The Giant 400: Credit crunch helping manufactured home sales

According to Professional Builder magazine's "Giant 400" survey, sales of manufactured homes fell steeply during the recent housing boom and bust cycle, made even worse by the steep discounts 'site-built' builders were offering buyers. But as the credit crunch has eliminated most loans without some type of down payment, the lower cost of manufactured housing has re-made it as an affordable housing of choice in certain areas.
Site-built housing's downturn dragged the manufactured housing sector into the gloom the past two years, but now the sun is beginning to shine again for at least some in that industry. Part of the reason is the credit crackdown that has many site-builders tearing their hair.

"It's tough to sell any kind of housing when so many production site-builders are discounting wildly," explains Tom Beers, vice president of economics for Arlington, Va.-based Manufactured Housing Institute. "Our members complain about the strategies of the public home builders just as so many other builders do."

"But the last couple of months, we've seen single-section HUD Code shipments turn up dramatically. Both consumers and lenders have had a reality check," Beers says, "They can't put people into $500,000 homes anymore if they don't have a big down payment."

Single-section HUD Code homes are the most affordable product in ownership housing, with an average price of $35,000. A $2,000 down payment will work fine for such a home, while it may not work at all in the current tight credit environment for even the most affordable site-built homes.

Multi-section HUD Code homes and modular housing are still in the dumps, because both track closely to site-built. But even there Beers sees reasons for optimism. Multi-section HUD houses are assembled on-site and average $85,000 in price, without the lot and the decks and porches many people attach to them. The federal stimulus package now in Congress contains a provision to update FHA Title 1 mortgages, upping the loan limit from $48,000 to $70,000. If Congress passes that provision, Beers believes the mortgages will be used widely on multi-section as well as single-section HUD homes.

Modular manufacturers have carved a niche recently supplying modules to custom site-builders for assembly into expensive custom homes in rural areas. Those rural markets are not as bad as those in suburbia, and that market segment is not as interested in standing inventory homes. So even modular has hope.

Still, the best chance for manufactured housing is the HUD code single-section segment that's already rocking. Tighter credit is pushing people — who should have been customers all along, Beers says — back into HUD singles.

The Giant 400: Rental Units Take Center Stage

According to a story related to Professional Builder magazine's "Giant 400" survey, builders of rental housing sailed through 2007 while those building 'for sale' housing suffered:

Six of the 10 rental kingpins finished more units in 2007 than in 2006, while the single-family builders are all down.

"Rental is the flip side of ownership housing," says NAHB economist Dr. Bernie Markstein III. "Right now, with foreclosures rising and people reluctant to buy homes, the rental market is benefiting from the woes in ownership housing. Condo sales are falling for the same reasons as single-family detached, and when that happens in the condo market, a lot of those units wind up back in the rental market, at least temporarily." That phenomenon kept vacancy rates higher in some markets, but they're now dropping again...

Markstein predicts another upswing in luxury renters-by-choice in many markets. "Since home appreciation rates are likely to be flat for several years to come, there's not as much motivation for young, high-income couples to buy," he says. Such couples may opt for well-located rental apartments and put off owning a home until prices really start to recover.

The Giant 400: Largest Concerns for 2008

Calling it a "market in full flight," the editors of Professional Builder magazine's Giant 400 also surveyed builders on their top concerns for 2008:

Housing's giants list sales as their biggest challenge (64.9 percent of respondents), narrowly edging out fears related to the economy and interest rates (64.5 percent). Land issues are a distant fourth (26.4 percent), but land is actually the key component of this downturn — the Old Maid card no production builder wants to hold when people stop buying houses.

The high and mighty titans of the housing industry — publicly held builders like No. 1 ranked D.R. Horton and No. 2 Lennar — are humbled by holding too much land bought at the peak of the market, at prices now out of whack with falling home prices.

New York-based housing market analyst Ivy Zelman says this slump is far from over, predicting that by the end of 2008 the largest builder may have 20 percent fewer closings and revenue than in 2007. "It's ugly out there," Zelman says. "The public builders are challenged as never before, and most of the private builders are dependent on the banks for financing, and those banks are behaving irrationally right now."

If there's light in this tunnel, look for it to show first in Texas, which has the advantage of a vibrant, oil-driven economy and existing home prices that are still rising...

When the market does recover, it will be interesting to see if the largest builders can recover their momentum and resume growing. The public builders have laid off hundreds of good managers, who just might start their own companies when they have the chance.

Giant 400: The Land Impairments of 2007

In continuing coverage of Professional Builder magazine's "Giant 400" listing, land impairments were a huge deal for large builders in 2007 (and were generally taken right after earnings are reported):

Public home builders are not the only ones drowning in a sea of red ink flowing from vast tracts of impaired land. In the mid-2000s feeding frenzy, the largest public builders got their snouts in the trough of overpriced land deeper than any private builder. Just check out these descriptions from Wall Street stock analyst David Goldberg of UBS Securities of some of the most significant impairments since the early days of the housing crash in mid-2006:

Centex: $2.1 billion from land impairment charges (including $213 million in joint ventures), $454 million from forfeiture of option deposit and pre-acquisition costs, goodwill of $61 million

D.R. Horton: $1.6 billion of impairments on owned lots, $234 million from forfeiture of option deposits and pre-acquisition costs. Also includes $474 million of goodwill impairments.

KB Home: $1.6 billion of inventory impairments (including $215 million from joint ventures), $288 million of option impairments, goodwill write-offs of $108 million.

Lennar: $2.1 billion of inventory adjustments (including $623 million from joint ventures), $682 million of write-offs of option deposits, goodwill write-offs of $190 million. Excludes $740 million loss related to land sale to Morgan Stanley.

Stock analyst Carl Reichardt of Wachovia Securities says the public builders usually report their margin numbers before impairments for very good reason: "If they reported them after impairments, those numbers would be mostly large and negative."

However, Reichardt notes that reporting margin numbers before impairments does give a better picture of what's going on in the present tense. "Impairments really relate to future communities and homes rather than what the builder delivered in the most recent reporting period," he says. "Most of these companies have very small margins before impairments. If they include them, it flips over to huge negative margins. Let's face it, margins suck for these companies."

One industry insider, privy to senior management, estimated that if the current housing downturn persists into 2010, as many as half the Top 10 builders would not survive.

The Giant 400: The Year That Was 2007

With continuing coverage of Professional Builder's "Giant 400" listings of the country's homebuilders, editor Bill Lurz demonstrates that the pain of the housing bust actually hit the largest builders the hardest. There are even whispers that a prolonged slump lasting until 2010 would wipe out half of the country's top 10 builders:

It was probably inevitable that a housing boom that lasted 13 years would end with a cataclysmic contraction. And this is certainly one of those, a dangerous beast that will devour home building companies large and small. "It reminds me of the late '80s in Texas," says Don Horton, leader of our new No. 1 builder, Fort Worth, Texas-based D.R. Horton, "only this time, it's all across the country."...

Horton regained the top of the housing industry by strategically retreating, shrinking rather than growing. After becoming the first builder to ever top 50,000 closings (in 2005), and doing it again the next year, D.R. Horton fell to 37,717 closings in fiscal 2007 (-29.4 percent) and $9.6 billion in revenue — 34.1 percent less than the $14.5 billion it banked in 2006. Horton has cut its payroll by 60 percent since the peak of the market in 2005.

Miami-based Lennar Corp., last year's No. 1, fell farther, dropping 32.9 percent in closings to 33,283, and dropping 36.3 percent in revenues to $9.5 billion — to land at No. 2. Dallas-based Centex Corp., Bloomfield Hills, Mich.-based Pulte Homes and Los Angeles' KB Home round out the top five, the publicly held group of huge companies we used to call Supernovas. All are now losing ground at an astonishing rate. None of them look particularly super these days.

As the overall ranking shows, this downturn is hitting the largest giants hardest, and the bottom line is that non-giants are gaining market share of total U.S. housing completions for the second consecutive year. That trend is likely to continue...

A year ago, we were amazed at how a housing market downturn reshuffled the Giant 400, noting that 154 builders dropped five positions or more, and 137 rose by at least five slots. Of course, we had no idea then that this year's rankings would make that volatility pale in comparison. This year, 108 builders rose by 20 or more positions, and 86 dropped a similar distance...

Last year, the theme of our coverage of the Giant 400 was the "selective" nature of the housing downturn — that Texas and the Carolinas were untouched in 2006, which allowed builders in those states to climb the rankings at the expense of many in California and Florida. This year, it's obvious that Texas and the Carolinas have not escaped the downturn, but builders there are still relatively better off. And we can also see that rental housing is beginning to act counter-cyclically to for-sale housing. Run your finger down the rankings poster in search of firms with big position increases. You'll find most are either rental housing specialists or Texans...

And here's the shocker: some Texas builders are growing — a few of them by a lot. Examples include Austin entry-level specialist Main Street Ltd., which climbed 53 places (from 205 to 152) on the strength of unit growth from 991 to 1,008, with revenues up from $126 million in 2006 to $133.1 million in 2007. And Peter Shaddock's Sotherby Homes rose 71 spots (192 to 121) as Dallas closings went from 306 to 383 and revenues from $132.3 million to $163.6 million...

The Giant 400:

Professional Builder calculates the Giant 400 rankings by using a two-step process. First, the top 400 production building firms are ranked according to housing units closed in the previous calendar year (or the company's most recent fiscal year). This year, the 400th company closed 82 homes in 2007 (down from 115 last year). But since dollars — not units — are what builders put in the bank, we do another sort, by revenues, to finalize the rankings.

The editors of PB believe this two-step process is a better way to identify the true giants of housing rather than a one-step sort based on either revenues or units. Revenue, after all, is the way the world measures the size of any business. But down at the bottom of the list, we think true production builders should make it into the rankings at the expense of high-end, semi-custom builders with high average sale prices but few units.

Professional Builder magazine unveils the Giant 400

The two largest national magazines serving the building industry -- Builder and Professional Builder -- both compile rankings of the largest builders in the U.S. each year, although their methodologies differ. Whereas Builder magazine ranks builders by closings and focuses mostly on the top 100 (as well as the 'next 100'), Professional Builder ranks their listing by revenue and expands it to the "Giant 400." Both surveys are released in May.

In the first of several articles, Senior Editor Bill Lurz discusses the state of the market for these 400 builders and what they're seeing ahead on the horizon:

When we ask builders, analysts and housing industry consultants what they think about the future, they seem to have radically different views. For instance, Colorado-based consultant Chuck Shinn believes recovery will bring drastically different housing products and new kinds of building companies.

Shinn says the public builders should be land developers or builders, but not both. He offers NVR's land-light business model as one alternative, then says the big builders can't see the wave of the future in community development because they are blind to anything that doesn't fit the demands of their production machines.

"We already have land developers taking market share by developing mixed-use projects that put many services within walking distance of homes," Shinn says. "People don't want to drive to Starbucks," he charges. "They want to walk." He believes successful communities in the future will blend commercial and retail space with a 60/40 mix of small-lot detached homes and high-density multifamily, with average prices settling some 30 percent lower than in most of today's developments.

He also believes large private builders, backed by big equity investment funds, will soon be a powerful force and that new technology will drive mass customization into every sales office.

San Francisco-based Wachovia Securities stock analyst Carl Reicardt endorses the wisdom of the largest builders taking lessons from NVR as a way to avoid another decade of extreme volatility... "The big public builders know Wall Street cares more about sustainability of growth than a high percentage of change in that rate over time. Wall Street rewards predictability," Reichardt says.

"When you put land in the home building equation as part of the profit center, you throw predictability right out the window.

"It sounds — now — like the other public builders want to reshape their companies to be more like NVR," he says. "But the cynics will tell you it's bull." As soon as the market turns, they will get right back into development, Reichardt charges.

"They can't give up that land margin. These guys are like drunks on a bender. NVR is all about becoming more efficient constructors of housing and getting rid of the risk and volatility associated with land. But these other builders will never do it."

Reichardt, however, has a different vision from Shinn's about the future of housing products. "I don't for a moment think we'll see the end of distant suburban subdivisions," he scoffs. "Even if gas goes to $9 a liter. ... What I don't understand is the beige boxes. Why does the design aesthetic have to be so bad?

"You can see the direction the next generation wants to move," Reichardt says, "and it's modern."

The Giant 400:

Professional Builder calculates the Giant 400 rankings by using a two-step process. First, the top 400 production building firms are ranked according to housing units closed in the previous calendar year (or the company's most recent fiscal year). This year, the 400th company closed 82 homes in 2007 (down from 115 last year). But since dollars — not units — are what builders put in the bank, we do another sort, by revenues, to finalize the rankings.

The editors of PB believe this two-step process is a better way to identify the true giants of housing rather than a one-step sort based on either revenues or units. Revenue, after all, is the way the world measures the size of any business. But down at the bottom of the list, we think true production builders should make it into the rankings at the expense of high-end, semi-custom builders with high average sale prices but few units.

Seminar on controlling costs in Irvine, CA -- May 29, 2008

Jonathan Smoke with BlueSmoke and HousingIntelligence.com recently invited me to speak with him at a luncheon at the Irvine Marriott on Thursday, May 29th, as part of an all-day seminar hosted by Hyphen Solutions, the building industry's provider of choice for scheduling and supply chain management.

This special business forum -- "Controlling Costs When You (and Your Suppliers) are Stretched Thin" -- will feature experts from homebuilders such as Shea Homes, Ryan Homes, Taylor Morrison and Standard Pacific as well as reps from GE, Black & Decker, SelectBuild and BlueSmoke on establishing the types of common technological standards and relationships with suppliers to survive in a tough market.

For the luncheon portion, MetroIntelligence will be partnering with BlueSmoke/Housing Intelligence on showcasing the tools and technologies we're using to bring market research consulting into the 21st century using specific examples for Orange County and Southern California.

If you're a homebuilder and want to know how to increase absorption at current developments by analyzing your best prospects, learn about the Orange County's best-selling projects or hear when this market is set to rebound, then don't miss this lunch!

But don't wait -- RSVP by May 15th, 2008, as space is limited to just 75 builder participants.

To register for this free seminar hosted by Hyphen Solutions and Professional Builder magazine, click here for a .pdf brochure or email Judy Brociek at Jbrociek@reedbusiness.com.