When we set out to design and build the Lone Survivor Foundation’s first retreat center, the goal was to create a space that not only made our veterans feel our support and appreciation as soon as
The housing downturn that engulfed the largest builders in 2006 left others, especially in Texas and North Carolina, relatively untouched. As a result, Professional Builder's 2007 Giant 400 rankings are remarkably scrambled from those of a year ago.
Professional Builder's 40th Annual Report of Housing's Giants is a snapshot of the relative size of the largest production builders in America at the end of 2006. Unfortunately, that particular point in time now looks to be midway into a major housing industry cyclical contraction that has been especially hard on some regions of the country, notably the mega-market states of California and Florida, while leaving other areas almost unscathed.
This past year, the big national builders got hurt on both coasts, but many Texas builders are climbing the rankings because houses in that state still sold well in 2006. The investor-induced price run-ups that triggered sticker shock and sales resistance in San Diego, Scottsdale, Ariz., and Tampa, Fla., never happened in Dallas, Houston and Charlotte, N.C. All of this reinforces our conviction that housing is a local business, no matter the scope of a company's operations.
The big national builders are not manufacturing companies that distribute a uniform product across the country. Rather, they are umbrella organizations that collect 40 or 50 local building businesses under one financial roof. So it's no surprise that even within those companies, results were mixed in 2006 as divisions in Texas or North Carolina outperformed those in Ohio, Colorado, Florida or California.
Non-Giants gained market share of U.S. housing completions in 2006, compared to 2005, for first time since 2002. Among Giants segments, only Supernovas grew market share, while all other segments lost. Could this be the impact of extensive Supernova discounting?
Our Giant 400 rankings change every year. Throughout the 13-year housing boom that peaked at the end of 2005, we saw winners move up and troubled companies retreat. But the movements of those years pale in comparison to the volatility we see in the 2007 Giant 400. As a result of vastly different sales rates in different parts of the country, this year's rankings look like they've been run through a Waring blender. Some 154 builders dropped five positions or more, and 137 rose by at least five slots.
The first question we asked in last year's Giant 400 Report was whether the revenue and unit volume heights reached in 2005 indicated the top of a housing cycle or just a pause in the Roaring 2000s. We now know the answer: forget about that long boom. It's over. We're in a full-fledged down cycle in most housing markets, even though there's no national recession — at least not yet — in the overall economy.
Job creation, the oft-cited driver of home building, remains strong in many areas of the U.S., even in some where housing is on the canvas for an eight-count — such as Florida, where home sales have dwindled to a trickle. The question now is whether those areas with strong housing markets in 2006 will remain immune to the doldrums that infest most of the country. Will houses continue to sell in Texas and North Carolina, or will home shoppers there eventually be infected by the virus that induces people to sit on a fence and wait for prices to fall?
Another question is what the impact will be, in every market, from the recent nationwide crash of the subprime mortgage industry. Peruse this 13-page Giant 400 Report as we search for answers to those questions and give you our take on other implications of the movement in the rankings between this year and last.
During this decade, Supernovas’ market share by closings has steadily risen — even in 2006, when both top 25 and the full Giant 400 fell slightly.
As in past Reports, we've separated the Giant 400 into revenue groups along lines of change in the way builders operate. We think Strivers are closer to non-Giants in the way they do business than to the five Supernovas, the huge, publicly-traded leviathans that top our chart. The boundaries between the groups are revenue benchmarks that roughly match the points where we often see watershed organizational changes occur. At $75 million in annual revenue, a Striver makes the jump into the ranks of Achievers, who have probably embraced multiple levels of management, double-digit community counts and have at least begun to think about expansion to a second geographic market. At $200 million, an Achiever becomes Rich and Famous, and multi-market operations are likely well-established. At $1 billion a year, you're not just famous, you're one of housing's Masters of the Universe.
This year, the billion-dollar club kicks in at No. 33, where Dallas-based rental behemoth Lincoln Property Co. lands with 4,885 units produced, valued at $1,015,535,000. Bensalem, Pa.-based Orleans Homebuilders just missed with 2,079 homes closed for $911,551,391.
It's important to keep in mind that builders don't just move up the rankings. They also move down. In fact, even among the 28 Masters of the Universe, 10 lost ground, 12 advanced and six stayed at the same rank.
The closer you get to the top of PB's Giant 400, the harder it is to move up. Within the Supernovas, in fact, no change in the rankings of those five companies has occurred since Bloomfield Hills, Mich.-based Pulte Homes replaced D.R. Horton (then based in Arlington, Texas) at No. 1 two years ago. Horton has since moved its headquarters to Fort Worth but remains ensconced at No. 2 even though the firm became the first to top 50,000 closings in 2005 and did it again in 2006. The thunderbolt this year is Miami-based Lennar Corp.'s rise from No. 3 to the top of the heap, while Pulte dropped to No. 3.
Lennar rode to the top on the strength of a 16.9 percent increase in revenues, to $14.85 billion in 2006, to edge out Horton's $14.52 billion. Lennar had 49,568 closings (up 17.0 percent), Horton 53,410 (plus 5.8 percent). Lennar last occupied the throne in 2002, when it had 23,899 closings for $5.47 billion. Meanwhile, Pulte backtracked in 2006, dropping 2.8 percent in revenues to $13.98 billion on 41,487 closings — a loss of 9.1 percent on that front.
With all five of the Supernovas still taking broadside hits to their profitability and share prices in early 2007, it's not likely Lennar is celebrating its return to No. 1 in our revenue-based rankings. Competitors — especially local private builders trying to sell against Lennar's aggressive discounting and incentive programs — may not recognize the intelligence with which Chairman Stuart Miller managed his way through crashing markets in two of the country's big three housing states, Florida and California. But we do.
The Supernovas are all massive housing machines. They went into 2006 plowing their way through large sales backlogs and with five or more years' worth of land and lots flowing into their production pipelines. By the time they realized how badly they were hurt on the sales front, cancellations were peppering holes in their backlogs. Aircraft carriers such as these do not turn on a dime.
“The public builders are all holding too much land, as are most of the rest of us,” observes Ken Love, president of No. 29 Kimball Hill Homes, based in Rolling Meadows, Ill. “But what are their options to bring those land holdings down? Is selling off parcels at discounted prices better than keeping sales velocities up with incentives to burn through the excess land inventory? I don't want to sell houses next door to a Lennar project, but I'm not throwing stones at Stuart Miller. He looks pretty smart to me.”
Lennar operates on an even-flow production model, trying to match construction starts to deliveries. As sales slowed in 2006, senior managers saw excess spec inventory building up sooner than many others. That may explain why Lennar got aggressive with price cuts and incentives earlier than most. As a result, Lennar's orders and closings held up longer than the other public builders in 2006.
Glance up and down our Giant 400 poster and you'll see that a hot market is not the only factor contributing to success in the home building business. Some of the biggest moves up in the rankings were made by companies operating in the most troubled markets. For instance, South Florida's GL Homes of Florida jumped nine spots, from No. 45 to 36, by pushing up closings 11.6 percent to 1,443 homes and revenues 39.4 percent to $871.7 million. And Henry Fischer's embattled Crestview Hills, Ky.-based Fischer Homes shook off prosecution (or is that persecution?) of several of its supers by federal Immigration and Customs Enforcement officials, as well as a moribund Cincinnati market, to rise 17 spots — from No. 114 to 97 — by boosting closings 13.9 percent to 1,310 homes and revenues 15 percent to $280.9 million.
However, in general, the challenging markets yielded more retreats than charges. For instance, New Jersey-based Kara Homes lost 29 positions (to No. 128) on the way to bankruptcy court. And Jacksonville, Fla.-based developer St. Joe Towns & Resorts lost 25 spots (to No. 64) as it bowed out of the home building side of the business.
Without question, fighting for sales and revenue in a turgid market is no fun, even if it can be done. Fort Mitchell, Ky.-based The Drees Co. sees both sides. President David Drees says his Texas businesses are strong, as are operations in Raleigh, N.C., and Nashville, Tenn., but Washington, D.C., Jacksonville, Fla., and Midwest divisions in Indianapolis and Cincinnati temper his enthusiasm. Overall, Drees gained one spot in the rankings to No. 30 as closings rose 6.8 percent to 3,170 and revenues 15 percent to $1.16 billion. “Texas has held up well for us,” he says. “Austin is still strong, but we do see a little slowdown in Dallas so far this year.”
Drees worries that the subprime meltdown will affect Texas more than other markets because he sees entry-level product as an important segment of those markets, even though Drees operates only in the move-up market. “How many buyers will be taken out?” he frets. “Our buyers have to sell their houses to move up. It could hurt everyone.”
Washington, D.C., is dead in the water, thanks to an investor-induced price correction, but he likes it none the less. “It's producing a hell of a lot of jobs and there are barriers to entry in that market. We're in already, so we should benefit when it comes back.” In the Midwest, the issue is a struggling economy not price-sensitive buyers. “Our two best markets are Nashville and Raleigh,” Drees says. “We can sell all the houses we want in Texas, but we don't make much money because the margins are terrible.”
Consultant John Burns sees a softening ahead for Texas. “The economy has been roaring, and builders geared up to meet that demand, but now the economy is slowing some, creating a potential for oversupply. Texas is also vulnerable to subprime-related problems. Too many people bought houses who shouldn't have. You'll see a lot of foreclosures soon,” he says. “We've borrowed demand from the future for the last three years. We're going to pay for it for a couple of years before prices start to recover.”
The good news, Burns says, may be in Florida. “That will be the first market to recover,” he says. “Florida's strength comes as much from phenomenal job growth as from the impending retirement of baby boomers. People who think hurricanes are going to curtail Florida's growth are going to be proven wrong. They are being proven wrong today.”