With land available at distressed prices, many production home builders are busy contemplating their next strategic play. However, some are planning to form a separate company to hold the lots, keeping the land and its associated holding costs off the balance sheet. According to a recent survey conducted by Big Builder, 57.1% of respondents saw this as a viable strategy, given the cyclical nature of home building. Noted one respondent, "Wall Street will not allow them to shoulder the risk anymore."
However, 28.6% of respondents felt it was not a viable option and 14.3% were unsure. As one respondent argued, "Option lots are already off the balance sheet. I believe the entire home building industry going forward will have to rethink how they have been conduction business historically."
When asked if they believed home builders would be able to turn a significant profit off of its land--rather than simply relying on the home's profit margin--once the market rebounds, half of the respondents said yes, while 35.7% disagreed and 14.3% remained unconvinced either way. "Land profit should not be built into the profit of a home," said one respondent. "If one cannot make a profit on the home itself and the profit must come from the land, trouble will ensue sooner or later."
The following were offered by respondents as predicted changes in the business model of production home builders, following the current market correction:
--Higher quality, greener construction as many low quality builders go bankrupt and buyers' values change.
--Adoption by the majority of an "asset light" model, and/or purchasing finished lots once the home is sold a la NVR.
--Smaller homes, higher density, and more of a mixed-use approach Discontinuation of today's included extras to get prices into a more affordable range.
"After 34 years and five recessions, I decided to hang it up last year," said one respondent. "When talking to new workers or the kids at the universities, I always tell them it's not an 'if,' but a 'when' that another recession is going to happen, and they need to prepare now for the next one."