Marketing & Sales

Homebuilders Brace For Stress, And Focus On Being Their Best

'The model broke' and 'bring it on!' are pearls of wisdom from what seems like a lifetime ago on the brink of the last housing crisis. Let's see what value they might offer us in so different a time.

Marketing & Sales

Homebuilders Brace For Stress, And Focus On Being Their Best

'The model broke' and 'bring it on!' are pearls of wisdom from what seems like a lifetime ago on the brink of the last housing crisis. Let's see what value they might offer us in so different a time.

April 7th, 2022
Homebuilders Brace For Stress, And Focus On Being Their Best
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All real estate is local.

Onion-layer meanings of this mainstay principle of our business constantly and forever peel back to wholly new revelations.

Five words. A million gestalts nesting countless possibilities, odds, fantasies, and a gamut of grey areas, in with the black and white clarities.

The reason this canon law-style assertion grabs attention today, now, is part reflex, part instinct, and part adaptation to lessons learned. The onion layer we peel back to today, in the vortex of a sustainably powerful economic recovery sweeping up against a series of menacing counterforces, has to do with a character trait we harp on because it's so defining.

Exceptionalism.

Two instants, or rather two quotes, from late-winter 2005 – at the long-esteemed housing guru Martin Freedland's Presidential conference in Aspen, CO – pierce through the years and snap, crystal clear into mind.

Ivy Zelman, who was a Credit Suisse homebuilding and building products equity-side analytical maven at the time, saw intensifying signs of trouble at the intersections of mortgage finance, Wall Street investment in the space, the debt ratings industry, and homebuilding land speculation, production, and sales.

The model broke," she said.

Big builders in the room heard Ivy and took stock of warning signs they'd seen themselves. By and large, they looked ahead at a period of bumpy times and thought themselves and their business models as well-suited to the challenges ahead. Difficult patches of the housing cycle were mostly viewed then – after a dozen or more years of an upward arc of growth – as a time to "cull the herd" and consolidate market share and local scale in the multiregional operational arenas these national builders served.

Bring it on!" said the regional president of one of homebuilding's top 5 public builders at the time as he looked at his own enterprise as future-proofed for the stresses and shocks ahead.

Those two quotes, "the model broke" and "bring it on!" echo today, as a turn of tides strengthens.

Together, they set into clear separate compartments a gap between what was really happening and the recognition of its impact. "The model's broken" spoke to a number of widely held assumptions as to how the housing market was functioning, and how severely it could spin into dysfunction.

"Bring it on!" reflected both the belief and determination among some "smarter" and better-equipped and more experienced and more deeply capitalized homebuilding operators that the more significant the challenge for everybody else, the more material the opportunity there'd be for the "last man standing."  

By the way, the executive who declared, "bring it on!" worked for a company that did not see the other side of the housing crash and the Great Recession.

What could not be fully appreciated at the time was how treacherous and lethal the gap between "the model broke" and "bring it on!" had become. The reality that many assumptions underlying business, finance, investing, credit, and the markets' ability to function in a shaken economy were unspooling was hiding there in plain sight. "Bring it on" expressed a confidence in a builder executive's sense of exceptionalism.

Martin Freedland actually wrote of the event and the moment here.

In March 2005, at The Presidential Seminar in Aspen, Colo., builders received cautionary warnings. The signs of a possible, almost predictable, downturn were there. At the seminar's conclusion, builders were asked, “What do you see for the future and what will you do?” Their answers were interesting and were divided by age group. Older builders (over 45 years old) expressed caution. Younger builders, who had never experienced a housing recession, thought the boom would never end. One of the most successful young builders in the group requested a program at the 2006 Presidential Seminar on what happens in a downturn. He said, “I just don't know what a downturn is!”
A Bigger Piece of the Pie: Fast forward to The Presidential Seminar in February 2006. The storm clouds were very dark. The market was seeing rising interest rates, escalating costs, fleeing investors, rapidly increasing sales prices, growing inventories, and expanding use of questionable mortgage products. Still, even then, most builders stated they would be “even” for the year or up as much as 10 percent. A few months later, the bottom fell out in many of the country's best markets: Las Vegas; Tampa, Fla.; Orlando, Fla.; Phoenix; and Sacramento, Calif. Most of the United States is now feeling the downward pressure in home building.
NATURAL REACTIONS Recent events in the home building industry reflect Walter Cannon's theory of “fight-or-flight,” first published in the 1929 American Journal of Physiology. While he was describing how animals react to stress or danger, this theory was eventually applied to man under stress or danger. Yes, the home building industry is in stressful and dangerous times. How each builder handles these challenges will dictate the future of the company.
Some builders will manage through these tough times. They will find great opportunities by “playing the down cycle.” Others will not fare as well, and many will see their businesses fail. The builders most at risk are those that have too much financial leverage (debt) and weak organizations (people). These builders have been living on a market driven by eager buyers, investors, and never-ending optimism. Plus, they have too much land, spec inventory, ineffective people, cumbersome processes, and poor decision making.
For some, it is too late. For others, there are proven strategies that will bring long-term success and increased market share. The “name of the game” is building for the future.

However different today's dynamics may be from the insanity of the mid-2000s decade, the value of learning from 2005 and 2006 comes through loud and clear, particularly around three key areas.

  • "The model broke" – how might we look at some of the underlying assumptions, particularly around demand, and gut-check them for how evidence-based they really are?
  • "Bring it on!" – belief in exceptionalism – that "we are smarter and better" -- goes with the turf of big, medium, and little homebuilding operators, and rightfully so, as all real estate is local. The norms that apply to most certainly don't for a few. Still, while it's always true that some builders and some organizations are better than the rest, what's not always evident is the tie between who believe they are, and who really is.
  • Martin Freedland's principle: "The two proven components of a successful strategy in a down market are increasing market share and building the future organization.”

We keep hearing, "smart builders" are doing okay, even as the supply chain challenges, the inflation impacts, and the threat of higher interest rates erode some of the norms of demand.

We know you're there, and that you'll be the ones serving as an example of what to have done when we come out the other side of the throes of early 2022. We know, as well, that some of the ones claiming, "bring it on!" are not going to be around to serve as such examples.

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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This really isn't a home sales program," Bob Rademacher says. "This is an 'understanding' program. And when our guides fully carry out that program, they earn that role as a trusted advisor."


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To date, even as interest rates and inflation began to take a toll on qualified new-home buyers, builders remain confident their order backlogs will hold, with reinforcement buyer prospects waiting in the wings. Will that hold up?