As this article was being prepared for publication in mid-November, KB Home announced the resignation of chairman and CEO Bruce Karatz amid a federal investigation into the company's backdating of option grants for executives.
Ask KB Home chairman and CEO Bruce Karatz if it is short-sighted for his company to forfeit millions of dollars as it abandons control of scarce and coveted southern California land KB already invested in. Wrong question, he'll beg to differ, telling you it's just the opposite. KB, he'll assert, is taking the long view by putting the company's 2006 and 2007 money where it needs to go to get its best returns rather than to chase bad money with good.
That's part of business reality today, and Karatz said as much to attendees of the BIG BUILDER 2006 conference “Showdown With the Slowdown,” in Las Vegas last month. “Just because somebody walks away doesn't mean that they just have a short-term outlook. Based on where they see things going, they'd rather have that money available for future acquisition than to stick it into a piece of property that they don't believe will give them the proper return over the next three years,” Karatz said in answer to a question that inferred that KB Home's land option walk-aways may exemplify home builders' short-term thinking.
KB's about face in priorities around its land holdings and geographical footprint—mirroring those of Centex Corp., Pulte Homes, Hovnanian Enterprises, D.R. Horton, and other public home builders that have announced large land write downs and walk-aways as they look to reduce massive land inventories in line with their slowed sales levels—might be misinterpreted as a reversal in strategy.
But it is not. It's a tactic in a business environment that deteriorated faster than most of its business leaders could have imagined. Especially in a good economy.
In essence, home building is still a local business. The country's 500 largest home builders make up a $150 billion industry mosaic with vast and variable differences in business model, capital structure, and company culture. However, at least one common belief dwells in the strategic DNA of each and every one of them. That is, an expanding population base and a growing economy together should tip the balance of demand for new housing their way.
Strategies for every facet of big enterprise home builders—product development, land and geography, staffing and management, operations and manufacturing, sales and marketing, and capital structure—crystallize around widely held knowledge that the United States will add another 100 million people to its population in the next four decades, bringing with them a demand for another 14 million new homes in the next 10 years, and that seven states and about 50 metropolitan area markets will be the largest beneficiaries of these trends. Minus a broad and lasting economic recession or other unforeseen disasters, the demand side of the equation, the underlying strength in the economy, and the unabated “homing” trend among Americans old and new add up to a positively giddy outlook for many-sized home builders.
But as today's market conditions and tomorrow's outlook prove conclusively, demographics may be destiny, but it is certainly not an ATM. So, while strategies cling to the promise of redoubled home-buyer demand in the not too distant future, the plan needs to fix on getting from here to there. Centex chairman and CEO Tim Eller probably says it simplest and best for big builders of varying business models: Emphasis now should be on cash generation and cost reduction so that later during the down cycle one has opportunity to gain market share.