From Friday's Census Bureau release of new-home sales data, mainstream business media outlets and Wall Street analysts have drawn the conclusion that post-Fed quantitative easing interest rate spikes are killing the newborn housing rebound. Even within home building and development's community, there are two distinct camps: one that says interest rates are sucking the mojo out of recovery; and one that says recovery's taking on a life of its own that will trump interest rates. PULSE weighs in with 9 things home builders and their business, capital, and trade partners should focus on that are at least--if not more-- important to surviving and thriving than the July new-home sales release last week.
First, let's at least say hello to the 800 pound gorilla in the room. Interest rates started going up in May at the first hint of Fed "taper" plans, and immediately investment, funding, lending folks got set on edge. When capital sneezes, home building gets a cold.
Everyone knows interest rates are going up. How fast and by how much anyone can only guess. Also, when they do go up, it's pure speculation right now as to what their ultimate impact on housing demand will be, because interest rate increases won't happen in a housing vacuum. They'll go up, eventually the second order of house price increases will start to stabilize, and then the market will re-find its equilibrium.
So, yes, interest rates very likely had an impact on the fact that on an not-annualized basis, new home sales fell to their lowest monthly total since December 2012 (but still were 7% higher on a not-annualized basis than in July 2012).
But as Calculated Risk's Bill McBride notes:
1. This is just one month of data (I note this whenever we see a weak or strong sales report). There is plenty of month-to-month noise for new home sales and frequent large revisions.
2. The downward revisions to previous months were expected (In the weekly schedule I wrote: "Based on the homebuilder reports, there will probably be some downward revisions to sales for previous months."). But these revisions do suggest the housing recovery was not as strong as previously thought.
3. Important: Any impact from rising mortgage rates would show up in the New Home sales report before the existing home sales report. New home sales are counted when contracts are signed, and existing home sales when the transactions are closed - so the timing is different. For existing home sales, I think there was a push to close before the mortgage interest rate lock expired - so closed existing home sales in July were strong - and I expect a decline in existing home sales in August.
Also, have a look at one of Hanley Wood chief economist Jonathan Smoke's key conclusionsabout the Friday numbers:
We see no clear signs of decline beyond normal seasonality. July traffic increased per community over June by 2%, while contracts per community declined 9 percent over June. Both stats were higher than a year ago. Interestingly, using the Metrostudy data the July decline this year was almost exactly the same decline as last year, further indicating that all we are seeing is the simple reflection of the seasonality that normally happens in July.
So, lets for the moment assume that some of us will remain convinced that interest rates are wreaking havoc with new home momentum, and that some of us will continue to hold the thought that seasonality, data noise, and perhaps even "capacity constraints" may account for 2013's midsummer sales doldrums.
Where should the operational focus be--knowing that interest rates will continue to go up, and only having guesswork to bring to bear on how much home buyer psychology may be impacted as they go up? Labor Day's upon us, for cripes sake, so hell with the externalities, it's time to spiff up the models, cut the grass in the greenways, weed the flower beds, clean and polish the floors of all the spec homes, and make it so that your sales teams are prepared like they've never been before home building's pivotal moment of truth.
Here are nine issues, themes, and challenges at least as important as rising interest rates when it comes to the day-to-day operations of home builders, not in order of importance.
1. Mind the store: your presentation in model home parks, community entry points, individual home memory points, sales centers, and all the other details are crucial right now. Remember, as the macro market shifts, you're competing more with a normalizing resale marketplace, and it's a new against used pitch that needs to make all the difference.
2. Talent knowledge spillover: So important a "lesson-learned" from the last boom cycle is the fact that teams must matrix across disciplines, trust one another, and make their collective, collaborative goals more important than individual wins. Too many organizations still set up around compartmentalized disciplines and functions, and don't avail of knowledge spillover among peers and teams to get multiple jobs done better.
3. Right the first time ... how you demand and achieve that from your teams, especially amidst wonky labor and materials supply and execution mechanics? Price and time are the two variables here, and often, one must supercede the other in order to get a job done correctly the first time, which avoids more delay and, ultimately, higher costs
4. Iterative land gaming ... Sure, it was terrific to have the wherewithal to be in the position to acquire homesites during the prior 36 months, when there were fewer takers, lower stakes, and quicker ways to monetize the deals. Now, everybody's all in on the land dance, so it's about relationships, which is why land acquisition pros are the pick of the litter in home building land right now. One executive said, "you used to be able to hire a land acq guy for peanut butter and jelly sandwiches. Now, it's practically impossible to find a good one out there." The point is, can builders continue to score lots that they can make a profit on, even as land bubbles blow up here and there in the landscape?
5. Construction supers ... These are the local heroes who'll put the super in superintendent, if they can herd all the contractor and materials cats into the right place at the right moment so that no part of the construction cycle is exposed to higher cost time loss, or worse, materials or manufactured product losses.
6. New community openings ... Collectively, home builders are on pace to increase selling neighborhoods by between 30% to 50% in the next 18 months. Seizing the moment, capturing the buzz, and understanding who's responding, what their motivation is, and how to meet their needs and expectations as each new community store comes online.
7. Care, care, care ... perhaps no operational factor will have been more critical to the continued upward trajectory in new-home construction's cycle than customer care at the individual buyer level. Word of mouth, in all its tech-enabled platforms and formats, is where home builders that succeed will have shown their strength.
8. Entitlement skills: you want externalities to lose sleep over? Here's one, getting projects approved and entitled by localities is probably a bigger barrier to growth for most home builders and developers than labor shortages right now. Why? Municipalities, counties, and states have all axed jobs from their payrolls in the past several years, so getting new projects online will not only test the proficiency of planning and zoning and other government departments that have been out of practice for the past five years, but will severely stress under-staffed agencies. This is a big drag on near- and even mid-term growth, since most of the lots builders are putting into their pipeline these days are raw, unfinished, and unentitled lots.
9. Lobbying skills: while most of the focus of lobbying efforts is on what may potentially happen to the coveted mortgage interest deduction, we believe that unity would be well served around the issues of what impacts college student debt, as $1 trillion plus in currently owed college debt is a major demand suppressor. We believe policy that considers how college graduates contribute economic growth, both locally and nationally, would do well to grant some form of subsidy to those who choose post-secondary education. What's more, wage growth--or the lack thereof--is at the root of housing's biggest challenge.
How should housing, writ large, evolve its advocacy agenda to focus on where the economy's longer term pain points are?