Leadership

What Does 'Back To Basics' Mean In A Time Of Volatility?

For homebuilders, a tricky blend of buoyancy and uncertainty – a function of the relationship between systemic constraint and structural demand that keeps finding its way past detours undeterred – has become a common refrain.

Leadership

What Does 'Back To Basics' Mean In A Time Of Volatility?

For homebuilders, a tricky blend of buoyancy and uncertainty – a function of the relationship between systemic constraint and structural demand that keeps finding its way past detours undeterred – has become a common refrain.

May 2nd, 2024
What Does 'Back To Basics' Mean In A Time Of Volatility?
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Keeping a business sprinting in a supply-constrained landscape and staying prepared for anything and everything. That's a tall order, however, these are today's table stakes for homebuilding operators.

And they're especially hard to do indefinitely.

We keep hearing, 'Something's got to give,' and I'm trained to sense that may be true," a friend of ours who runs one of American homebuilding's faster-track young private operations after a couple of years of blistering, zero-to-$240 million growth. "I'm afraid of what may be out there, and I'm not going to get caught overextended, but we just had our best three months of sales and closings ever."

A tricky blend of buoyancy and uncertainty – a function of a hard-to-predict relationship between systemic constraint and structural demand that keeps finding its way through and past detours undeterred – has become a common refrain among our strategic leaders' commentary.

These mortgage buy-downs and other incentives continue to allow us to sustain sales, but they're expensive and getting more so," our CEO friend tells us. "We're looking end-to-end for opportunities to cut costs, increase our construction cycle velocity, be super smart about our land buys, and keep our borrowing costs as low as possible while ensuring our buyers get a great experience. It's nothing new, but it feels like the margins for error are razor-thin. They're the basics, and you have to excel at them. Or else."

These basics homebuilders revert to when turbulence picks up stand as a business cultural example of resiliency, getting stronger from what doesn't kill it. According to this recent article, this mirrors societies as a whole across a 30,000-year human history timeline analysis.

One feature that stood out was the frequency of downturns. You might expect that going through a lot of them would wear societies down, making them more vulnerable to new catastrophes. But the opposite seems to have occurred; societies that experienced frequent downturns went on to become more resilient, experiencing less severe falls and faster recoveries." – The New York Times

These basics put equal focus on people and operations today, and opportunity vs. risk tomorrow. Debt is a big part of that.

  • How much?
  • What kind?
  • What impact on growth?

This makes this piece from Collab Fund author Morgan Housel perfect timing.

Housel's access point into the conversation – Japan's 140 companies that are 500 years old or more – fits right into the earlier New York Times focus on resiliency. They all encountered adversity, and learned to adapt.

Housel writes:

These ultra-durable businesses are called “shinise,” and studies of them show they tend to share a common characteristic: they hold tons of cash, and no debt. That’s part of how they endure centuries of constant calamities.
I love the quote from author Kent Nerburn that, “Debt defines your future, and when your future is defined, hope begins to die.”
Not only does hope begin to die, but the number of outcomes you can endure does, too." – CollabFund

In graphic details, Housel makes a case that the less debt one carries, the more resilient one is when inevitable shocks, stresses, and volatility occur. And the inverse. He writes:

As debt increases, you narrow the range of outcomes you can endure in life.
That’s so simple. But it’s different from how debt is typically viewed, which is a tool to pull forward demand and leverage assets, where the only downside is the cost of capital (the interest rate)."

What's become crystal clear from the pre-pandemic late teens through a convulsive series of shocks, stresses, and strains is that many, many homebuilding firms --some of which withstood the Global Financial Crisis and some of whom started up during the housing crash or later — learned what Housel's saying about debt.

Once you view debt as narrowing what you can endure in a volatile world, you start to see it as a constraint on the asset that matters most: having options and flexibility."

They're in a position not just to endure volatility and calamity but to prosper. "Having options and flexibility" and agility to find lot positions, unmet needs among customers, and a pick of the businesses' rising stars in leadership and operational capability. These are the basics, and – for privately-held homebuilders – they're going to have to serve as a resiliency strategy against another major source of stress and volatility: Big public builders preying on their business.

Being a tad afraid that "something's got to give" may be exactly the note of vigilance and drive the higher-for-longer interest rate era calls for. Hearing it first-hand from one of the best private homebuilding operators of the last two decades makes me think it's a mindset to embrace.

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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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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