Home Builders Changing Business Model: Let's build rock mines, by gimleteye

Florida Trend notes the catastrophic effects of the housing crash on production homebuilders. "Miami-based Lennar's 2007 all but canceled out its profit from 2005 and 2006". Remember when critics of the homebuilders exuberantly lobbying for zoning changes in farmland were called, "elitist"? You don't hear that anymore, do you?

The new homebuilder strategy will "move to a "land light" strategy in which they no longer carry large inventories of lots for building." But remember, the crack pipe was passed between financial institutions and homebuilders and mortgage bankers, virtually assuring that the only thing farmers could do, who borrowed on their land based on the then-"developable" price, was to plot and scheme for more platted subdivisions.

If the homebuilders are changing their business model, as Florida Trend claims, then when is the banking industry bucking and fighting in Washington DC to tighten the regulatory regime to protect the public from being dragged along with the homebuilder addicts, the next time around?

"WCI CEO Jerry Starkey says he believes that WCI and other builders have been more focused on limiting land risk, "but this downturn was extremely sudden and deep. I don't think we've seen cycles where 40% or 50% of purchasers would walk away" from their commitments."

But remember, Jerry, it was your former chairman who crowed to the Washington Post in 2003 that suburban sprawl was "an unstoppable force!"

So who is to blame for the set of policies and growth management manipulation that landed the Florida economy in so much trouble: a $4 billion deficit this year? Or is that, just blameless?

"The wrath that this downturn is going to subject the big builders to is something they're not going to forget for years," Landry says.

What about taxpayers? And why should any Floridian trust the Growth Machine that made such a mess of our state?

Home Builders Changing Business Model
By Mike Vogel - 5/1/2008
Florida Trend


Depressing facts are a growth industry for Florida's publicly traded home builders. Miami-based Lennar's 2007 loss all but canceled out its profit from 2005 and 2006. Tousa, the Hollywood company that builds under the brands Engle, Newmark and Trophy, wiped out its shareholder equity when it went into Chapter 11 in January. Bonita Springs-based WCI Communities employed 3,900 at its peak in 2006. By March, it had cut that number to 2,065, and its 2007 loss offset its combined annual profits since 2001. WCI might face bankruptcy unless it can resolve a debt issue coming to a head in August. "They're not even close to out of the woods," says Morningstar analyst Eric Landry.

Rise and Fall of Home Prices

Aside from plenty of individual blunders in structuring borrowing and in off-balance sheet dealings, many builders overcommitted to land to increase growth to satisfy analysts and investors, drive higher multiples for their stock and secure market share, Landry says. But not all did. Denver-based M.D.C. Holdings and Reston, Va.-based NVR are fairly liquid.

Going forward, Landry expects to see fundamental changes in how home builders operate. For one, he expects them to move to a "land light" strategy in which they no longer carry large inventories of lots for building. That will drive up their cost of acquiring land but lessen the risk. Landry argues that it will be a "fantastic tradeoff" because it will allow them to turn their assets faster, offsetting whatever higher prices they pay for lots. He foresees an end to the current form of joint ventures to supply land. The new ones won't have builders in the driver's seat and will be led by pension funds and investment banks.

WCI CEO Jerry Starkey says he believes that WCI and other builders have been more focused on limiting land risk, "but this downturn was extremely sudden and deep. I don't think we've seen cycles where 40% or 50% of purchasers would walk away" from their commitments.

Lennar for the first quarter reported revenue fell 62%. It employs 6,200, down from a peak of 14,100. Last year it took steps to improve its liquidity — Lennar has $1.1 billion in cash and chopped the number of home lots in inventory by 200,000 — but still is exposed to $917 million in debt in 180 joint ventures. CEO Stuart Miller told analysts that market conditions "continue to deteriorate." Lennar's average sales price was down 8% to $278,000 (including $48,000 in incentives per home) in the first quarter.

"The wrath that this downturn is going to subject the big builders to is something they're not going to forget for years," Landry says.