The next generation will be looking for a much more efficient house," said Selva. Dugas agreed but added that the trick is finding out what specific green features buyers are willing to pay for.
Finally, Selva and Dugas told the audience that their active adult businesses had fared better than their overall business. One reason, Dugas said, is that active adult buyers typically don't need to finance their home purchases or only finance a small amount of the purchase price. But they still have to sell their home, Dugas added, and their urgency may be lacking.
Boyce Thompson is editorial director of BUILDER magazine.
Learn more about markets featured in this article: Los Angeles, CA.