Land

The Private Builders' Dilemma: Sell Now Or Hold The Line In '24

Are strong, local, private homebuilders feeling pressured to sell right now as competition, tight-credit, consumer volatility, and economic questions swirl? We asked. Here's one response.

Land

The Private Builders' Dilemma: Sell Now Or Hold The Line In '24

Are strong, local, private homebuilders feeling pressured to sell right now as competition, tight-credit, consumer volatility, and economic questions swirl? We asked. Here's one response.

September 15th, 2023
The Private Builders' Dilemma: Sell Now Or Hold The Line In '24
SHARE:
SHARE:

The ceo/founder of a $200-million-plus, top 10 private homebuilding firm in one of the nation's top 20 most-active ground-up single-family construction markets doesn't want to jinx himself or his company.

Overconfidence about what's ahead or claiming complete credit for the position the company's in and what's going so well right now, he let on, might just do that.

We're lucky," he says. "We've got 3,500 lots. Everybody wants to talk with us. We're growing. We love what we're doing. And we want to keep doing it."

When we talked earlier this week we explored any sway he might be feeling towards selling to one of any number of big publics courting him intensely right now, with their troves of dry powder, and their promise of a heady ride upward with a corporate powerhouse.

As the big national builders drive for deeper scale and market share in one of the U.S.'s sure-shot local economies of the next decade or so – growing both organically and with a surge of domestic in-migrants seeking relative affordability in housing, quality of life, and work-life balance – it may feel to a privately-held operator like a Hobson's Choice. Those deep-pocketed nationals either want to embrace, engage, and literally own firms like his, or they want to do everything possible to squeeze them into a corner of diminishing returns or extinction.

Put that daunting competitive pressure together with the tricky mixed signals of the broader economy, the higher-for-longer borrowing cost regime, a vise-grip of bank credit, the signs of strain among consumer households, a generational shortage of vacant developed lots, and a half-dozen or more potential economic whammies – government shutdown, autoworkers strike, natural disasters, oil price volatility – and you're starting to see why an entrepreneurial homebuilding operator is loathe to mess with karma right now.

Many of the nation's top 500 homebuilders by volume feel the same. They'd braced themselves for much worse in 2023 than they've experienced this year in reality. And that reality – demand not only undeterred by a more than doubling of mortgage rates but intensified by the lock-in effects of existing homeowners' choice to stay put rather than sell and lose historically-low rates of their own – looks, for all intents and purposes, like a smooth, solid runway ahead.

Whereas this time last year, they'd had to wonder how low they'd have to push their new home prices to get them to move and how much they'd have to cede to keep backlog buyers from cancelling in droves, few builders express worries about those two risks at all as they budget for 2024.

A recap from a Private Homebuilder Symposium hosted this past week by Wolfe Research and led by Wolfe senior VP Truman Patterson notes:

Given the recent move higher in rates, the builders generally expect there will be a digestion period for the consumer later in the year, which the industry will overcome through incremental incentives (rate buydowns, etc) given the outsized GM levels currently being realized—we forecast HB Group ’23 GMs of ~24% versus normalized levels in the lower 20% range.
We get the sense that builders are attempting to balance the well-understood New-Res tailwinds, but are not blind to the fact that rates have moved higher. Net, builders believe ’24 demand should continue moving higher yet ’24 GMs are anticipated to flatten or decline as incentives are expected to accelerate to combat rate-driven affordability constraints, while higher land costs begin to negatively impact P&Ls—builders expect a 150+ bp GM headwind from land cost annually the next several years, all else equal.

During last year's budget-planning run-up, owners, principals, strategists, and key share and stakeholders chalked "demand" in a hope category while they prepared their balance sheets and business exposures for a double blow to both backlogs due to cancellations and deep, deep price discounts to reach a strike price that could clear any standing, languishing inventory.

Whereas, in contrast, this year, undeterred, strong demand resides in a belief category – propelled by demographics, domestic migration trends, and local economic strength, all together colliding with historically constrained supply, especially on the existing home resale front.

So, in a sense, for owners and principals like the executive we spoke with earlier, the perceived risk profile has flipped, from worrying about demand in the year ahead to worrying about the cost it will take to add supply, and the near- and longer term impact that cost will exert on the business. Operators – privately-held ones – will have to front land banking options with more of their own cash to get access to capital and lots, and they're anticipating using more of the shock-absorber of their profit margins to absorb both increased cost of sales for incentives and increased cost of money for lots.

So while it's fair to say that the lion's share of privately held homebuilders are having a better 2023 than they'd imagined they would and prepared for, and a rare few are flirting with any level of financial distress, it's also fair to say that most of them are in a bind. Especially if they have to start taking bets on lots so they can keep feeding their overhead structure through production and deliveries.

This is why, in all humility, the the executive we spoke with this week starts the answer to the first question – on whether he's feeling any particular pressure to sell his firm -- with the words:

We're lucky. We've got 3,500 lots."

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.

MORE IN Land

Purchase Of Biscayne Lands Sumitomo A Florida For-Sale Beachhead

A deal completed this week will add Tampa Bay, FL-based Biscayne Homes, extending DRB Group's multi-regional footprint from the Mid-Atlantic through the Southeast coast.


TBD Case: Here Is A Build-To- Rent Wellness Community Model

A look at how Zeal for Living aims to boost the health and well-being of renters.


Strong Private Builders Can Write Their Ticket In M&A Sweeps

A select group of sellers – whose backs may be viewed as against the wall purely financially, given their reliance on personally guaranteed bank lending for AD&C – have tremendous leverage on both options and terms.


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.

MORE IN Land

Purchase Of Biscayne Lands Sumitomo A Florida For-Sale Beachhead

A deal completed this week will add Tampa Bay, FL-based Biscayne Homes, extending DRB Group's multi-regional footprint from the Mid-Atlantic through the Southeast coast.


TBD Case: Here Is A Build-To- Rent Wellness Community Model

A look at how Zeal for Living aims to boost the health and well-being of renters.


Strong Private Builders Can Write Their Ticket In M&A Sweeps

A select group of sellers – whose backs may be viewed as against the wall purely financially, given their reliance on personally guaranteed bank lending for AD&C – have tremendous leverage on both options and terms.