Two time and volume frameworks run simultaneously in the minds of the nation's bigger home builders and developers, we learned over the past few days.
As we spent time listening to the higher-volume production builder thought and practice leaders at our just-concluded Housing Leadership Summit, at the Ritz Carlton Laguna Niguel in Dana Point, Calif., these parallel realities flow in almost comfortable unspoken relationship to one another. One is the time and volume framework of what is. The other, whose data set and influence may be largely unconscious but no less valid, is what should be.
In fact, one time and volume framework suggests that the housing recovery is half-way back--a profoundly great distance--from the Great Recession's low-point, while the other time and volume framework looks at the same point as 50% lower than the prior peak of activity.
Which is real is not the question, for both are real. It feels ludicrous to suggest that "pent-up demand" that has yet to activate in the current residential investment business cycle is phantom demand. From the "what is" set of data points, one can look at the past 36-plus months as salvation from the death-grip of a housing nuclear winter. From the "what should be" set of data points, one tends to look at the next 36-months--longingly--with a "you-haven't-seen-anything-yet" attitude, largely because typical housing recovery behavior involves a big, bold, sudden tsunami of entry-level buyer demand somewhere in its mix.
Many companies started to make money again, and some started to make a lot of money, based on their relative ability to put a delta between their newly level-set land-bases and product lines that allowed them to test the elasticity of prices at the higher-end of the home and community value spectrum.
An 800-lb gorilla in the room, however, is this. "What should be," in quantitative form, is essentially that part of the market that has been missing in action so far. Speculate all you want about why that's the case, it is. The actuality that first-time and young adult buyer activity has been running between 30% and 50% lower than the norm as a percentage share of buyers since housing's recovery began can still be viewed as a tremendous upside opportunity. Or, it may begin to do something else, which is the prerogative of what hasn't happened yet--i.e. it may never happen.
In the HLS Finance Bootcamp, six of for-sale housing finance's top-notch players--Tony Avila, CEO, Builder Advisor Group, Jamie Pirrello, Chief Financial Officer, UCP, Inc., Anthony McGill, Advisory & Capital Markets, Zelman & Associates, Rodney Montag, CEO & Managing Partner, RAM Real Estate Capital, Joe Walsh, Michael P. Kahn & Associates LLC, and Ryan Starck, Wells Fargo--explored home building, land strategy, and residential development's respective capital stacks in a session deftly led by FTI Consulting managing director Brad Foster.
Question of whether the current housing cycle has begun to inflect--assuming as most of the housing community's players do, that it's either rising or falling, or about to do one or the other--focused a lot of this great conversation on current and future entity valuations.
That mergers and acquisition pace in the home building industry had fallen off from the prior two years was lost on no one. But, as Kahn & Associates' Joe Walsh noted, the math of strategic motivation--companies who either want to expand into new markets for opportunity or to increase their share of business in markets they're already operating in--and the recent behavior of players like Sumitomo and Clayton Homes as acquirers give potential sellers serious food for thought as to whether now is the time to act if they want either to "take some cards off the table," and lessen their exposure to whatever the next direction is for housing, or to sell outright.
Because of the two time and volume frameworks, always at work in the mind of any healthy-minded, able-bodied home builder, it's a difficult decision to make, but it's a question to ask.
And under the guidance of FTI's Brad Foster, the question did get asked, in these very words: "Has the peak time to sell already come and gone?" A corollary: Are valuations--primarily of private home builders who might explore an exit plan--from this point on going to get dinged, especially as investors punish the stock values of the publics?
Whether a buyer's looking for value in future net income, the ability to better scale operations in a market, the opportunity for access to a finished lot pipeline, an operational best-practice process, a one-of-a-kind talent or leadership team, etc. the question gets directly at the notion of the double time and volume framework going on in the minds of home builders.
Tony Avila's response both answered the question and raised an even bigger one. Avila noted that in June 2006, well after the spate of home building company acquisitions during last decade's housing boom had subsided, John Laing Homes sold to Emaar for $1.05 billion, a four-plus times multiple to book value. It was a moonshot, and it had to do with a host of stars-aligning motivations, circumstances, and timing.
So, in a sense, Avila answered the question--has private home builders' peak moment to sell and get the most value now come and gone--affirmatively. And at the same time, the affirmative begets its opposite. Because, Avila, at the same time was saying that a particularly nervy, savvy, astute, and brilliant move by one or more potential sellers may come well beyond the bounds set by prior deal-flow trends.
We'd noted earlier this week that a consensus of our home building organization executive leaders signaled their view that the current housing recovery has reached its mid-point. That's what is. What should be, however, is that first-time buyer volume should kick in this year as more builders and more communities offer lower-priced product that syncs with slightly easier access to financing and still-dirt-cheap mortgage interest rates, taking on a life of its own and kick-starting the housing-as-an-engine of broader economic growth.
Those two time and volume frameworks keep on operating parallel to one another, which makes for a never-a-dull-moment industry.