Could the housing market be stabilizing? BUILDER 100 executives seem to think so.
So far this year, Michael Sivage Homes has seen its sales rise by 34%. Hovnanian Enterprises and The Drees Co. have both noted upticks in their businesses this spring, say their respective CEOs. Even Southern California “is showing signs of stabilizing,” observed Albert Praw of Landstone Communities.
Such observations and anecdotes contributed to a general consensus among builders and other housing experts at this year’s BUILDER 100 conference that home buyers are returning to a market that appears to be bottoming out. The executives made their comments at a lively roundtable discussion that kicked off this year’s conference, located at Chicago’s Peninsula Hotel.
“Hopefully, it’s not a false bottom,” said Joe Robson, chairman of the NAHB, which estimates the new-home sales will hover around 338,000 units in 2009 and 539,000 units in 2010. (For context, that’s still below 2008 levels.)
No one, though, thought the housing industry is out of the woods yet, especially when questions remain about construction financing and asset valuations.
“In some markets, we’re a long way from the bottom, but I’m no longer hearing total despair,” said R. Bird Anderson of Wells Fargo Wachovia. He said he’s hearing a lot less from distressed builders and more from the occasional interested land buyer. Hovnanian’s chief Ara Hovnanian says that his company, too, “is finally seeing some land opportunities that make sense. But developed land values are still well below replacement costs.”
In addition, the deals that are available are generally not great properties, according to panelists, who suggested it will be some time before top-quality lots again become available in large quantities.
However, buying land is perhaps the farthest thing from the minds of many builders, countless numbers of which are in survival mode. They are also wondering just how their companies will recover if banks continue to be stingy with their construction lending dollars. “The challenge going forward,” observed Andrew Hede of the workout consultant Alvarez & Marsal, “will be ‘how do you finance growth?’”
That’s an open question given the current economy and the ongoing upheaval in the housing industry as a result. Centex Chairman Tim Eller—who ought to know, given his company’s pending merger with Pulte—forecast an unprecedented “transformation” in the housing industry coming out of the recession. “The outcome, though, is not clear to me,” said Eller, who co-moderated the panel with BUILDER Editorial Director Boyce Thompson.
Eller’s comments led the panelists to parry and thrust about whether public or private builders are better positioned to survive and thrive as the market heals. Larry Webb, the former John Laing Homes CEO who is currently managing the assets of LandSource Communities in that developer’s bankruptcy reorganization, asserted his belief that private builders are nimbler and can adjust to market conditions quicker. But Eller suggested that the publics have myriad advantages, not the least of which being access to capital. “The runway is going to be so broad and so long [for them] because there’s not going to be much competition left out there.”
One major private builder appeared to agree. The inability of private builders to secure construction financing “is scaring the hell out of me,” said Dan Ryan of Maryland’s Dan Ryan Builders, who predicted that only 10% of all private builders would make it out of the recession.
Some builders, such as Jamie Pirrello of Michael Sivage Homes, say their banks are lending money, and Anderson spoke of “the law of small numbers” that might favor smaller builders seeking to borrow money from banks for modest projects. Several other builders, though, are amazed when their lenders do actually lend money these days. Ryan notes that his company recently got an 18-month extension on its credit line, “and you would have thought we won the Kentucky Derby. There was euphoria in our offices.”
Praw mentioned an article in the Wall Street Journal about how some banks have moved towards 364-day revolving credit lines and wondered how any builder or developer could buy land under such rigid lending terms. Pirrello suggested that if that kind of lending became pervasive, more companies would need to focus on merchant building.
The consensus in the room was that private equity capital, if it’s available at all, is going to be more expensive, at least in the short run, because investors “don’t want the wear the dunce cap again” by making more bad decisions, said Steve Friedman of Ernst & Young.
As is always the case, lending comes down to a question of yield, and right now no one knows for certain what assets are worth. “If we find a deal today, how do we value it?” asked Anderson. The larger question, he continued, is “what is the appropriate return” from an industry where so much as gone wrong over the past few years?
That question is even harder to answer when industry experts admit don’t know what housing will look like after the recession. Some, though, are convinced home builders need to make fundamental changes in how they operate and what they produce. “I’m listening here, and what I’m hearing sounds like we’re still [riding] horse and buggies,” said Bruno Pasquinelli, the patriarch of the Illinois-based Pasquinelli-Portrait Homes, who told BUILDER that he had been through six recessions. He warned that after decades of lax lending practices that propelled the unbridled growth in the housing sector, the federal government “is not going to allow us to abuse the system again; we’re just dreaming here. We have to start thinking about a new business [model] now.”
Robson agreed on one level, when he asked how many buyers are actually going to be able to qualify for mortgages in the future. Pirrello added that builders must figure out “how to create a sustainable competitive advantage,” which he believes will come through innovation.
The panelists concluded their discussion with thoughts about the impact of the federal tax credit for first-time home buyers. Most thought it was working, and Robson quoted NAHB projections that the credit would be responsible for 160,000 sales. However, E&Y’s Friedman observed that state-financed incentives, such as California’s $10,000 tax credit, have proven to be better sales drivers.
While buyers are still “very conservative,” said Eller, they are starting to see their homes again less as investments and more as “shelter,” observed Ryan, who thinks that’s good news for builders looking for signs of life in the marketplace. “Momentum is a very interesting thing,” he said. “We’ve seen it go both ways. But we’re keeping our fingers crossed for July and August.”
John Caulfield is senior editor at BUILDER magazine.
