Private Home Builders Still Struggling

Grading for private home building firms’ report cards changed, perhaps the instant East Brunswick, N.J.–based Kara Homes imploded in September 2006.

The grades since around that time have been simply: “pass” or “take two or three years off.”

Very nearly six years later, there’s no real reason to mess with this grading principle, since just about everybody still falls into it. Private home building companies can and do all of the following—survive, thrive, motor to new heights—in what generally continues to be an environment hostile to people who go by the name of home builder. The principals at The Rottlund Co., HearthStone Homes, Mercedes Homes, American West Development, and a raft of others who still may be walking viability’s fine line, know only too well that but for the good graces of an unusually patient capital stack and an exceptionally active submarket or two, the dark flipside of surviving, thriving, and motoring along has a greedy appetite.

There will come a time to surgically separate the term “private home builder” and the word “plight.” But not yet.

The private home builders’ plight is, has been, and will be the narrative equivalent of a taut, long braid of dread. Made up of buyers’ fear of falling house values, lenders’ fear of regulators on one side and the consequences of bad loans on the other, financiers’ and investors’ fear of declining land asset values and broken payment terms, and builders’ fear of no absorption or crippling, loss-inducing discounts and cancellations, each is a helical strand compressed into a cord of defeat.

Save for the baker’s dozen of publicly traded firms we’ve covered in other pages of this special supplement, and a smattering of private companies whose primary capital wherewithal draws from sources beyond U.S. borders, private home builders mostly need functional banks—both for their acquisition, development, and construction financing and for their home buyers’ mortgages. And the sad fact of the matter is that housing’s finance engine on both the commercial AD&C side and the residential mortgage side remains seized up since banks are anything but functional.

So, the 12 months from beginning to end of 2011 were more of the same leading to more of the same for private home builders. To stay in business, they needed home buyers and they needed other money, and both—in a 302,000 new-home sales universe—played very hard to get.

What did the companies do then?

“There was only so much you can do,” says Jamie Bigelow, president of Bigelow Homes, who literally had to decamp after nearly 30 years in the Chicago metro area and move his company wholesale to the Austin market for it to have a prayer at making a go of it. “I’ve said the same thing to myself every night and every morning for the past year-plus: ‘What do I need to do to make a sale?’ and ‘What can I do to cut costs?’”

Now, to speak of volume home builders, even the privately held ones, as a single homogenous group introduces misconceptions, because real estate, home building, and home buying is specific to location, not to mention varying debt and equity investment structures. Still, however you cut it and whatever the size or capital structure of the organization, the challenge was to stare chronic adversity in the eye and figure it out.

Different strokes

“I’m the IT guy, for crying out loud,” Bigelow says of his focus on saving money as he tries to kindle a modicum of home-sales velocity into the company’s San Marcos and Kyle, Texas, communities, just south of Austin. When Bigelow backs out debt service on some legacy land loans from the company’s now dormant Chicago operation, he says his company was cash-flow positive. This year, he says, the company will be profitable, even counting for the weight of that legacy land debt from back in Illinois.

“It’s uncomfortably busy,” Bigelow says. “We’re at the point like a lot of small companies in the U.S. We’re busy enough that we’re thinking of hiring, but we’re reluctant to put new people on the payroll.”

Who can’t relate to that sentiment? It’s especially frustrating because a goodly number of talented individuals from the housing boom have gone and gotten jobs in less lumpy sectors of the economy. So while the job openings may be few and far between, confidence that one can get a top-notcher for the spot that does open up is somewhat shaky.

What else did builders learn in 2011?

For some, it was to play opportunistically, recognizing that recovery’s gyre—at least in its initial years—would be painstaking and gradual and that growth might need to be acquired versus happening organically. In one sense, the opportunity that emerged after four or five years of slim pickings or worse came in under the guise of succession planning.

Fact of the matter is, a fair number of the private home building companies are being run by fellows who’ve weathered a housing cycle or three or four, and a few of them may just be looking to go out on an up note before this downturn loosens its grip.

Both David Weekley Homes and MHI/McGuyer Homebuilders went this route, with Weekley gaining entrée into the Indianapolis and Midwest market as it took the Estridge Homes name into its fold and a much-sought-after Phoenix market beachhead with the purchase of T.W. Lewis.

Here’s what David Weekley, chairman of Weekley Homes, says about what his organization drew on in 2011 to move with forward momentum into this year:

“We learned that our team was competent and excited enough about growth to dig deeper and continue to do more with less. We learned that we could be profitable even at low national sales rates, by being innovative with new product and positioning. We learned that financing will be available for those of us with good operating histories and balance sheets.”

MHI/McGuyer picked spring 2011 to buy Wilshire Homes, giving Wilshire’s heart-and-soul Ed Horne and his team a more-than-dignified and purposeful timeline in which to wind down. What the move did for MHI/McGuyer was to more than double its San Antonio and Austin volume, adding scalability, market-share clout, and efficiency in two markets. Plus, in the vernacular of “last-man-standing” home builder math, the purchase took just one more of its rivals out of the two arenas’ competitive picture, a way of improving MHI/McGuyer’s odds of both velocity and profitability.

Ask MHI/McGuyer president Gary Tesch about key lessons from 2011 that he’s drawing on this year, and the answer is, “Be more selective of the new deals we are entering into and be more aggressive ‘early’ in communities that start slowing. In addition, we have worked to make all departments within the organization more efficient to be prepared for the recovering market.”

When you think about it, it’s not so different than the Bigelow mantra—“How can I make a sale? And how can we save some money in what we’re doing?”

For WCI Communities, which took the death and resurrection path to what has all the makings of a redemption as a Florida-only operator, 2011 meant rebirth as a home builder.

CEO David Fry offers highlights of WCI’s progress versus perfection during a year in which it emerged from bankruptcy, sold its way out of debt, and pitched its way back into home building. “Since late 2010 and throughout 2011, much of our focus has been on re-initiating sales and construction activity in nine of our Florida communities. We underestimated the amount of time and effort required to rebuild a home building organization and also design and permit all new product in multiple municipalities. As you are aware, most municipalities have reduced their staffs, which in part is causing our cycle times to lag our expectations. While we are pleased with the initial year’s sales results, we could have done better if we had anticipated these delays and allowed more time during the community startup process.”

For Bigelow, the lesson learned was sharper, simpler, more life-or-death, more do or die. “I learned to stop trying to get construction lending.”

Still, for Bigelow Homes, climbing that learning curve earns him and his team a “pass,” which is still about as good as it gets for a private home builder.

Learn more about markets featured in this article: Austin, TX.