Traffic is down. Builders can hardly believe that a few weeks ago their landscape and business prospects were contoured by supply constraints. Not demand anxiety.
Today, one of the few sources of solace for single-familiy for-sale builders–public, private, large, medium, small–is the notion of backlog. Orders with earnest deposits, extending out a few weeks, or better yet, months, may serve as a bastion of resistence as builders’ capital structures wobble and heave beneath them.
Entity valuations have entered a middle-earth moment for any and all businesses predicated on borrowing or inviting equity investment for future returns. That’s land development, home building, and manufacturing capacity described to a T: heavily front-loaded loans and investments teased out across a range of time horizons with promised return rates.
This is the essence of risk, and when disruptions tear apart the few norms of near-term predictability–model home traffic, web visits, absorption rates–and turn those metrics upside down, home building concerns become especially vulnerable because of how reliant they are on the tug of fundamental demand for new homes.
The Federal government–namely, the U.S. Senate, so far–pulled the trigger on its best shot at a bi-partisan multi-channel life-sustaining stimulus. To the tune of $2 trillion, an array of programs aims to place a solid floor under us for an investor confidence reset, an immediate blitz of healthcare support initiatives, and a lifeline of household, small business, and large corporation loans, loan guaranties, tax credit, and payments. The bill is expected to get bi-partisan support in the House soon, and head to the President for passage into law.
At the same time, builders and their partners are rallying to keep their operations–and the ecosystem of America’s entire residential construction sector–going. Ninety organizations, lead by the National Association of Home Builders, appealed yesterday to the U.S. Department of Homeland Security for a broad-stroked waiver, that would effectively exempt home construction, remodeling and repair work from all local jurisdictions’ power to shut down businesses and their operations with stay in place orders.
Herman Farrer
“As cities and states issue declarations and public health orders as a result of the crisis, it is essential that communities have access to our professionals to build and maintain essential services including: building, plumbing, residential property management, rental housing operators, roofing, electrical, HVAC systems, waste/wastewater treatment plants and power generations,” the letter stated. “Home construction, including those industries listed above, should be designated as ‘essential’ because it is necessary to maintain safety, sanitation, and economic security.”
‘As housing goes, so goes the economy,’ said NAHB Chairman Dean Mon. ‘Construction of single-family and multifamily housing is essential to the economy and should be allowed to continue under a remain in place order.’
To keep the housing sector running during this economic crisis caused by the COVID-19 pandemic, DHS should take the following actions:
- Permit government functions related to the building and development process, such as inspections, permitting and plan review services, to be modified to protect the public health. This can be done in a way that allows these functions to continue and serve the construction of housing, such as allowing qualified private third-party inspections in case of a government shutdown.
- Allow supply stores, distributors and manufacturers of building products necessary to serve the construction, repair and maintenance of housing to operate.
- Let those working in building trades continue to maintain the essential operation of residences and other operating businesses.
A large majority, if not all land development and residential construction job tasks fall within the Occupational Safety and Health Administration’s (OSHA) Lower Exposure Risk jobs. Working on a new unfinished home site occurs primarily outdoors and does not involve going onto a location occupied by residents or a public location, and there is minimal (if any) physical or transactional contact with customers compared to other customer/client relationships.
“Housing is currently 14.6% of Gross Domestic Product and a major engine of the economy,” the joint letter to DHS stated. “Keeping the men and women of the industry building must be a priority. If the construction industry and its supply chain is disrupted, it creates a domino effect leading to dire negative economic repercussions for an already-burdened economy.”
Our voices here join with those who make this appeal to the DHS.
Need for shelter, need for homes, need for new communities, need for repairs–these needs don’t take a time-out during a pandemic any more than the need for food, water, or power, or any other vital resource. People’s resilience, and our society’s ability to remain fit to withstand continued trauma, whatever form it takes, requires adequate, healthy, safe, decent housing as an essential, ongoing activity.
That is true, and yet, home builders must, hourly, every half-day, every 24 hours, every week, and every month for the foreseeable time ahead, do what you need now to do to accomplish three essentials:
- Protect your people’s health and safety
- Reduce your balance sheet, fast and without personal “golden cow” favoritism
- Improve your skills for a present-day maintenance level subsistence, and a future rebound
We’ve been hearing tell in the field of fast moves among builders to batten down their expense and investment hatches. Many of them–especially those with the experience and skills acquired in prior down cycles and the mid-decade housing meltdown of the 2000s–have yanked out their 2007-2008-2009 playbooks for reference as to how to manage as a monster storm blows in.
- They’re walking away from land deals with developers whereever they can;
- They’re laying off construction superintendents for many communities as well as a number of other positions;
- They’re cutting corporate overheads “with an abundance of caution,” to improve durability and resilience for a buffeting near-term future
Get ready, if you haven’t already, for a lot of this:
“Regional factory activity contracted sharply in March as firms were negatively impacted by COVID-19,” said Wilkerson. “Many firms indicated overall demand and sales have slowed dramatically, with capital investments being put on hold. Around 60 percent of manufacturers faced delayed payments from customers and 54 percent had concerns about cash availability.”
And a lot more of this:
- The index of consumer sentiment dropped to 89.1 in March — its lowest level since October 2016 — from 101 in February.
- March’s decline in sentiment was the fourth-largest in nearly 50 years, according to Richard Curtin, chief economist for the Surveys of Consumers. “
- There is no silver bullet that could end the pandemic as suddenly as the military victory that ended the Gulf war,” Curtin said.
Here’s KB Home ceo Jeff Mezger’s overview commentary from yesterday’s Q1 2020 earnings call with investors/analysts [listen to the KB Home earnings call by clicking here], for a flavor of how public companies are hyperfocused on team member safety, expense responsibility, and ongoing operational resilience:
“Remarks today will focus on how we are responding to the COVID-19 related challenges, the actions we are taking to navigate this uncertain environment and the strength of our positioning to manage through it. We began the process early last week of temporarily closing our sales centers, model homes and design studios to the general public. During this time, we have shifted to appointment only, following appropriate protocols to help ensure the health and safety of our employees and customers.
We are also leveraging our virtual sales tools including home video tours, Interactive floor plans and an online design studio to give customers the ability to stop for new home from the comfort and safety of their mobile device or personal computer. In addition, we are also actively engaging with customers by phone, email, FaceTime, Skype and other online tool. We are seeing an increased response to our digital efforts. Month-to-date in March, visits to our website are up nearly 50% and conversions to sales leads are up over 20%, both as compared to their respective prior-year periods.
In addition to the temporary changes we have made at our communities, we have also shifted our corporate and division office functions to working remotely. We will continue to monitor the situation and follow the guidance of the Centers for Disease Control and Prevention, as well as state and local authorities. In most of our markets, there are restrictions on activities commonly called shelter in place orders. But these orders, usually exempt residential construction, categorizing it as an essential activity.
Our company is better positioned than perhaps we have ever been to deal with this type of disruption. The tremendous progress we made over the past three years under our return focused growth plan has truly transformed KB Home. We are now a larger, more profitable company with a higher gross margin, supported by a solid balance sheet which has no goodwill and over $1.2 billion in liquidity. Our leverage ratio has steadily improved in the past few years, and continued to progress in the first quarter, both year-over-year and relative to year-end 2019. In addition, we have a better mix of assets as a result of both our discipline in acquiring land, as well as the ongoing reduction in our inactive inventory. Our approach to land acquisition has primarily focused on communities that provide a roughly one year to two year supply of lots in preferred submarkets with price points that are attainable by the median household income. Our lot owned at the end of the first quarter represented a 3.1 year supply, based on our last 12-months of deliveries. In these challenging times, housing is an even more essential need as homebuyers want a place of their own for many reasons including safety, security and health.
Between the lines here, you can read how all home building leaders–national, regional, local, subdivision, and custom–face a bumpy, impossible to predict, emotionally-fraught prospect. Combine, if you will, the devastation of wildfires, hurricanes, and tornadoes of the past decade with the nauseating experience of the financial meltdown the decade before, to begin to grasp what companies large and small feel they’re up against right now.
Silver linings, as Mezger notes, and as Lennar executive chairman Stuart Miller called attention to a few days ago , are the “grab-bars” of the moment, and fortunately, they’re impossible to extinguish under any circumstance.
- Already, firms have begun “re-skilling”–even working to retrain current staff rather than lay them off–for a transformed, friction-reduced, digital connective thread. Originating with customers, early in their journeys, the digital thread consists of engagement, nurturing, service, adaption, and value creation that becomes essential data for building information modeling, sourcing, construction specs, scheduling, fabrication, and delivery. Social distancing included.
- Already, firms have shifted from baby steps to strides in their regard for team members, the need to keep them safe and healthy, and their mutual interest in their well-being and livelihoods, as a “deposit” to draw on at times like now, where trust, commitment, focus can happen in a world full of external disruptions, distractions, and worry.
- Already, random acts of kindness swell and surge and affirm the very nature of what builders and their partners do every day, as they continue their essential work, their necessary jobs, their foundational contribution to people’s well-being. So many of us now, sheltered-in-place in so many locales where, quite literally, a state of emergency has only just begun, have you to thank for the sanctuary we may feel. We belong at home, and you, builders, building materials suppliers, building products manufacturers, and members of the building channel, are an essential part of that belonging.
We’ll stay keenly focused on silver linings as dark clouds continue to hang over the immediate future of home building.
