How Homebuilders Can Survive the Housing Cycle Downturn

Industry experts believed the housing cycle downturn was going to be a short-lived, mild 10 percent adjustment with a soft landing. It has been anything but a soft landing, and the economists keep adjusting their forecasts and extending their predictions of when the industry is going to hit bottom.

Throughout the first half of 2008, the housing industry will continue to weaken in activity and home prices will continue to drop. Banks will put a lot of pressure on builders to require stronger financial statements and adhere to the loan covenants. Builders that are not financially sound will have a hard time surviving, which will increase builder bankruptcies.

What actions should you take to survive?

1. Get your financial house in order. Try to reduce the amount of debt your company is carrying. If you have operating lines of credit, don't extend them to the limit and leave them there. Banks prefer you operate at a balance of about 50 percent.
2. Don't hide from your banker. Talk to your banker before you get into trouble. Put a realistic business plan together based on the current market conditions to present to the bank. Renegotiate your loans before they get into trouble. Work to reduce your debt, extend maturity and include interest carried.
3. Diversify your financial institutions. Banks have different lending practices, which can change depending on how they feel about real-estate lending and how exposed they might be to our industry. You might want to have a mix of national and local banks. They tend to operate differently and will possibly give you some maneuvering room.
4. Get rid of your spec inventory homes. Liquidate your spec inventory homes and turn them into cash. Too many builders are still holding on to homes that have had an anniversary. They were built during a different economic time.
5. Get rid of your land if possible. Renegotiate your land contract or walk from your earnest money. If you are on a take-down schedule, renegotiate the take-down rate to match the current sales rate or don't exercise the future take downs. Put an investment group together to walk you through the process. You might have to discount the land and it might cost you some future profits, but you can get out of the land debt and the negative cash flow.
6. Work on your direct construction costs. Strip your added standard features. Determine what your sales price needs to be to get velocity back in your communities and work backward to what you can afford for direct construction costs. Value engineer the product and work with your trade contractors to eliminate inefficiencies in the construction process.
7. Target-market your product offering. Survey your customer traffic to determine who they are and what types of housing they want. Sort your traffic cards by zip code and research the U.S. Census Bureau information for the main zip codes. Design your product and systems to fit the customers buying your homes.
8. Trim your overhead. Improve your systems so you can reduce your overhead. It needs to stay in balance with your volume of sales. It is better to do it once and do it deeper than you think is necessary.
9. There is a silver lining. We will come out of this down cycle probably toward the end of 2008. You need to be in the survival mode right now and be able to position yourself to take advantage of the oppportunities that are coming. The downturn will allow you to develop the systems and staff you will need for the future growth. It will beocme a buyer's market for land that will continually become more available, with softer terms and conditions and reducecd prices. Home builders that react early and structure themselves to wehather the downturn will be able to take advantage of the opportunities, edning up stronger than before.