Good Time to Buy?
A speaker at the conference Builder magazine is putting on this week had the audacity to say that he didn't think now was a good time to buy. He said that prices for new and existing homes are likely to continue falling this year, given that foreclosures are on the rise and the number of homes for sale is going to continue climbing.
The statement was greeted with a spontaneous outbreak of boos and hisses from the builders in the audience. "All the reasons you outlined for it not being a good time to buy also indicate that it's a good time to buy," said one builder, who believes that pricing is beginning to firm up. Recent price declines mean that some buyers have the opportunity of a lifetime to buy the home of their dreams, said another.
It's a good thing tomatoes weren't served for breakfast, because the contrarian speaker would have been littered with them. Builders, it's abundantly clear, are sick and tired of hearing any negative takes on current market conditions. After all, they are fighting a life-and-death battle to keep their companies afloat. And one of their major leadership objectives is to prop up morale within their companies, especially among salespeople.
Later in the program the usual shots were taken at newspaper articles that contribute to negative consumer psychology. Private builders got their digs in about public builders that ruined the market by pursuing 20 percent annual growth at the behest of the public capital markets. Some speakers criticized cash-strapped builders desperate to sell homes by offering six-figure discounts that condition every buyer in the market to ask for concessions.
All these comments argue for further price declines, of course. Bad news on foreclosures stemming from the subprime fallout is likely to continue as the number of ARMs resetting increases this year. Public builders may have stopped building homes on spec, for the most part, but they still have tons of land to work through. Check out the announcement that Centex made yesterday that might set a new floor for land values. And now we have the added negative influence of a pullback in consumer spending due to a potential economic recession.
It's important that builders not "smoke their own," so to speak, that they not confuse what they are telling potential buyers and their employees with what they really believe. Most housing organizations, including the NAHB, are calling for a decline in housing sales and starts this year. Mortgage rates may be historically low, and recent moves to liberalize FHA credit and allow Fannie Mae and Freddie Mac to buy more high-priced mortgages may help. But probably not until later in the year.
As our conference speakers have made clear, builders need to look within their operations to improve productivity. They need to be reworking home plans to take out unnecessary costs. They need to be carefully monitoring purchasing expenses, and make suppliers know they are doing this by sending things back occasionally. They need to be routinely meeting with subcontractors to find process improvements. There is still a ton of money to be saved in this business. A penny saved is still a penny earned.
At the same time, builders need to reach out to more potential new home buyers, even people who may have cancelled a previous new home contract. A far more sophisticated approach to demographics is required; we need to reach submarkets that aren't served by the existing home market. Rest assured, there are buyers out there who still need to move, who still need to buy a new home. We need to find them and convince them that our communities are ideal places to live.
It's important for builders as business managers to separate what they want customers to believe from what they know to be true. Everyone today needs to be planning for the worst and hoping for the best.
Oh, and the contrarian speaker happened to be me. Go ahead, throw tomatoes.