During a question and answer session at a recent industry conference, a home builder asked Moody’s Analytics chief economist Mark Zandi for his thoughts about the labor
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Understand and monitor housing market conditions to decide where to allocate resources and expand your business.
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The 20 largest builders in the country build homes in 84 metropolitan areas. The average top-20 GIANT builds in 23 metro areas, and most of these GIANTS are looking to grow their geographic diversity even further as a way to insulate corporate performance from regional downturns. Monitoring housing market conditions in major markets all over the country dictates nearly every behavior, and for good reasons:
- Risk and capital allocation - Which divisions should receive the most capital, given the outlook for their local market? Which markets have the greatest likelihood of rising home prices? Where should the company grow a division to 1,000-plus homes per year versus where is a 300-home division sufficient? Which markets are most susceptible to mortgage rate changes? What is the right balance of high-risk and low-risk capital allocation based on market outlook, price point, etc? Executives assess all of these factors and more to determine strategies and set goals.Related Information
Top 25 Metro Areas Metropolitan Area Grading Methodology Next: Sacramento, Calif.
- Market expansion - Where should a GIANT expand next? A decision to go to a new market should be based on the long-term outlook for that market as well as the builder's ability to compete effectively and grow profits. The timing of the decision, however, can affect earnings growth significantly.
- For example, Lennar's decision to expand into California in 1995 not only put it in position to ride the wave of rising home prices, but the corporation also acquired an outstanding management team from a company still reeling from the downturn of the 1990s. Had Lennar moved into California in 1989, the results would have been much different.
- Bonuses - This is a sensitive topic, for sure. However, executives should not ignore the fact that market conditions significantly affect division performance. Should the CEO pay bonuses based on earnings only, or should local executives be rewarded based on earnings compared with those of their peers? In the best-seller Execution: The Discipline of Getting Things Done, by Larry Bossidy and Ram Charan (the keynote speaker at Benchmark 2003), the authors strongly suggest that executives should reward employees based on the individual's performance rather than circumstances generally beyond the individual's control - local market conditions.
In each issue of GIANTS, we'll deliver the five-minute market overview that today's home building executive needs to make decisions. We will provide the latest statistics and the calculations necessary to help evaluate the outlook for each market. While this cannot replace a more in-depth analysis, it will provide an information foundation that can help set the groundwork for more in-depth analysis.
We have been analyzing housing demand and supply data on all the major markets in the country for years and have been contracting with local market experts to get a local perspective. In each issue, we will feature one major market as well as an up-and-coming market. We also will add information on the smaller markets over time. Send comments to firstname.lastname@example.org.
Major Market: Las Vegas
While most building industry executives were shuttling from meeting to meeting at the International Builders' Show in Las Vegas in January, Las Vegas builders were busy completing more than 100 homes per day. In 2003, Las Vegas home builders pulled 30,289 single-family and 9,601 multifamily permits, including a number of permits for $500,000-plus condominiums in luxury high-rises. The new homes are a diverse mix of entry-level, move-up, second-home and retirement home housing.
Only 12 of the top 20 GIANTS build homes in Las Vegas, but that likely will change during the next year. With every investment banker and builder CEO staying at the Mandalay Bay Four Seasons during the January show, it's highly likely that a few deals will get done this year.
Las Vegas employers added 33,600 jobs in 2003 despite the market's significant dependence on tourism. After Sept. 11, 2001, local leaders shifted their marketing dollars away from airplane travelers and toward travelers who could drive. The shift was highly successful, as evidenced by the Sunday night traffic jams in the desert between Las Vegas and Southern California.
Local market expert Dennis Smith of Home Builders Research reports that in 2003, five GIANTS topped 1,000 homes closed in Las Vegas, including more than 3,300 by KB Home, more than 2,700 by Pulte/Del Webb and more than 2,000 by Richmond American.
Job growth is not the only driver of housing demand, as evidenced by the fact that the three top-selling communities were age-restricted. While in Las Vegas, we also noted that the number of dark units in "sold-out" high-rises near the convention center proved what many people had told us - many Las Vegas home buyers are buying second homes, perhaps as tax shelters.
Sacramento almost certainly will emerge as a major housing market during the next 10 years. Our short-term outlook is a "D" because of recent job losses and an all-time high level of supply. However, we are bullish on Sacramento over the long term because it has:
- Jobs - A strong employment base, including Hewlett-Packard, Intel and other operations within two hours of Silicon Valley.
- Affordable housing - With a $240,000 median home resale price, Sacramento has very affordable housing by California standards.
- Accessibility - The recently expanded airport is minutes from downtown, and two of the country's major freeways (interstates 5 and 80) intersect in Sacramento.
- Land - Thousands of acres of undeveloped agricultural land lie within a reasonable commute of the employment centers. Local developers complain about the entitlement woes, but development restrictions are much less severe than in larger California markets.
Eleven of the 20 largest builders in the country have moved into Sacramento during the past few years, making it a competitive market. However, all 11 likely will do well, at the expense of small builders.