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The Sullivan Group Market Observer
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Part one of a two part series on looking at the housing market from another angle.
One of my favorite parables on perspective is the story of the three blind men and the elephant. Each holds a different part of the pachyderm but none can understand the essence of the whole: one holds his trunk and thinks it's a hose; one leans on his leg and thinks it's a tree; and the last holds his tail and believes he has a broom.
In some ways, the variety of weaknesses we have seen in the housing market in many regions of the country is like the three blind men grappling with the elephant: To understand the ebbs and flows of the market, we need to take a step back and try to see the bigger picture.
So in light of our current work that addresses housing development in at least 10 states, we'd like to share some of our key observations and try to put them into perspective for you.
The Consumer
Ask some builders in California, Arizona, Nevada and Florida about who is buying homes and they will lament, "No one." In the past three months we have seen an increase in the buyer cancellation rate and, in spite of what might seem like a reasonable economic environment, buyers are sitting back and waiting. What are they waiting for? Price cuts. Though incentives are rampant, the prevailing mood among buyers is that prices will still go lower.
Ironically, many consumers who participated in the speculation that inflated prices and overstated demand in many housing markets are now reaping what they sowed.
The Perspective? There are a few signs of life in most parts of Texas, the Pacific Northwest and the Carolinas. Further, we have seen a few neighborhoods across the southwest defy the market slowdown through great value (Rhodes Homes has sold 350 homes in its new Golden Valley master planned community in Mojave County) and cool product (John Laing has sold about 70 of their triplex homes at Main Street at Route 66 in Rancho Cucamonga) or both.
Landowners and Developers
In past downturns, land owners were always the last to believe and embrace that the market had turned. Today, land owners who turn a blind eye do so at the peril of losing whatever few deals may still be possible in the short-run, which will be priced incorrectly as the market's activity increases sometime in the future.
The Perspective? Many public builders are at best in a holding pattern in most major metro areas and some have stated that there are only a handful of markets in which they will continue to buy land and lots. Some have walked from deals, preferring to lose earnest money now versus fighting through a tough market later.
Builders
In the last 90 days, we have seen layoffs at most home building companies in the southwestern United States, with some having shut entire divisions – as a few builders have done in San Diego in 2006. It's part of a larger centralization effort, where public builders appear to be in pursuit of lower overhead and simplified processes. While most builders that we talk to are moving forward with and building their active deals, they are taking a conservative, longer term view as they consider future land acquisitions.
It's no secret that incentives are prominent, running the gamut from free media centers to 20 percent reductions in price (as long as standing inventories are purchased and the builder's own financing is used).
The Perspective? We are watching this closely and trying to gauge how long it will go on. One thing seems certain, however: As long as inventories (unsold new and resale homes) are increasing in any given area, it is likely that the area will see additional price adjustments.
What to Do?
The strategy that is right for your business will vary by business type (lender, builder or developer), geographic diversity and operational position. But here are a few ideas to facilitate discussion:
• Minimize land exposure by optioning land deals, extending their timeframes and having land owners participate in the back end
• Find non-contingent home buyers and captivate them through a great story and wonderful product
• Consider buying the home from contingent buyers to free them up
• Conduct consumer research to determine the features that buyers truly want (and will pay for) and build to that spec level and not beyond
• Reengineer your key business processes related to construction, management, accounting, sales and marketing; what can you do better, faster and cheaper?
Whatever strategy fits the scope of your business, the key point is the market is changing and you need to act quickly. Accept that we are touching the elephant and face it head on.
>> Next: Economy and Housing Demand: Something Different This Time Around<<
Volume 3
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To understand the ebbs and flows of the market, we need to take a step back and try to see the bigger picture.
- Tim Sullivan
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