A company has to have financial backing to be able to hold onto land and wait for the market to come back, but very few companies have that luxury. The real lesson to be learned on land is the lesson Weekley learned in Texas in the 1980s, not to overextend your land purchases, Ara Hovnanian, CEO of Hovnanian Enterprises, based in Red Bank, N.J, still contends.
“Whether it’s deposits or price or quantity of land, it’s a time to be cautious,” he says. “It was a difficult call to make at that time, because the housing industry seemed so immune to what would normally have caused a slowdown.”
Too Much, Too Fast
It seemed everyone believed the market had outgrown its cyclical nature and would only keep going up.
As the market took off, the combined revenues of the top 10 Builder 100 companies shot up from $21.6 billion in 1998, to $92.9 billion in 2005 (see breakdown by company in “Top 10 Builders’ Revenue,” left). As the overall market for homes increased, America’s largest builders grew to accommodate the demand. The same top 10 builders increased their share of the overall new-home market (see “Top 10 Builders’ Market Share,” left) from 9.40 percent (of 941,000 units) in 1998 to 20.97 percent (of 1.38 million units) in 2005. Their market share increased again in 2006 to 25.70 percent.
But how did those companies grow, and did that growth leave them weakened with massive debt accumulated through many acquisitions, asks Gopal Ahluwalia, staff vice president of research for the NAHB, Economics Group?
“Those who did organic [growth], they chose a better way to grow,” Ahluwalia says. “But if I have money, I can grow overnight.”
And so they did. But as the market for new homes began cooling in 2005, builders fought to keep activity heated, getting more into the mortgage and financing side of the business, and “that exacerbated their current problems,” Zandi says.
In a scenario similar to what happened to technology companies, which were infused with huge amounts of investor cash during the dot-com boom of the 1990s, home builders had to show growth to appease Wall Street analysts, and buying other companies accomplished that in the quickest amount of time. Many of the acquired companies were in the hottest markets in the country. The builders thought it was a sure thing since land and home values in those areas kept going up.
And they were wrong.
“There were lots of arguments that this [market] is different and reasons why, demographics and so forth and so on, but obviously that wasn’t the case,” Zandi says. “There was a thinking that because the industry was becoming increasingly dominated by publicly traded builders, that they would, in theory, be more disciplined than the smaller private builders that came before them; that we wouldn’t have these big swings in activity up and down. But that certainly did not hold true.”