Sometimes, a negative is a positive.
In the world of housing metrics and measures, a benchmark that reflects the relative level of difficulty–or ease–that home builders encounter as they try to arrange bank financing to operate their businesses, construct homes, and buy and develop land for lots is the National Association of Home Builders’ AD&C Financing Survey.
When the survey indexes in the positive numbers, it’s a scale of credit tightness, which runs counter to home builders’ interests and needs to access streams of needed capital. When the same data points show up in negative numbers, as they do now at a -10.7, it means the opposite of credit tightening–i.e. net credit easing.
An important feature of this data is not only direction but the strength–or rate of change–in that direction. NAHB economist Michael Neal points out that the second quarter 2017 data point is good news directionally for builders, but less than good news from the standpoint of the index’s rate of change. Neal writes:
Although builders and developers continue to report net easing on AD&C financing, the pace of easing has slowed.
Now, it has been the case–and is very much likely to continue to be the case–that all loans are not created equal when it comes to the ease or difficulty builders have in obtaining them.
Normally, it’s easier to obtain construction financing–assuming a purchased, developed, and entitled lot–than it is to acquire and develop that lot in the first place.
Today’s dynamics in housing affirm a relatively strong confidence in the pipeline of new homes being built and planned for already developed lots, and less confidence in the farther-out horizon of developing lots that are still raw and unentitled. The NAHB’s Neal explains how the NAHB AD&C Financing Survey reflects this difference in lenders’ confidence and behavior this way:
Over the quarter, the pace of easing slowed on land development loans and single-family construction loans while net availability on land acquisition loans were about the same. Over the year, net easing slowed the most on land development loans while the slowdown on land acquisition and single-family construction loans were similar.
So, this suggests that builders are, in general, finding it measurably less easy–in other words, harder–to get financing on acquistion, development, and construction than this time last year, and quite a bit less accommodating in the area of construction and development financing vs. the first quarter of this year.
Housing analysts look at this data as a filter through which one can detect how confident builders are in their ability to access capital to grow. An indicator like this one takes on added freight of meaning at this time of year as budgets for 2018 take on more structure and specificity.
Of course, the vast majority of home builders’ ability to project growth in 2018 relies on ready access to bank financing, while a few large public enterprises draw on debt and equity markets that free them somewhat from the noisier ups and downs of bank credit tightness and easing.
One may wonder whether some of the relative “slowing” of credit easing in construction finance programs with builders may be banks’ way of trying to nudge more builders away from more expensive product–move-up, second-time move-up, and luxury level housing–toward more attainable, more affordable price-points, where there’s growing activity and a vast unmet market.
At any rate, lending for growth, and investment projections on the part of builders need both to allow for more rapid change, more volatile, less certain, more complex, and more ambiguous (VUCA) conditions.
Strategies, then, need adaptiveness to be a core skill along with other more traditional company values, principles, and proficiencies.
And if adaptiveness, the ability to quickly learn and course correct toward a refreshed near-term set of objectives to reach a basic goal, is required, so is this most-basic rule for home builders, who are as different as the pieces of ground upon which they build.
Know who you are. And, secondly, know who you want to be.
This wisest of counsel gets support at all levels of business guidance, from the field and in the halls of academia. Harvard Business Review contributor Ron Carucci, a principal and co-founder at consultancy Navelent, notes in a piece entitled, “The Better You Know Yourself, the More Resilient You’ll Be:”
Adversity in organizational life, sometimes the result of major change, sometimes the provocateur of it, is a way of life today. Leaders need higher levels of resilience in constant reserve to weather this new normal. Those leaders with strong self-knowledge — who have a clear understanding of their skills and shortcomings, their frustrations, and their core principles — are more likely to sustain those needed reserves of resilience to thrive through adversity and change.
Home building and residential development has long been a business welcoming of both leaders and followers. Now, however, we’re sensing that the pendulum has swung in favor of those who lead, leaving fewer and fewer spoils for those who follow.
