by Kurt Liebich, CEO at RedBuilt
Former US Congressman, Walt Minnick, stopped into my office last week. I enjoyed speaking with him, and reminiscing about TJ/RedBuilt’s history. Prior to entering politics, Walt was CEO of Trus Joist in the 1980’s and early 1990’s. Walt led the company through the brutal building recession in the early 1980’s, and he led Trus Joist’s expansion into the Residential building market. During Walt’s tenure as CEO, the Company grew exponentially, and Walt always provided outstanding leadership during both the good times and the bad. Walt and Jody Olson hired me back in 1994, and they were my first mentors in the business. I owe a tremendous debt of gratitude to Walt, and all the opportunities and guidance that he provided me during the course of my career.
Walt was always very direct, and so it did not take him long to ask me his standard question, “How’s business?” To which I replied, “It’s better… not good…. but better.” I went on to explain that RedBuilt, like almost every construction related company, has been to hell and back over the past five years. As we all know, housing peaked in 2006 at over 2 million starts, and then with the collapse of Lehman and the rest of the financial markets, housing starts bottomed out at 500 thousand in 2009. Since this point in time, housing and all construction related activity has been bouncing on bottom. This downturn has been unprecedented in its severity and duration. As a result, many great Companies have been destroyed. RedBuilt has been fighting to survive for the last six years, and while we are seeing some positive signs of activity, there are still many storm clouds on the horizon.
In my lifetime, the only downturn that came even close to the one that we are currently living through is the recession in the early 1980’s. Walt was running Trus Joist during this period of time, and he shared with me his unique leadership perspective. In those days, housing peaked at around 2 million starts in the late 1970’s, and then plummeted to 850 thousand units in 1981. This downturn was brutal, and it was largely driven by the dramatic rise in mortgage rates, which was related to a spike in inflation. Mortgage rates increased from 9% in 1978 to 18% in 1981. At these high financing costs, nobody could afford to build or buy anything. Walt explained how tough it was to manage the business through this rapid decline. For any business that experiences this rapid of a decline in demand, it is almost impossible to take fixed costs out of your business quickly enough to survive. The ones that survived, cut quickly and cut aggressively. These tough decisions are the only levers that leaders have to balance the cost structure of the business with the overall level of business activity.
The difference between the recession of the 1980’s and the one we are dealing with today is that the downturn in the early 1980’s was driven by inflation and the resulting increase in mortgage rates. Once the policy makers got inflation under control, interest rates declined, and building activity resumed. As a result, in the 1980’s, the downturn was short lived, By 1982, housing starts rebounded to 1.3 million, and for the balance of the decade, they hovered in the 1.5 million range.
Conversely, the downturn that we are currently dealing with was directly related to the complete and utter collapse of the financial system in late 2008. These events coming in the wake of the housing bubble were utterly devastating, and resulted in the destruction of vast amounts of home equity. The resulting foreclosure mess has created a shadow inventory that will take years to unwind. Worse yet, the policy makers in Washington really do not have any levers that they can pull to address this situation. Unlike the early 1980’s, interest rates are already at historical lows, and the large fiscal deficit positions and the resulting political gridlock make it nearly impossible to pass bills that could stimulate the economy.
Having painted this bleak picture, both Walt and I believe that the worst is behind us. Despite the lack of leadership in Washington, it appears that developers and consumers are beginning to gain a small amount of confidence. Housing starts are improving modestly, and at RedBuilt, we are seeing a marginal increase in the level of commercial building activity. The residential and commercial construction industry is regaining stability. Slowly but surely, we are working through the fundamental structural issues that have plagued our industry for the last six years. I remain optimistic about the long-term fundamentals for the US economy despite the macro uncertainty that will continue to emerge from Europe.
As Walt left my office, he turned and said, “RedBuilt is a survivor!!”
While none of us are in business to “survive”, I couldn’t help but agree with him, and to be proud of the hard work and sacrifices that the RedBuilt associates have made to help us survive these unprecedented economic times. Survival is a defensive position. Success comes from thriving, and with better days most certainly ahead, we are shifting our focus to “Surthrival” – essentially, we need to continue to be diligent, but also, need to shift our thinking to thriving in the new norm. Simply stated, we can’t wait for better days, but instead, we need to make the current days better.