Happy New Year!  I was doing some reading this morning and came across Lennar’s most recent earnings report and transcript of its conference call.  Lennar is the largest builder in Minnesota and they have several projects going on in the northwest suburbs including Taryn Hills, Legacy Park and Bonaire.

As you can see by the graph below, it has made a fairly dramatic rebound from the low of about $3.5 around Thanksgiving this year.  (Click graph to enlarge in new window).

While the news remains grim of course for the home builders, Stuart Miller, CEO of Lennar, was actually rather optimistic about the future…not the immediate future, but the future nonetheless.  That’s encouraging especially when you consider where the builder confidence levels have been from the National Assocation of Home Builders.
It’s critically important at this stage that we watch the home builders like Lennar, Toll Brothers, K. Hovnanian, DR Horton, and Centex.  Since these are billion dollar businesses generally operating in multiple markets across the country, they will provide an excellent read as to what’s happening.  We all know it’s bad out there, but they will give us signs when markets start to improve.

Prior to the foreclosure problem, home builders were the tip of the spear for the market.  They drove everything.  Right now they are taking a back seat to the banks with the foreclosures, but they are reacting to it and are prepared to weather the ongoing storm.

Below are some highlights from Stuart Miller’s discussion on the earnings conference call:

Traditional sellers, that is, homeowners and homebuilders, are not able to sell homes unless they offer even greater discounts and keep up with liquidation values.

He goes on to say:

Sellers in this market are primarily liquidators, ever more prone to accept any offer in order to move today’s inventory to make way for the mounting backlog of defaulted loans that are moving ever more slowly through the foreclosure process. Now on the other hand, natural primary purchasers are on the sidelines.

This was also an interesting comment he makes about dealing with foreclosures.  I would agree that it takes someone with some special knowledge in dealing with the banks.  Also, not every buyer (my opinion) will be up for dealing with the banks on foreclosures.  While foreclosures are getting all the headlines, 50-80% of the homes sold these days are sold with traditional sellers – not the banks.

The purchase of foreclosed homes is more of a professional business than a selection of a dream home. Many of the foreclosed homes are in disrepair and the negotiation process is cumbersome. Participating in this part of the market requires a unique familiarity with diligence and patience that is not easily understood and natural purchasers, fear that if they do not get a uniquely priced problem home then they are simply paying too much.

Miller goes on to say that part of his optimism is that the problems have now been revealed and that we have a new administration coming in with new energy and ideas:

I remain generally optimistic about where we are going from here. I feel that the problems that define our industry and for that matter our economy, are now revealed and recognized. I have said for many quarters, that the bright light at the end of housings dark tunnel will be governmental action taken to stop the downward spiral. And I have said that since that once someone connects the dot, they will fashion a solution that will include a meaningful fix for housing and the slide will subside, a floor will be formed and we can begin a recovery.

I am optimistic because, we are at the threshold of a new governmental regime that is not saddled with the responsibility of having created the problem and can therefore take dramatic action to change the environment without being defensive. The new administration is truly enabled by the fact that the problem is revealed, they did not create it and everyone wants it fixed. I am optimistic because, the new administration appears to be dynamic, thoughtful and intelligent.

Stuart concludes his comments before passing the microphone to Bruce Gross, CFO by saying:

In conclusion, let me say that, we have made a great deal of progress in very difficult market conditions. We have prepared our company for market conditions as they currently exist and we are not projecting material improvement for some time to come. But as I have said before, this should not be confused with abject pessimism.

In fact, I remain quite optimistic about our business and about the housing market in general. We have made significant progress in repositioning our business as a scaled down and lean operation. We have adequate resources to weather the difficult market conditions that are in front of us and we continue to focus on the operational elements that will drive us to profitability and continued cash flow in the future.

The home builders are in the trenches dealing with skittish buyers every day.  It will be interesting, insightful and important to hear what they have to say each quarter.