The Homebuilder's Housing Pendulum

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Michael P. Kahn of MPKA consulting explains why homebuilders should use their money wisely to come out ahead.

March 24, 2008

There are very few surprises for us old home building warhorses who have been around for at least 20 years or more, and 2007 was no exception.

What we have been experiencing since the beginning of 2007 is equivalent to a high school physics lesson: what goes up must come down. It is only the speed of the descent, the steepness of its angle and its simultaneous broad spread across most of the U.S. that make this cycle different from previous downturns.

We haven't hit the bottom yet and won't until home buyers feel that house prices have bottomed out in their specific market, have stabilized and even turned up; that's when they'll feel comfortable buying a house again.

Pendulums always swing to extremes before returning to a midpoint. This too shall pass. Home building will be popular again but will have a different face than previous turnarounds. This is and always has been a cyclical industry. But to benefit you and your company, you need to make it through this cycle more or less intact and wiser.

How do you make it through this cycle?

  1. Don't wait to ask for help or look for additional capital until you only have two or three months of cash based on your run rate.
  2. Seek alternative capital to help you bridge the gap, but only after you have prepared ultra-conservative financial projections based on real absorptions and without increased absorption beginning until at least the end of 2009 and possibly 2010.
  3. Establish multiple relationships with smaller local banks to replace larger regional and national banks that will be running for the exit as soon as federal regulators force them to move the assets to their "bad bank" side.
  4. Learn how to be more efficient in each of the home building processes and disciplines. Don't be afraid to bring in experts even if your cash it tight.
  5. Take a tough look at SG&A, but remember you will need some good qualified staff to restart your engines once homebuilding starts to improve. So cut as much as possible, but not too close to the bone.

Remember, fresh capital always rushes in to fill gaps whenever there is a perceived need; in this case it is lined up to invest in home building space. Home builders with good reputations, franchise values and equity will reap the rewards of incoming capital.

Believe it or not, home building M&A is still alive and well; it's just different. Think buy-ins and not buy-outs. Don't be shy about giving up some ownership so you can be one of the survivors.


Author Information
Michael P. Kahn is president of MPKA Consulting, a financial advisory firm specializing in housing industry mergers, acquisitions and capital formation.

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