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Enron Homes, Inc.

Here's one view on what lead to the current brownfield-like debacle that is now the U.S. home building industry

J. Mason
Chief Operating Officer, Antares Homes
Arlington, Texas
April 3, 2008
HousingZone
The recent steep downturn in some U.S. housing markets has left many wondering about the value of local real estate and how to go about making wise decisions in pursuit of the American dream of home ownership. This essay offers a few thoughts on how market conditions, increasingly available investor finance and public investment lust all converged into an industry leadership void, bringing about the current uncertainty (and debacle, in some markets). In every industry the leaders ‘own’ the nurturing of the unique business environs within which they operate. At a very basic level developers and builders are driven to remake some portion of their part of the world. They alter the face of the earth, and because of that, by rights, should own in a beneficial way the protection of the natural environment as well.

The Perfect Storm

The recent landscape was ripe for the current brownfield-like debacle that is now the U.S. building industry. Growth in purchase volume in traditional segments came from baby-boomers’ second home purchases, the increase in single-parent households and the baby-boom ‘echo’. An estimated 10-12mm undocumented immigrants added substantial demand for living units, and the lack of documentation certainly didn’t keep all of them out of the buying pool. Meanwhile, real estate speculation was being sucked into the tech-sector crash investment vacuum.

Geopolitics had a hand on at least two different levers: From an investment perspective, U.S. residential property was (in some cases still is) priced substantially below comparable real estate in many other developed countries. And at a time when the United States’ standing with the international public is at an all time low, with emotions fueled further by the perception that we are ‘resource hogs’, it was (is?) grossly impolitic to discourage permissive lending standards, thereby closing the door to home ownership opportunity for many. Doing so would have just added more noise to the clamor that the country’s leadership disregards the less fortunate, even its own citizens.

These two sets of drivers converged at a time when the international capital markets were and still are going through stages of complex and rapid development, allowing arbitrage in almost everything; and as we’ve now seen, some pretty creative slicing and dicing of mortgage-backed securities. The pace of the meltdown in these ‘new age’ investment instruments evokes the kind of fantastic and failed schemes envisioned by the architects of the Enron crash.

Leadership Led Astray

Industry leaders, notably national and large regional builders, appear to have detached their growth plans from what is, or at least used to be, the ‘idea’ at the genesis of the industry. Fundamentally, the housing business is demand-driven by individuals’ biological imperative toward territoriality and the need for family shelter, colored and influenced heavily by a range of social values and emotional factors. A long-ago study of the impact of the buying experience rings as soundly and intuitively true today as when it was first conducted years ago. The top-down hierarchy: marriage, birth of a child, death of a loved one, buying a home for the family; these are pretty rare and sacred spaces for most people. However, the intent and behavior of large builders leaves not a whiff of an impression of concern for what true home ownership means to people who purchase and occupy their homes. From speculating in restrictive land markets with an eye to maximizing the buy-sell spread (with little thought of the consequence to providing affordable shelter) to polluting new neighborhoods with investor sales sure to quickly become rental units, the only value clearly evident was builders’ ROI. There is a growing sense that the recently-elevated prominence of the ‘publicly-traded builder’ had not been a thoroughly positive turn for the industry as a whole, and certainly not (at least in some markets and communities) positive for the home-buying public.

Over the past 6-8 years most, if not all, major builders have experienced substantial growth in unit and revenue volume, with concordant rapid organizational growth. In a business environment in which HR expertise and practices still noticeably lag the curve in other industries, this was a wreck waiting to happen – and it did. It appears now that many building and mortgage industry executives lacked the wherewithal to know, or to know how to articulate and lead toward, or how to seed and replicate the ‘DNA’ of a set of Values that were in any way aligned with the fundamental drivers of core demand for housing.

To be fair, we must also recognize the significant part played by the lust of the American consumer for investment goldmines. For close to ten years the pre-dawn cable TV line-up was replete with tutorials on how to get rich in real estate with no money down. Ken Lay and Carlton Sheets were both fishing in the same river, just at different spots in the demographic pools. Tales of policemen and firefighters speculating in $500,000 condos financed with no-doc loans are probably and sadly the tip of the iceberg of evidence of abuse; abuse of what is a most precious natural resource – the land itself.

What Next?

Now the mess is evident in the financial markets, in consumer confidence, industry reputation; in the supply chain and hundreds of neighborhoods across the country that are more-than-peppered with foreclosed or distressed properties. These communities stand in stark contrast to those in which builders were more circumspect, or less greedy, or at least more ethically respectful of their customers’ values in the home buying process; these are neighborhoods where people are living in the homes they purchased, not leveraging them for short-term gain. It won’t be long before a more stark awareness dawns on an industry (and marketplace) that is working honestly to ‘green’ itself in an effective fashion: how un-green it has been for some builders to push an extra two, three, or four-hundred thousand units into a bubble of speculative demand. Developing land and building homes is a process which changes the face of the earth for generations to come. Was there never a thought about the implications of feeding the frenzy for investment real estate, all for the sake of the yearly bonus or a play on executive stock options? While in some cases building homes that will quickly be obsolete against emerging standards of higher energy efficiency? While allowing thousands of neophyte investors to get into a game that must have been recognizable as, at least at senior-level perspectives, a pyramid that would eventually topple?

The industry and the investment community (from the neophytes to the world-wise) have earned the spot in which they collectively find themselves. Ever independent, builders will stand where they stand . . . and those owners and executives that revere the ground on which they build will act accordingly: with respect for the unique position of the business in our society; with care and concern for their home buying customers and for the value of the land on which they live.

U.S. real estate values will continue to increase over the long term (on the other side of this ‘correction’), although likely at a much more realistic pace. In those markets not contaminated by speculation, and in those communities not overloaded with investor-owned rental homes, the buying risk today is minimal. That risk, as has been the case for countless generations, is prudent and appropriate when balanced with the long term benefits of owner-occupied home buying.

This essay was submitted to HousingZone.com by J. Mason who is Chief Operating Officer of Antares Homes based in Arlington, Texas.


© 2008, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.

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