The Death of Private Homebuilders?

John McManus ( is always an interesting and worthwhile read, particularly his two most recent entries (PRIVATE HOMEBUILDERS MOMENT OF TRUTH APPROACHES WITH 2ND HALF OF 2010 and ORLEANS HOMEBUILDERS FILES VOLUNTARY CHAPTER 11).

Orleans Homebuilders, of course, is a publicly-held company.

One of John’s points: “Private home builders are in a fix because most of them depend heavily on banks, and banks are in a fix. The recent increase in the Fed Discount Rate doesn’t mean a lot to most of us, but it certainly doesn’t bode well for businesses that draw on bank capital with the intensity that home builders do. If it’s more expensive for banks to borrow, it’s going to be more expensive for their commercial customers to do so, one way or another, and it will be in shorter supply.”

One can debate the ultimate winner of this seeming game of chicken between builders and their lenders (include the FDIC if you want to triangulate it). Perhaps survivor would be a better term. Or, maybe, it is just some financial version of the Circle of Life, in which new versions of builders and TARP-less banks emerge as new creatures, eerily traversing the post-apocalyptic landscape, past the skeletons of the previous Era of Homebuilder Entitlement.

Long, long ago, before I became a builder, before I became a consultant, I was a banker, more specifically, a commercial and real estate lender. I have long memories from being on the other side of the table, but my most vivid recollection, from the disaster that was playing out in 1982, was the observation/advice offered by my Dad, who was also a banker:

“Son, leverage is something that makes good times better and bad times worse”.

The jury is maybe still out, maybe for awhile longer, but “out” is the operative term, the words of builders and lenders to each other echoing like the lyrics of an old Hall and Oates song: “You’re out of touch. I’m out of time.”

In mid-2009, I posted an entry to “Escape from Averageness”, titled “Apocalypse Now: Is a Shattered Industry What it Takes?”. It is archived. You can read it again. But, it bears repeating. Two of the points about our vision of this post-apocalyptic Fixed Residential Investment landscape were that it would be one in which builders achieve 6:1 Inventory Turns, and therefore, need negligible working capital for production operations, and one in which cash on the Balance Sheet is not the defining competitive advantage.

To which , I would add, it would be one in which builders do not even use debt financing for land and lots, let alone allow it on their Balance Sheet.

We shall see.