If the question on most home builders' minds is, "Are we there yet?" in terms of a market bottom, real estate consultant John Burns' answer is almost. In a session yesterday during PCBC 2008, Burns told audiences that he expects the new-home market to rebound before the existing-home market, with existing sales volumes and permit activity rebounding in 2009 and home prices flatlining by the end of 2010.
Burns described the current housing market's nose dive as a stage five in the housing cycle--but not for much longer. "It's time to start thinking about stage one: the bottom," he said.
However, long after the market bottoms out, the industry will still bear the scars of the downturn. Burns discussed with panelists Richard Dugas, CEO of Pulte Homes, and Bert Selva, CEO of Shea Homes, some of the major shifts resulting from the housing slump, the least of which will be fewer players in the competitive arena and capital with more strings attached.
As land-related debt has proven to be the anchor around many builders' necks, builders are looking to limit their exposure to land risk. Builders have begun to move out of the land development side of the business, returning to a merchant builder business model and using options to tie up finished lots for just-in-time delivery.
NVR's option-only model may be the gold standard for that business strategy, but Pulte's Dugas said he thought the trend toward option-only was a knee-jerk reaction to builders coming up short after going too long on overpriced land. While he acknowledged that the idea of buying "land off the shelf like potato chips" eliminates some of the risks of owning land, he was quick to point out it comes at a cost. Builders end up paying retail for lots, a fact that Dugas said he fears will hit home buyers' pocketbooks as the price increases are passed along to consumers.
"It sounds good to Wall Street, but it's not practical," Dugas said of the model.
Dugas and Selva also suggested that the private equity and vulture fund players looking to buy up land on the cheap may be just flashes in the pan. While Selva said he was able to do a deal with private equity for a group of land assets, he appeared to believe that was more the exception than the rule because he believed there was a fundamental disconnect between the interests of the money players and their understanding of the residential land game.
"I think a lot of times those guys come in and have money, but they have a very different view of the future," Selva said. "If you are looking to get your money out of land in three years, good luck."
"The issue is that there are going be folks who realize there's a lot about this land business they don't know," Dugas added.
Dugas also said he thought builders would be challenged to find additional efficiencies going forward. And labor is an area on the brink of transformation to that end.
Dugas said he was starting to see some of his trades look to expand their skill set. He said it was music to his ears when a plumber told him he had decided to gain expertise in HVAC installation and electrical work in hopes of providing a one-stop-shop experience.
"We want more business with fewer folks," Dugas said.
With fewer trades providing more services, certain efficiencies are gained, especially once builders' purchasing powers are factored in. Builders can buy materials much cheaper than trades because of their volume.