DSO’s … A Leading Resi & Commercial Indicator

For several weeks bank economist have hinted while they are not projecting outright recession or inflation, the sub-prime mortgages have touched off slow down in the US economy. With tightening credit rules and huge increase in foreclosures, there continues to be about 30% to 50% more new home capacity (homes being built) than the current market can absorb over a 180 day period of time.

If as a distributor you focus a portion of your sales on residential light commercial construction (restaurants, strip malls, banks and etc), you will see, in some markets, a slow down. Many banks are being told to all but stop lending money to home builders unless they are have “pre-sold contracts” to borrow against. Track/production and cookie-cutter builders are now facing much closer inspection of their credit lines. Over the past week, several developer/builders have indicated that their projects will slow down because of their lenders and the tightening of credit for the home buyer.

This week in www.wsj.com/Sunday they indicate that housing stocks are falling. Some of these stocks are as much as 40% below book value. To compound this problem, the book value of some of these builder/developers will continue to erode because of the amount their land holdings are declining.

During the last down turn, 25% of publicly traded builders sought some type of bankruptcy law protection. The best guesstimate of builders who were not publicly traded and sought bankruptcy was 42%. Many builders began to slow pay suppliers when the banks failed to open loans and when their customers couldn’t qualify for permanent home loans.

A quick check with several distributors across the country with significant business in the residential sector indicated that their Daily Sales Outstanding (DSO) is on the rise with their builder customers. Collection efforts and tighter credit could become the rule of the day for many distributors as the housing and light commercial market shrink.