Reports of home builder shares falling sharply and the potential for bankruptcy filings have saturated the news recently. The impact of a slowing housing market, coupled with credit tightening due to subprime market woes, are negatively impacting an industry that has an enormous impact on the global economy as a whole. Most analysts believe that in the coming months home sales will slow as mortgage market contraction continues until the credit markets settle down and an oversupply of homes in the resale market hurt builder bottom lines.

"The biggest problem facing builders right now given the state of the economy and real estate market is their balance sheet. The more debt they have in relation to liquid assets such as cash, the more concerned they are," explained John Burns of Irvine (CA)-based John Burns Real Estate Consulting, Inc., a firm dedicated to helping real estate executives make informed decisions. "Many builders are becoming very concerned."

There is some good news, too. Toll Brothers, Inc. (NYSE:TOL), the nation's leading builder of luxury homes, recently reported that, for the period ended July 31, 2007, third-quarter home building revenues were approximately $1.21 billion, third-quarter-end backlog was approximately $3.67 billion and third-quarter net signed contracts were approximately $727.1 million. While these totals represented a decline compared to FY 2006's third-quarter results, investors looked favorably at the numbers as shares traded sharply higher that day.

"With supply plentiful and home sellers motivated to make deals, this may be the ideal time to buy a new home; the media, however, is warning people every day to beware. We believe significant pent-up demand is building, based on solid demographics, a decent economy and still-strong employment," stated Robert I. Toll, chairman and chief executive officer. "However, we caution that, with the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down. In the near term, tightening credit standards for borrowers should reduce the pool of potential buyers: Liquidity and affordability issues may impede some customers from closing, while others may find it more difficult to sell their existing homes."

Burns supports Mr. Toll's take at the real estate market. "Because this has been a correction driven by rising mortgage rates, the impact is being felt almost everywhere. The most luxurious homes seem to be less affected because there are still many wealthy people whose businesses are doing well. If a recession occurs, this part of the market will disappear as well."

To help builders save their companies from record write-offs and lost market share, Burns offers the following advice for every participant in the housing industry:

  • Be Passionate - Does your entire team care passionately about doing a great job? What extra effort can you specifically point to for each team member?

  • Be Decisive - Are you known throughout your company and the industry as someone who makes good decisions quickly? Can you point to several instances where your competitors or others within your organization copied the decisions you made after you made them? Is it your corporate culture to address tough decisions quickly?

  • Be Authorized - Are you given the authority to make good decisions quickly? Are decisions appropriately delegated to people throughout the organization?

  • Be a Great Listener - Are you known as a great listener? Are you spending at least 8 hours per month gaining the perspective of others by taking the time to attend industry events, meet with competitors, and meet with others with whom you are not conducting every day business?

  • Be Informed - Are your decisions based on four criteria: 1) well-researched, 2) actively debated among management, 3) based on past experience and 4) in concert with your gut instinct?

Builders who strategize based on the booming markets of the late 1990's and early 2000's may not be in business the next time a similar market comes back around. The current troubled market addressed in this article could be around for years to come. The idea here, as Burns stipulates, is to accept that fact, and look at new ways to enhance your company's bottom line. His four suggestions outlined above makes for an excellent starting point.