To move unsold product, Lennar and other builders are re-pricing downward. Eller of Centex observed that in Sacramento, Calif., builders’ prices dropped by 20% to 25%. Standard Pacific’s margins in San Diego, which had been 32% to 33% before that market’s downturn, were hovering around 18% this summer, the result of price competition, said Scarborough.
Discounting hasn’t been embraced universally, though. Bob Toll, CEO of Toll Bros., the 14th-largest builder, chided other builders for “advertis[ing] that we’re cracking the price,” although he sympathizes with those whose inventory levels had been mounting.
O’Leary said Beazer had seen a 5 to 6 percentage point “degradation” in margins as a result of its response to so many builders discounting their products. Beazer hoped to recapture some lost margin by putting pressure on trade partners—including pro dealers—to lower prices for materials and labor. In fact, most of the symposium’s builders are renegotiating contracts with suppliers; Hovnanian Enterprises, the seventh-largest builder, expected to reduce its subcontractor-related costs by 12%. Technical Olympic, the 12th-largest builder, saw those renegotiations as one of the ways it could take between $5,000 and $15,000 out of the price of its homes, thereby making them more attractive to buyers, CEO Tony Mon said.
Uncertain Outlook Mon, decidedly bearish, doesn’t think the market will bounce back until 2009: “We’re planning for the worst, and hoping for the best.” While most builders have written off next year, some believe the market could recover sooner. Chad Dreier, CEO of The Ryland Group, the industry’s eighth-largest builder, was the most optimistic of the builders at the symposium when he suggested that market conditions had “plateaued” and that “2008 would be better than 2007.” There was general agreement, though, that consumer confidence must stabilize before people will start buying houses again.
“The best thing about the market today is that everyone in the country knows it’s bad,” said Larry Mizel, CEO of M.D.C. Holdings, the industry’s ninth-largest builder. “Even the regulators woke up. So this is a self-correcting [market], and the secret to any builder’s success today is ‘Don’t go broke.’” Mizel said his company had $1.3 billion in available liquidity at the end of the second quarter. Several other builders at this meeting—including Lennar and Beazer—said they would focus on strengthening their balance sheets and building their war chests, which many believe will be fattened by improvements in cash flow, now that they are buying less land and building fewer homes.
How they will use that extra cash depends on the builder. Some will continue to repurchase their companies’ “undervalued” stock. But there isn’t much enthusiasm for acquiring other builders, at least not immediately, even though several builders expect there will be consolidation as a result of this downturn. Lennar’s Miller was like most builders when he said he didn’t think his company would enter into major deals until the dust settled. “These are uncertain times, and people are having difficulty seeing where the bottom is.”
There was a sense among these builders that this downturn would expose which of them has the better operating strategy. Eller, for example, noted that while the past decade has “certainly been a rising tide,” lifting everyone to new levels of prosperity, “now, it’s about execution.” Schottenstein saw this as a healthy thing because “you shouldn’t be allowed to be successful just by being there. The race should be won by [builders] that stress quality and design and treat customers well.” —John Caulfield is a contributing editor for PROSALES.
