housing cycles

Probably no one who’s a middle-level manager on up needs reminding. It’s budget time, right smack dab in the middle of it.

For a process that comes every year—seemingly earlier each progressive year—it’s a process that sure feels different, time after time after time.

No matter how many budget planning cycles I go through with my team, it’s almost a given that very few of last year’s critical assumptions carry over directly to the current set. Every time, it’s like starting from scratch. Customer sentiment changes. Strategic imperatives change. Secular business models change. Operating groups change. The outlook changes. Nothing feels like it did last year.

Is that amnesia? Or is it real? Is the lack of a feeling of year-to-year coherence and familiarity a distorted perception, or is it a correct appreciation of profound new structural drivers at work in housing’s economic ecosystem?

This year is no different. Most or all of the data fields are the same, expenses offset by revenue in one way or another. There are “asks,” for new resources and funding for opportunities; and there are “gets” that map to new streams of revenue. There are base-line current and prior year “actuals,” current year “re-projections” that may either hockey-stick up or reality-check downward.

Yet, there similarities end. This year may be no different; but it feels radically so. Assumptions, which key performance indicators are really key and which are fading as measures to steer by, and trending metrics are in a state of super-flux. There are hardly any “cut-and-paste” data points from 2015 to 2016.

And this, we’re counseled to expect, is the “new normal.”

The conundrum now is simple, and immensely complex. The decisions we make now as managers, senior executives, and those few with the highest strategic accountability, carry enormous importance for 2016 and beyond. This is true, both on a micro-organizational plain and on a macro housing economic level. The dilemma is this:

Grow now or shrink?

For a firm, a right or wrong answer to this question may mean that organization will be viable or not. For housing’s collective of going concerns, a correct or incorrect answer is tantamount to a vote of confidence in recovery’s ability to track upward, or close to the point where it will head down.

It shouldn’t be at a point where it could go either way, but it is. A bad jobs report, almost non-existent wage power, an at-best-mixed second-quarter earnings season, a global glut of oil, amid already slowing international economic powers, and apparently no-end of policy paralysis.

Oh yes, and housing. Hard to permit; hard to find lots that pencil; hard to finance; hard to produce affordably, and hard to call the “engine” of recovery.

By the same token, consumers account for more than two of every three dollars spent in the U.S. economy, and consumers spend and use credit in droves unpredictably. They may or may not decide it’s time to get adult kids out of their basements. They may be tired of the roommates thing and ready to strike off on their own households. They may be ready to hook up, settle down, start families, re-invigorate school systems and local parks, etc. They may decide that it's just, plain, time to buy homes.

The point is, they don’t tend to heed or follow some of the other significant, broad, macroeconomic bellwether indicators we’d look at to know the answer as to whether it’s the middle innings or not. They’re on their own keel, behaviorally and psychologically. They may make housing continue to recover, by hook or by crook.

One thing for sure is that first-time home buyers as a percentage of total purchases have not begun to approach former norms through what we have been calling recovery. So we assume that that phenomenon is still quite possibly ahead of us, especially since that group has been trending up, and lending is gradually becoming more inclusive.

And if first-time buyers activate in a big way over the next year or two, then the impact on the broader economy could be big enough—due to a multiplier-effect of new home construction on local jobs, local demand economics, and local prosperity—to single-handedly reignite momentum in GDP growth.

Given the known hurdles—the paucity of available, finished, reasonably-priced lots; the critical constraints of predictably available, predictively priced trade crews, and the hoops one has to jump through to get access to operating, acquisition, and development lending—the “pent-up” first-time buyer market is still more theoretical and abstract than actual, boots-on-the-ground demand. A lot has to go right for first-timers to clock back in the way they've done historically. But they might.

So, while some of us find it hard to believe it could go either way, it could.

It’s been a fact of all housing and business cycles before that somewhere at their mid-point opportunities and risks flip-flop. Sound business and balance-sheet expansion based on an accelerated pace of growth switches—on cue—toward focus on reducing exposures, shrinking balance sheets, monetizing assets, piling up a cash trove … and waiting to pounce on those who’ve missed the message.

Some get it; for some reason, there are ones who don’t ever seem to. Some may already have data and indicators the inflection point has come. Some may be just as certain—based on their own proprietary way of looking at trends—that now may be the time to double down, to invest more in lots that haven’t yet been activated in the current recovery.

The litany of names of companies and builders who mis-timed housing’s shifty, baffling, deceptive tipping points is long. Fact is, those entities become savory ingestible nuggets for those who’re stocked full of dry powder.

The middle innings of housing recovery typically mean builders and developers start to change their strategies and tactics--for reasons ranging from that it will benefit them to do so to that they need to in order to survive. This is an important moment to recognize, particularly as companies piece together budget and growth strategies for 2016.

Toll Brothers ceo Doug Yearley affirmed the other day a position we’ve had for a few months now, that the housing recovery—post Great Recession—has entered its middle innings. Here’s his statement from CNBC's Squawk Box:

"Four years in, I would think the housing market would be further along. I think it means we're going to have a longer, slower recovery."

Too, the huge consolidation of Ryland and Standard Pacific into a single operating unit under the CalAtlantic name is a bet by co-leaders executive chairman Scott Stowell and president and chief operating officer Larry Nicholson that the cycle has moved into the middle innings.

Could it be that for every 76,000 owned and controlled lots owned by home builders and land bankers, there’s an equivalent $70 million in savings and efficiency “opportunity,” thanks to improved technologies, systems, processes, and management? It could be.

For the erstwhile firms of StanPac and Ryland, one motivation is--like Toll Brothers with its 2013 buy of Shapell Industries' 5,200 California lots and like TRI Pointe's 2014 $2.8 billion acquisition of the five Weyerhaeuser home building operations with 27,000 lots--also to become a home lot developer and seller in this next stretch as well as a consumer of home sites.

Now, as important as it may be to know whether a hunch that the housing cycle has entered the middle innings is the case in fact, it’s actually not possible to do so. The way housing’s economics work, with disproportionately huge upfront investment of capital, leading, lagging, and otherwise indifferent indicators mask the moment in advance; cloud it as it’s happening, and reveal it as blindingly obvious only after it’s come and gone.

If you wait for it to be clear, it’s almost inevitably too late—often catastrophically so.

The question for 4th Quarter 2015, when it comes down to it is two-pronged. Is this an “if-you-build-it-they-will-come” moment? Or is it a “build it and sell it fast so that you won’t be holding the debt and carrying cost of it” moment?

And the question for 1st quarter 2016 and beyond is this. Why not prepare for either eventuality?