Surviving the Market
NEW FROM NAHB
“Survival” and “crisis” were the words most uttered by those in attendance at the NAHB fall board meeting in Seattle. There was certainly a serious tone as all in the home building industry attempt to maneuver through these challenging times. Only a few markets in the country have not been affected by the downturn.
NAHB is now predicting the market may hit bottom sometime in 2008, although all recent forecasts have been off target. “Mortgage disruption,” as it is now called, is a huge concern for an otherwise weakened industry. The sub-prime market is virtually gone, and the availability of credit has been limited, especially for jumbo loans. While not as much of a problem locally, the number of foreclosures that will impact the market and compete with new home inventory is substantial.
Some good news – it appears raw material prices nationally have fallen an average of 10 percent this year, with another 5 percent decrease expected. There is apparent capacity in many of the production facilities, especially in the Southwest and Southeast, barring any future hurricanes.
The NAHB is working very hard to lobby the Fed for some additional short and long term interest rate relief. If nothing else, these rate cuts should help the psyche of the market and provide some much needed good news.
THE LOCAL MARKET
The market continues to sputter along. Despite time periods of inconsistent sales, decent to good traffic, and very attractive incentives, the home-buying public continues to lack a sense of urgency to buy. It is truly unfortunate given all the excellent opportunities available to purchase. Also, for the first time, there is a fear from potential buyers of swapping their existing mortgage rate for one that is likely to be substantially higher.
The local market showed signs of a slowdown beginning in August 2005. Despite a few spurts in the last two years, overall sales have decreased since 2005. Eventually there will be some pent-up demand that should occur, especially given the reduction of finished spec inventory. The slowdown in new projects being developed also will help reduce the perceived oversupply of lots.
It remains even more imperative that all home builders, lenders, suppliers and subcontractors work together to navigate these challenging times.
Stay tuned!
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What Can Be Done
Now to Survive the Crisis?
Create a Business Plan and Upgrade Systems and Processes
- Strive to be the best you can be at your current level of activity.
- Use this time to upgrade and improve your systems and processes.
- Create a short-term (one-year) and a long-term (five-year) plan.
- Include both your income statement results and a period end balance sheet to monitor ratios like debt to equity.
- Budget at a detailed level to remain accountable and manage costs.
- Update your short-term plan quarterly and your longterm plan annually.
Manage Your Overhead
- Review your staffing levels versus your current, short-term plan and long-term plan sales.
- Keep control of your developed lots and spec inventory levels.
- Review each detail income statement expense account for cost savings.
- Cross-train individuals to keep them productive and better utilize resources.
- Walk your job sites to identify needless waste and opportunities for savings.
- Remember, cash is king – treat it carefully!
Work with Professionals
- Ensure that your relationships with your bankers are solid.
- Be sure to get ahead of your banker with your forecast.
- Remove the element of surprise in your year-end financial statements.
- Always work with a lawyer before signing contracts.
- Adjust insurance rates based on your new production levels.
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