Blueprint for Recovery [Go to Slide Show]
Recovery this time around will begin with a buyer whose first home is a new home–as usual. And, as in housing cycles past, the plot line calls for home prices to drop back to well within the means of that first-time buyer to pay for his, her, or their dream.
However, perhaps more than in housing cycles past, it's high-volume home builders' sole charge to back prices down low enough and on a large enough scale to bridge the gap between a first-time buyer's wanting and having a new home.
Affordability, for its many definitions, means one thing for companies who build homes by the hundreds and thousands: They will have to reverse business strategies they embraced during the run-up. Now, instead of pricing their homes to market, they will price them to cost. Their ability to ratchet down costs profitably will rekindle the stone-cold new-home market.
They'll admit it. When debt was easy, big builders overpaid for land. They oversupplied the market with new homes and overcharged for them in the risk-free pyramid scheme that was home lending circa 2003 to 2006. Now, they'll likely have to overcorrect on price to work through excess supply and meet the housing demands of a new, more risk-averse, and budget-conscious group of entry-level buyers.
The good news is that this is precisely what stronger home builders are made to do. Builders who crack the code of bringing newly designed, less costly, more efficiently constructed homes to market–and can still pay the bills–will lead the way to recovery.
They'll do it by managing what they can manage, even as the broader economy swirls. They will re-engineer land plans, simplify homes, and streamline purchasing and construction processes to capture savings at every turn. Mark-ups that went hand in hand with the easy-money days are getting re-marked to a harsh reality of oversupply and a feeble pulse of demand.
Amid tightening lending standards, a slowing domestic economy, commodities price inflation, and flagging consumer sentiment, it's home builders' operational tactics that will close the abyss that separates their "asks" from home buyer "bids" in today's market, delivering affordability profitably.
In starkly simple terms, the job of production home builders is to look carefully at the first-time buyer universe and do two things: The first is to separate those who can't buy from those who can but won't. The second is to convince those who can but won't to buy a new home now.
As it is, low home sales volumes, excess inventory, and proliferating foreclosures have moved affordability in the right direction. Raymond James & Associates' Summer 2008 quarterly housing report released in June has affordability hovering near its 20-year historical average.
But the pricing pendulum must swing farther to win first-timers back. Home prices have slid off their peaks, but first-time buyers aren't first-time buying. Diminished loan options, fear of paying a price for a home that loses value, unheard of prices at the gas pump, and a deep disquiet about where the economy is heading–all that has many people thinking it's not such a good time to buy, despite still relatively low mortgage rates and a host of builder-sponsored highway billboards announcing fire-sale deals.
Assuming that high-volume home builder math of affordability can change the first-time home buyer universe in two ways–converting more of those who can't buy into ones who can, and converting more of those who won't buy into those who will–our analysis focuses on ways to drill beyond conventional wisdom about affordability trends into what home builders can and must do to overcorrect prices and prime the first-time buyer pump.