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Focus on Home Builders: Looking Up From the Bottom

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The best statement that can be made about 2008 is that it is finally over! The worst economy in our lifetimes has certainly left much carnage to the national and local home building industry. Inconsistent to infrequent sales through the year seemed to be the norm.
January 11, 2009

THE MARKET

The best statement that can be made about 2008 is that it is finally over! The worst economy in our lifetimes has certainly left much carnage to the national and local home building industry. Inconsistent to infrequent sales through the year seemed to be the norm. Pick your poison, cause or reason(s) – falling stock market, gas prices, lost jobs, lack of credit, too much credit, the election, etc. – all had a very sobering effect on what may have been the worst fourth quarter and year seen by most.

Now the good – it does feel like, and let’s hope, that the market locally has hit the bottom. Spec inventories appear to be at a low manageable level. The raging fire that has become the national housing industry appears finally to have caught the attention of Congress. With a line forming at the “relief” window, NAHB and all related housing groups will have to exert much in the way of muscle and resources to get needed assistance. The new leadership team in Washington appears to have many ideas, such as mortgage interest rate relief, permanent tax credit, etc., to stimulate the market and, most importantly, to create some urgency to buy now. It would seem the more you “throw on the fire,” the better the chance of putting it out . . .

What to expect for 2009?

Most builders will have little or no backlog going into the first quarter. Appreciation should be given to the lenders that have allowed or worked with builders to manage their cash flow in the best manner to ultimately survive. If long-term mortgage rates continue to fall as expected, it should finally trigger some of the pent-up demand that has been sitting on the sidelines for more than three years now. Most experts feel the recovery will be a slow process. Maybe the most challenging aspect of the anticipated recovery will be how builders compete with varying lot costs. Builders who survived may be selling against lots that have been “reclaimed” or market-value-adjusted by others. However, it will take considerable time for the builders to recover financially and psychologically from this extremely challenging time period.

In addition, it is likely your lender will expect more, such as:

  • Enhanced reporting requirements will likely be required – some sort of compilation, review or audit financial statements will need to be prepared.
  • Internal financial statements must be accurate and reliable.
  • Personal financial statements will likely be required.
  • Timely filings and reporting required for tax returns and financial statements will be enforced.
  • New and enhanced bank covenants likely, such as:
    • Debt to equity ratio maintained
    • Spec/display levels
    • Net worth requirements
    • Limits on distributions or compensation
    • Increased personal guarantees

Finally, it is important to note that throughout the crisis, what has been reported here is a national story being told in a local market. The conditions in the Midwest do not match the devastating results experienced in markets like Detroit, Phoenix, Las Vegas and others.

STAY POSITIVE AND STAY TUNED!

HAYS’ BITS:

  • Despite the crisis in the industry, several raw materials continue to escalate – not always sure on the reasons why . . .
  • When the market does start to recover, it will be interesting to see how advertising and promotion dollars are spent. I’m guessing there will be some substantial changes . . .
  • Congratulations to past HBA president Tom Hughes on an outstanding job in the toughest of years . .
  • The Housing and Economic Recovery Act of 2008 passed in July and was a huge failure. Let’s hope our legislators don’t miss the mark the second time around . . .

 

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