CRY “HAVOC!” AND LET SLIP THE DOGS OF WAR

Coming from a Midwestern middle-class background, my family did not deem it appropriate nor could they afford to send me to prep school so I did not have the benefits of a “classical” education, failing to learn Latin or to read Homer in the original Greek.  But apparently the Chicago public schools provided a fairly decent education, especially compared to what is provided today in public schools around the country, as I was taught biology, chemistry and physics, algebra, geometry, trigonometry and calculus, world and American history. I learned to parse a sentence and write somewhat intelligibly, I was exposed to both opera and classical music, and I read and read and read, including works by Austen, Bronte, Bunyan, Chaucer, Conrad, Dickens, Dumas, Golding, Hardy, Hawthorne, Hemingway, Huxley, London, Melville, Salinger, Shakespeare and Twain, to name just a few.

I am afraid that I have forgotten most of the science and mathematics but the appreciation for classical music that I first learned in fourth grade has stuck with me to this day.  Perhaps most importantly I learned to love reading.  The classical authors opened my mind to both the world around me and to the power and beauty of the written word.  And although I found both Conrad and Hardy to be somewhat overly excessive in their uses of the written word, I did appreciate their prose and imagery.  shakespeare 1We spent an entire semester reading Shakespeare.  I never was a great fan of the British history series but I must admit to being amused by Richard Dreyfuss’ portrayal of a flamboyant Richard III in The Goodbye Girl (1977). Although I enjoyed Shakespeare’s comedies, my favorites remain his tragedies, especially Hamlet, King Lear and Macbeth. Julius Caesar provokes mixed feelings as I had to translate a large passage into Spanish in high school, a painful experience, but my favorite quote from the Bard is from that play and is the headline of this blog.

I actually researched that phrase when I first heard it as I found it intriguing.  The military order “Havoc!” was a command given to English military forces in the Middle Ages to direct the soldiers (in Shakespeare’s words ‘the dogs of war’) to pillage and create chaos. And the quote serendipitously popped up in 1991 in a favorite movie, Star Trek VI: The Undiscovered Country when spoken by the Klingon General Chang.   And I find that phrase exceptionally appropriate to the homebuilding industry today.

There is much to be respected and admired among the larger members of the homebuilding industry and smaller sized builders should consider emulating many of these attributes.  The larger builders regularly produce quality housing products at affordable pricing, having refined their designs through cost optimization and secured a network of efficient subcontractors and suppliers who provide very competitive pricing.  They also are experts in scheduling the construction process and have refined their building cycles to the minimum thereby saving substantial additional dollars. 

The national builders are quite adept at general business practices, having secured advantageous access to the capital markets and, while they misjudged by overly aggressive land acquisition during the boom markets, they managed to successfully lobby Congress to amend the tax code and create extended loss carry-back provisions that will yield an estimated $2.5 billion in tax refunds.  This has helped many to turn a profit for the first time in years and create a war chest of more than $1 billion in cash now being used to snap up tracts of land at bargain prices to be ready for the coming homebuilding resurgence.

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HOMEBUILDERS AND DEVELOPERS AT TANAGRA

Captain PicardPlease forgive the somewhat cryptic headline of this blog.  For those that are not “trekkies”, it is a play on one of the more well known lines from episode 102 of Star Trek The Next Generation (air date September 30, 1991) in which Captain Picard must decipher the Tamarians’ metaphorical language to create communication and prevent conflict (http://en.wikipedia.org/wiki/Darmok). 

I have decided to try to speak metaphorically here in the hope that     homebuilders and residential developers will listen and thereby also prevent conflict: 

          Two homebuilders meet on the street, the first looks beaten down and haggard while the other looks to be the picture of health and extremely prosperous. 

          The first says to the second, “Well you look great!  How are you surviving the housing downturn?” 

          The second builder responds, “Actually, I got out of the housing business and I gave all of my developments back to the banks.” 

          The first asks, “then what are you doing now?” 

          The second answers, “I am now exclusively doing commercial properties.  In fact, I am concentrating on building houses of worship and business is great”. 

          The first, being somewhat awed, compliments his friend on his success and asks, “How does one go about specializing in houses of worship?  Do you pick a specific religious denomination and then solicit those congregations or leaders? I know that you are a Catholic, do you have a special relationship with the leadership of your church?”  

          “And what about the architectural requirements”, he continues.  “Have you partnered with a design firm that already has those contacts?  Quite honestly, this is all very interesting.  Is there room in that field for me too and, if so, how should I get started as my homebuilding business is just barely hanging on?” 

          “Well” replied the second builder, “I really did not give the process much thought beforehand………..I build them on spec”. 

An outrageous scenario?  Maybe.  But it appears to me that the lack of foresight of this builder’s venture into commercial property was illustrative of an all too common and widespread occurrence over the last several years and the repercussions are just about to hit.  If you believe that the collapse of the residential industry had far-reaching impact, just wait for the commercial sector’s destruction in 2010 and this builder’s supposed development of houses of worship will be just the tip of the iceberg as office, retail and even the industrial components start their domino tumble. 

The impact of the forthcoming commercial real estate debacle will be most severely felt within the banking and related financial communities and the end result will be an even scarcer supply of funds for residential development and homebuilding for the next several years. Developers who wish to stay in business will need to locate alternative sources of funding and the most probable source will be in the equity markets.  So don’t delay, start seeking those funds now.  And for those fortunate enough to secure equity funding, it will be both more limited and more expensive than what was previously available from the banking community. 

For the developers that can continue to do business, they will find that except for the larger public homebuilders, their customers (the builders) will be even more severely limited in their access to capital and financing and therefore be both unwilling and unable to purchase larger tracts of homesites.  Developers will find themselves increasingly required to become financial partners with homebuilders, financing the homesite purchases, subordinating to model and construction loans, perhaps structuring an equity “kicker” on the back end to create the necessary ROI.  

The original metaphor from Star Trek TNG is “Darmok and Jalad at Tanagra” and refers to a situation in which heroes must learn to trust each other so that they may work together to defeat a common foe.  And it is certainly applicable to our industry in which homebuilders and developers must work together to survive and prosper in the current economy. But that’s just my opinion. 

Please visit our company website for more information on how Levitan & Associates can help you with your residential marketing efforts to sell more new homes and enjoy greater profits in 2010 and beyond.  And please consider following us on Twitter – http://twitter.com/DanielLevitan.