Surviving may very well be thriving in today’s housing market—but only if you have enough cash to carry you to the next turnaround.
That was one of the key themes emerging from a lively panel discussion that on Monday kicked off Builder and Big Builder’s Housing Leadership Summit at the Drake Hotel in Chicago.
More than 250 industry executives are attending this year’s three-day event, and a good number of them listened while an advisory council composed of builders, analysts, and consultants gave its assessment of current market conditions and future opportunities.
Tim Eller, PulteGroup’s vice chairman and a principal with the real estate investment fund Cordalla Capital, set the stage for this conversation when he observed, “I can’t remember a time when there’s been this much uncertainty in the industry.” Eller said this uncertainty revolves around supply, demand, and demographics; pricing and affordability; and capital available for land and development.
The panelists spent a good part of the 75-minute discussion identifying where they see short- and long-term growth for their companies coming from. And their comments—such as Dan Ryan describing his company, Dan Ryan Builders, as a “counterpuncher”—sometimes betrayed their own sense of limitations operating within a housing market that’s stalled.
This was particularly evident when executives expressed trepidation about competing in markets where public builders have far greater access to capital, a concern that Ken Campbell, CEO of Standard Pacific Homes, didn’t dispel. Despite losing $11.7 million in 2010, his company was able to borrow $1 billion at 8% interest. “Ridiculous,” he admitted, “but we’re going to keep doing that if we need to.”
Campbell said his company—whose website says it intends to open 60 new neighborhoods this year—is focusing less on the present and more on what the housing market is likely to be three to five years from now, during which he projects “homebuilding is going to triple.”
He preached patience, but private builders on the panel mostly said they can’t wait that long. “The publics can think about the future, as can privates working with private equity, but we’re fighting for business day by day,” said Jamie Pirrello, CFO of Michael Sivage Homes. But he admitted that one of his company’s biggest challenges right now is getting customers qualified for a mortgage, particularly in San Antonio. He also floated the idea that builders might consider getting into the construction of for-rent single-family housing. “But where’s the capital going to come from?” he asked.
Bank financing in general, and its availability, triggered some debate among the panelists. Eric Lipar, CEO of LGI Homes, said his company’s strategy of employing private equity to acquire finished lots “won’t work” if and when LGI needs to purchase undeveloped land. “We’re hoping we can buy enough finished lots to last us until bank financing returns.” But he repeated the common refrain among builders that while banks will lend for construction, they still aren’t touching acquisition or development.
However, Bird Anderson of Wachovia/Wells Fargo pointed out that his bank hasn’t really seen all that many good land deals worth financing, at least not within today’s stricter lending parameters. Meanwhile, “builders need to make sure they’re having that weekly lunch with your bankers so you’re staying well-positioned with them,” said Michael Rehaut, JPMorgan Chase’s housing analyst.
Rehaut believes the housing turnaround for some companies could come sooner than they expect, especially when “there are no more vacant apartments to rent,” and buying a house becomes more attractive again.
But price comparisons alone are not going to win customers back. Several panelists, including John Wieland, CEO of John Wieland Homes and Neighborhoods, argued in favor of emphasizing architecture and design to differentiate their products from foreclosures and short sales that have become their main competition. Pirrello said his company had doubled its market share in San Antonio by redesigning its product for that market. And the consultant John Burns noted that public builders and developers have been surveying consumers “to see what’s missing in the market” and then aiming to fill that void. He pointed specifically to Meritage Homes and its recent introduction of a net-zero production home as the kind of differentiator other builders should strive for.
Campbell, though, asserted that the housing market might still be too fragile for builders to go too far out on a limb by experimenting with innovative ideas. Larry Webb, CEO of The New Home Company, seemed to second that notion when he stated that any builder having a modicum of success right now “should just keep doing what you’re doing.”
John Caulfield is senior editor for Builder magazine.