Summary
There is no doubt that homebuilding is well off its peak building year of 2005; however, smart builders such as NVR are well positioned to take advantage of opportunties that do exist in this current market to build market share. NVR's strategy of lot options allows a more flexible business plan that can reduce short term losses and enhance profits in the long term.
Analysis
We all agree that homebuilding activity is down so now it is time to focus on builders that are opportunistic in this current market. The sales data for January to April 2007 strongly supports the contention that many national builders are weak and getting weaker. This is not the case for NVR when comparing sales activity for the peak year of 2005 with the same period in 2007.
Yes, it's accurate that total volume for all builders including NVR in the Washington Metropolitan area is lower; NVR's sales volume over the period is down 15% (1111 versus 947); that's the bad news and now it is out of the way to focus on good news. For the two building companies that comprise NVR, Ryan Homes and NV Homes, there is a silver lining in the cloud. In the period studied, Ryan Homes sold 782 homes in January-April 2005 and 651 homes between January-April 2007. But Ryan Homes actually had 40 fewer projects in 2007 so the average project sold 7.08 homes in 2007 versus 5.92 homes per project in 2005. Also in this period, Ryan Homes increased their market share in the Washington Metropolitan region capturing 11.1% of sales in 2007 against 8.4% of the homes sales in the 2005 timeframe. A similar story is in the data for NV Homes, the upscale building unit of NVR. NV Homes increased its overall market share and especially increased its Single Family market share by over 2%. This bit of news is even better because this segment of the NVR market has the potential for higher mark ups thus contributing to profitability .
So NVR is using this market slowdown to their advantage. NVR is actually increasing operating efficiences and sales productivity with fewer projects; streamlining internal operations and capturing greater market share from their competition.
The most recent broad sales data confirms the trend that NVR is leading the competition. Several prominent national builders are losing steam in the Washington Metropoltian area and dropping off their former pedestals. NVR is also pushing a few of the stronger regional builders down in their share of the market so NVR is benefitting.
How can NVR accomplish this feat? They are exiting projects that no longer are selling while their competitors have to stay put since they own the lots versus NVR that has lot options that can be cancelled albeit with a little short term financial pain. NVR can renegotiate their lot options thus allowing them to adjust sales prices for their homes that are more reflective of the current market. The flexibility of lot options also means that NVR can maintain more desirable profit margins since the land developers are taking at least part of the so- called haircut. National builders who pursued land ownership get hit twice; they have to write down the value of their own land and in their homebuilding arm also lower prices.
The current homebuilding market is certainly a test of staying power and some builders will most definitely contract, exit the market or consolidate. Don't look to NVR to be weakened substantially by this market. Profitabilty is most definitely lower but NVR is positioned to capture a greater share of the sales that are out there. As I learned early in life (my grandfather was a stock market investor), every market has opportunities. NVR is showing again that in good times and not so good times, its the competitior to watch.
