We focus on yet another TRI Pointe Homes announcement of five new lot, land and community deals this morning for its ability to help explain a) what is going on in the housing economy, where investment and capital interests intersect with residential construction operators, and b) what operators are doing in light of the change that is happening.
How does one see the opening of new "stores" and sense a roadmap, not just for the particular company opening them but for the sector? We'll take a look.
First, it's important to know that one of the biggest questions Wall Street investors have, now that both federal government accommodations and capital sources are both dialing back on their overweening support of the housing sector, is this: can the patient stand on its own and walk? And for individual operators, the question is: can a company make money in a more normalized, less artificially stimulated, less opportunistic business environment?
Simply, it comes down to this. Wall Street is challenging, and in some ways insecure, about home builders' capacity to play the game well without a lot of financial equivalents of "performance enhancing drugs." Namely, can a home builder access land and lots in today's environment, where sellers have more options and are in the driver's seat, vs. three years ago, when a little bit of cash could go a very long way.
We know broadly that about eight weeks ago, the Federal Reserve signalled that it planned to "taper" its program to purchase truckloads of mortgage backed securities, an accommodation that kept big-time borrowing costs down and mortgage interest rates low. Since then, investors' conviction that they were going to ride housing's recovery to heady heights for a good long stretch has withered. The nexus of fear, opportunity, and greed serves as a pivot point where investors' big time money either pours in or checks up, and questions about whether housing's recovery is riding fundamentals mojo or merely reacting to fed and Wall Street-injected stimulants have checked up the money flow.
When fear's in the picture, investors curb their exposure to risk. They want to know, most of all, can a home builder "replicate" success, even as the business context improves. As land and lots get more expensive because there are more buyers on the prowl, can a builder get access to those lots at a price that fits its profitability model?
So, here's what to look at in the TRI Pointe press statement. The deals each go back to a masterplanned developer with home the trio of Doug Bauer, Tom Mitchell, and Mike Grubbs has had dealings with over the decades. Further, the Colorado deal suggests that TRI Pointe and its primary stakeholder Starwood Capital will serve one anothers' interests as regards working lots into the pipeline and putting value on them.
