The single family housing market is expected to build 22% of the number of homes they built in 2005, which was 1.3 million. Whether they will even sell that many houses remains to be seen. The national public builder’s share values are off over 20%. KB Home is off over 50% since the first of the year. Most of the mergers have taken place, all the layoffs have been made, and soon even the feds won’t be there to help (thanks, it’s like your dad continuing your allowance when he’s unemployed).
Insanity is to continue doing the wrong thing over and over hoping that at some point you will get it right.
Builders continue:
- to buy land hoping that the market will catch up,
- to reduce the sizes of the house they build cheapening them until they are worthless,
- “right size” to the market (whatever that means),
- change their stripes from single family to condos,
- cooperate with the feds over their questionable lending practices and lose even more cash due to fines,
- to burn cash - cash they don’t have.
I’m not one to tell a company how to run thier business, lord knows the business of businesses is a murky alley with many foul and onerous and odorous things hanging about the darker edges. And today the one business I wouldn’t start is a home building company. Very high entry (land), high costs (construction materials), and a questionable market (reminds me of the nascent electric car industry – don’t get me started). The one good thing it has is the number of available and experienced out-of-work employees.
To be sure the marketplace is there and every minute grows by more and more people. They want a place to live. This need is not being met at the moment. Yes, the media makes an issue about the homeless and the unemployed; they are easy faces to find for the camera. What they don’t show are the kids living in their parent’s home, after college, married, with children. The families doubled up in apartments. The empty homes and apartments frozen out of the market by rental laws. The people living in their boats as pointed out in a newspaper article this week.
I would suggest a few strategies for home builders that want to stay in the market.
- Be flexible, look at the rental market, build single family homes FOR the rental market.
- You know how to build, build apartments.
- Hold these rental properties on short term leases, learn how to rent to own. Don’t leave it to others to pick up your mess and make money on it after you are gone.
- Remember that the market is a cruel mistress that must be obeyed. Explore smaller neighborhood infills where there is growth in specific industries.
Examples:
Throughout the Marcellus shale region of the eastern US small towns are beginning to quickly grow due to the exploding gas and fracking industry. I will bet you they are suffering from a lack of housing, even if it’s twenty or thirty homes. Track the gas producers, look for the potential. These are literally in our own backyards.
College campuses are facing severe housing shortages. Build homes for this market, rental or even develop residential for sale products that allows multiple students to share ownership and grow equity (they can ask their parents what that means, they might remember) while they attend school.
Locate, design and build high-end Boomer villages in suburban neighborhoods. Focus on the detached single family house, fully and highly amenitized, for those that kept their investments during the last five years and even flourished.
The shakeouts and the last man standing rule will continue to roil the builders. There are hundreds of brilliant men and women out there running their companies well, some will survive. But will they be in the right position when this game of musical chairs finally stops? Me, I would listen closely to the tunes being played.
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