Here's How One Private Builder Gets Ready For Whatever's Next

John McManus -

This week marks the eve of the back half of 2023.

If nothing else, the front half attests to an operating principle among big, medium, and small homebuilding and residential development firms that swung into play even before Covid arrived in 2020. It stood most operators in good stead, right up to the present moment, as chock full as it is with "knowns, unknowns, and unknown unknowns."

Almost uncharacteristically – and probably as a direct result of the humbling devastation that ran through the business during the Great Financial Crash, Recession, and Housing Depression of 2006 to 2010 – people who own, lead, and invest in America's new-home business community got ready. They got nimbler.

They prepared, which is to say, they readied their finances, operations, and expectations for something other than blue-sky growth, even though they recognized that the Millennial generation "pig in a python" of adult household formation and family formation would continue to crescendo well into and throughout the 2020s.

They expected – beginning before 2020 – that housing's run-up was "long in the tooth" and despite indications it had plenty of headroom, many operator- owner- investor-players took pains to "de-risk" for turbulence. They didn't know what would bring it on, but they were convinced it would happen.

  • They'd taken chips off the table in terms of owned land assets
  • They'd trimmed operational costs and focused on expanding margins
  • They'd spent time and focus on surrounding themselves with trusted, talented team mates
  • They'd de-levered and, to the degree possible, re-termed loans at low, fixed rates
  • They'd focused – in relative terms, mind you – more on customers, their experience, and their journeys toward selecting and acquiring a home that matched as well as possible with their dreams.

Even as the Fed's rate hikes – following a solid year-plus of supply-chain craziness – started to undo the momentum of the post-Covid new home boom – that preparedness gave builders of all sizes a number of options for almost every eventuality that challenged them.

Here are the words of one of them, Wade McGuinn, CEO of Columbia, S.C.-based McGuinn Homes, whom we wrote about in September 2021,  as he readied himself and his team for a stress test ahead.

With Wade's permission, here's his own words on what he was preparing for, and his sense of the resilience his 2021 recapitalization yielded for times like now [What follows are Wade's words – slightly edited for style. They're as valid and helpful at the end of the front-half and the eve of the back-half of 2023 as ever.]:

Wade McGuinn, CEO, McGuinn Homes

After three financial conferences this year and multiple meetings with our largest clients and investment partners, I have come to my own conclusion. It seems “experts” are split: 50% Bull and 50% Bear. Can both sides be right? Will changes be national, regional, or local?

Let's see.

What is Hubris? Hubris: Noun hu·bris | \ ˈhubris  \ Definition of Hubris: exaggerated pride or self-confidence. Its current usage, Hubris denotes overconfident pride combined with arrogance. Hubris is often[quantify] associated with a lack of humility. Sometimes a person's Hubris is also associated with ignorance. The accusation of Hubris usually implies that suffering or punishment will follow. This is a market with a lot of Hubris -- companies and people at the controls.

Why would anyone think what was happening in the marketplace was normal or sustainable? If you have benefited from all the recent business success, particularly 20-21-22, you may be prone to Hubris... If you believe you deserve to be where you are, the market will test you … soon. If you think growing markets, big profits, and huge backlogs are normal businesses, and somehow you deserve it, get set for a surprise.

In a meeting, my long-time trusted business friend and current CEO of McGuinn Homes said:

It looks like we will have to start looking for customers rather than looking for drywall."

Great leaders know what the horizon looks like. Yes, we have had all kinds of supply chain issues in recent years, but today the answer to tomorrow's problems will be getting your market share of a shrinking market. Which, by the way, will be the return to normal.

For 37 years and many economic cycles, I have been running McGuinn Homes. In 2020, I decided that the downside cycle in the construction and real estate industry has too many risks for the capital I had invested, especially at my age! So, I made a series of decisions that allowed me some margin for the coming market correction. This paper will help you see what I believe I saw and reacted to so that you may see it and make  appropriate adjustments for your position, business, or family.

If you have been in your present job since 2011 or later, you have never experienced a substantial market change. In fact, if you were in college or had not yet joined the workforce in 2006, you will not even find a reference for much of what I am covering.

Because you did not see it or experience it does not mean it did not happen. History is real, and everyone can learn from it. Charts and graphs won't make you change. But when it starts to affect you personally, you will begin to look around. The problem is when most people "feel it" it is too late to make the kind of change necessary to survive!

In challenging economic times, why do some people and companies make it, and others don't? First, it is information. People who are passionate and serious about what they do continuously monitor their industry and industries around them to see what the future holds. Even a farmer knows to look to the horizon to see what the weather outlook is like.

So, what are the characteristics of people and companies (leaders) who survive or even thrive during these impending and subsequent "bad times" or economic slowdowns or turndowns?

Here is some sage advice from a 37-year CEO who has survived it all and will survive this one too!
• Hubris is the enemy; most people "don't see it coming."
• Have a plan (don't wait)
• Reduce Debt
• Reduce operating cost
• Less leverage
• Less Inventory
• More equity
• Have cash … never run out of cash

Let's consider each, one at a time:

Hubris is the enemy,  most people "don't see it coming."

What is your daily mission regarding your business and family? The enemy, whether the devil or your competitor, has a mission! So, get over yourself and look to the horizon. What do you need to work on today to ensure you and your business, family, and team are ready for tomorrow?

Have a plan (don't wait)

In 2007, I wrote a 911 business plan. I decided if all the economists were correct and a big storm was coming, what would I do? I was at that point unaffected, but the horizon was "dark". So, I wrote a plan. Slowly but surely, with God's grace, the plan worked, and we survived  … barely. It was tough, really tough. But having a plan was the main ingredient behind survival. Unfortunately, you can't develop a battle plan in the battle. It will be too late.

Reduce Debt

Some things make just make sense. In fact, we would be better off if we just operate our businesses and families by some basic ideas and principles regardless of financial or economic outlooks. Reducing debt is always a good idea. It can be counterintuitive. It must be done in a way that does not jeopardize your plan or keep you from growing. It must be smart. Study, get advice, and see what the best operators do.

Reduce operating cost

Again, like reducing debt, this makes sense in all circumstances. Do you know what your operating cost should be compared with the very best operators in your industry? You should! Why would you guess when there is so much information available? Are you really paying the lowest cost for your goods and services? Are you paying your employees, family? Are there things you can do without? A good idea is to spend 30-40- days opening the mail of your home and company, studying each bill, each invoice,  then asking 'is it necessary, is it fair, is it available at a lower price or is there a substitute, and finally, can I do without it?' Just one sublime item to prove the point. In 2008, I was  spending $700 a month on logo door mats being cleaned and replaced by the uniform company. Today we don't service the mat's we vacuum them, and our employees don't wear uniforms.

Less leverage

Probably the number one item! Leverage is what makes most people go bankrupt. What is your personal or business debt-to-equity position? Remember, your house is not an asset as you must live somewhere! So, taking that out of the equation, how long would you last in a downturn? For instance, if you have a 20% equity in all your assets and there is a 25% market correction, you are 5% upside down. Don't let leverage trick you into thinking you are financially solvent. Pay down the things you need to survive so you can hold onto them in a downturn or slowdown.

Less Inventory

Understanding and controlling your inventory is what makes you a great leader. How much is too trim, and how much is too much? Inventory can be confused with cash flow! Think about it. If we build or start another widget, the cash flow and activity make us believe we are okay. Trust me, it's a trap. A temporary trap at best. One core reason to have a plan is to answer the inventory questions!

More equity

I get to fly with a good friend of mine occasionally. He is an excellent pilot, and I never worry when he is at the wheel! He says there are two things a good pilot can never have enough of, runway and fuel! In business and family, there are two things you can never have too much, equity and cash! So, make sure you own what you own, and what you own does not own you.

Have cash … never run out of cash

A wealthy friend once told me that the three most important things you can have in business are cash, cash, and cash. You see, no matter how profitable you are, you're sunk if you run out of cash! Based on your plan, you should know when to make all key and significant changes and trust the plan, not your gut. On September of 2009, I was invited to talk to various groups of people in different states of "surviving and not surviving." I told them all that "hope is not a business plan." It is a great salvation plan but not a business or family plan. Don't "hope" your situation will change or improve by magic or outside circumstances. Instead, make and plan and follow it.

So, here's my humble opinion on 2023.

2023 will not be a slowdown or crash:  20-21-22 was not sustainable. That was Hubris. However, the market will return to normal, which will seem like a shock! Especially for those who came into the market after 2011 and have always experienced an upward bell curve of prosperity.

A few facts and comments:

  • Household demographics and migration: 2008 lacked the "formation of household" with many young people staying home, not starting their own families. Not so this time. Household formation and in-migration will help South Carolina do exceptionally well among its peers. Jobs, low cost of living, affordable housing, and sunshine are all driving factors.
  • Student Debt loan payoffs will increase demand. Many buyers who are now renting have great jobs and excellent credit. However, their debt-to-income ratio kept them from getting a mortgage. The government tuition payoff program will allow these renters to become buyers of not just homes but additional consumer items such as cars and furniture. They don't have a keen sense of what lower rates and higher prices look like. They will want and need a home.
  • Higher interest rates will increase inventory and therefore lower prices. With inventories, there will no longer be a mad dash for buyers to outbid each other, creating false home valuations. Right now, we have less than a 60-day inventory. For comparison, in the '07 crash there were 7 years of inventory. (this is not a typo).
  • The higher interest rate impact is negligible. The market in "normal conditions" knows how to react to changes. You will see the return of ARM loans, buydowns, and even government intervention with "special" programs and rebates if necessary. However, it won't support upward growth, rather it will create a foundation to get back to normal supply and demand.
  • Higher interest rates will help supply chain issues and inventories. Between demand and COVID, supply chain interruption has been the most difficult of all the hurdles. Return to normal absorption and all inventories to build will help suppliers "catch up" and prices to return to normal along with available material and labor.
  • Building inventories will help restore normal traffic and pricing of new homes. The real winner will be the people who buy in the "new market." They will pay a fair price, which will more than offset a higher rate (they can always refinance). It will give them more choices in both locations and features. No real whiplash for the end user; it will be a win for them.
  • Reduced prices will boost demand again and get us equalization. I think what we all desire in life is for things to be predictable. In rising and falling markets, we feel off balance, albeit easier to navigate when it's rising! Demand will grow with consumer confidence that what's ahead is not like 08, but rather a back-to-normal.
  • Rent is a significant option. How MHH works in the BTR space. At McGuinn, we became a leading supplier on our local market of  Build for Rent. Our company has always had the agility to change to market conditions and is best placed to take advantage of early adoption of the change in the market. We still have the capacity to be a great retail company or continue the path of BTR. The best part is I think both sides of the industry will do well as they certainly adapt to new market.
  • The biggest issue is political, not financial – silent moratorium and zoning are the new NIMBY's. Lot size and affordability cannot be separated. Each of us, a voter or business executive, should be active in the political arena to be sure we are not legislated out of business. Most people do not realize we are not a democracy; we are a representative republic! That is, we vote for people who will learn the real issues and advocate for us. We delegate our authority to trusted politicians, even if that sounds like an oxymoron. We do have a great leader in both local and federal government. Join your association and support the person in the office who supports our business and our community.

It's being repeated everywhere there is a 4-million for-sale single-family housing shortage. Where are "they"? I don’t really believe that anyone who wants a home is shut out. When I look out the window of my home and office, I don't see people wanting for a house, or not finding them. Buyers today have options, and one option is to stay where they are.

Our job is to get them "moving." Moving people create economy! Be creative, be innovative, be a leader and decide how you are going to get your fair share of the "new" market.