Truths & Tall Tales from the Builders Show

When Tom Kranz told us he was heading to Las Vegas for IBS we asked if he would compile a report on what he heard and observed. Formerly a Managing Director with GMAC/ResCap, Tom now heads up his own consultancy, Housing Capital Partners. Here’s Tom's report:

Economic Outlooks and other Abstract Speculations

Economists presented and declared the recession over, inflation would not occur, mortgage rates will not be over 6% by year end even if the Treasury stops buying the securitization bonds of Freddie and Fannie, and that by 2011 closings will reach 1 million (or more) by 2012 or 2013. There were some non-believers in the audience.

Despite the declarations from the economists, three panelists (a developer, homebuilder and a capital provider), are planning for future higher inflation.

The argument for higher inflation is the extreme amount of monetary and fiscal stimulus. The argument against higher inflation is due to over capacity of every resource. Time will tell.

The experts are still saying that the US needs something like 1.5MM new homes built every year to keep up with household formation. Meanwhile, 40% of builders surveyed said that they expect to expand in 2010 and 46% expect to be able to increase prices.

Show Me The Money

The NAHB recognized that obtaining financing is the number one problem facing their members right now and hastily, but in a well done fashion, put together a program for money to meet builders, called the Partnership Pavilion (similar to Meet the Money at PCBC.) Lots of conversation. Not sure how much money flowed. Capital remains an issue.

The Partnership Pavilion includes a web-based clearinghouse of capital providers and those seeking project finance. While there are bugs to work out, most expressed interest in seeing the concept perpetuated.

As a lender participant in the Partnership Pavillion, my advice to builders was to look locally. There were several stories where even banks (a credit union in one case), especially those with unburdened balance sheets from past year’s problems (e.g. newly formed / didn’t participate in boom) and with a specific interest in bettering the community, were willing to put up dollars. Finding the unburdened balance sheet lenders is the key.

Among the regulated lenders I talked with, all said that they are lending….but ONLY “strategically,” whatever that means, which IMHO means you’re not likely to get any.

Don’t know the accuracy of this statement but came from a credible source: There are 760 banks on the FDIC/OCC watch list that are expected to fail, yet the Feds only have the capacity to deal with less than 250 failures. Things are probably not going to get easier anytime soon.

Industry Trends & Strategies: Something Old, Something New

Sales agents have to generate their own traffic by going back to the “old ways” of targeting neighborhoods/apartment buildings, putting flyers on cars, donuts to Realtors, etc. Guerilla Marketing is in vogue.

Social media (e.g. Facebook, Linkedin, Twitter) is much more important today than the old methodologies that included radio, print and TV, perhaps accounting for as much as 33% of sales.

The average new home size has decreased from 2309 in ’07 to 2094 in ’09. On a similar note, Meritage announced smaller, more efficient home designs during the show, joining others like KB, Shea, etc. with similar offerings.

Meritage’s CEO stated that despite the historic higher value usually placed on new homes vs. existing, he absolutely will only buy a piece of dirt today underwritten against resales.

For privates, don’t go head to head against the publics’ balance sheet because when they need to drop the price to create velocity, they will, and you’ll get creamed. Go where they’re not.

This environment is the “New Normal.” Get used to it.

Report courtesy of:
Tom Kranz
Housing Capital Partners

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