Every quarter we listen to and summarize more than 70 home builder, single-family rental (SFR) and apartment REIT, and building product manufacturer public-company earnings calls, looking for market intelligence as well as financial results. This adds color to the intelligence we gather in our research and consulting business.
4Q22 was a phenomenal quarter for profits, but a lousy quarter for new home sales.
However, early 2023 results improved, and the CEOs expressed cautious optimism with a better-than-expected start to the year, driven by additional discounting / incentives (especially rate buydowns), and falling mortgage rates.
A few takeaways we also gleaned from the home builder earnings calls:
- Builders continue to find a market-clearing price / monthly payment to sell homes near completion.
- Gross margins are starting to moderate but remain high as recent incentives / price cuts have been somewhat offset by falling lumber prices and other cost-cutting measures.
- Write-offs on lot option abandonments and impairments on owned communities have begun.
- Cost declines and supply chain relief are here for materials installed early in the home construction process but haven’t significantly impacted later-cycle materials and installation yet.
Cash is king, and the builders have never had more cash.
Most public builders are in a great cash position, with very low levels of debt, which is at fixed interest rates far below today’s market rates. Only $2 billion (7%) of this debt matures by the end of 2023.
Additionally, the builders intend to generate even more cash by slowing land spending, closing their backlog, and accessing bank credit lines if needed.
By comparison, we recently attended and spoke at a large gathering of primarily privately owned home builders, and one of the lenders shared with everyone that loans were going to be even more difficult to obtain this year as construction lenders grapple with recent losses of deposits, made even more significant by the headlines around Silicon Valley Bank and Signature Bank. Banks are also now required to reserve even more capital for construction loans when the borrower falls behind their pro forma cash-flow forecast. We also know of mezzanine debt that has been provided by a non-bank at a 15% adjustable rate.
The bottom line is that the publicly traded home builders, because of their huge cash balances and fixed rate debt, should be taking significant market share right now, and will be best positioned to take advantage of opportunities.
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