You’d think that builders would be the first to notice a change in the economic weather, particularly after seeing so many months of poor sales.
But Chuck Shinn, who experienced many a downturn in his work as a builder and now a business management consultant to home builders, believes that’s not the case. “The recovery will take many by surprise,” he said in a recent Shinn Consulting webinar attended online by approximately 130 builders. “Builders typically miss cycle turns by six to 12 months.”
That could be a critically bad mistake in this housing recession, which began nearly three years ago, and has left many builders in hibernation, Chapter 11 bankruptcy, or worse. For those who are still operating, overlooking the uptick could mean missing sales or profit margin improvements. It also could mean failing to capture new business by preparing now for the recovery, whenever it might occur.
New-home inventories, which only stood at 357,000 in December, will “shrink quickly” once the recovery begins, according to Shinn. “There will be a scarcity of the right homes at the right price. There will be too much old product out there, and the home buyer will want something different,” predicted Shinn, echoing comments he made during a session at the International Builders’ Show.
While builders are developing new product lines to suit post-recession buyers, they will also want to be watching market indicators closely. “You want to have triggers for action” and a strategy ready for implementation when the indicators shows signs of improvement, said Shinn, who urged builders to pick only a few action items for their “recovery watch” so that they don’t get buried in numbers and miss the long-awaited upturn. Those strategies might include increasing advertising, boosting spec inventory, or evaluating finished lots for purchase.
To make the best decisions, Shinn said to pay attention to three primary areas—their local housing market, the existing home market, and their internal company information—and track statistics for all three. Here are his recommendations for data points, which can be graphed via Microsoft Excel or another spreadsheet program once the data is entered.
To track the health of your local housing market:
* Net employment change.
* Mortgage interest rates.
* Retail sales revenue.
* New auto sales.
To track the health of the existing home market in your area:
* Number of homes listed.
* Average number of days on market.
* Average existing-home sold price.
To identify upticks in your own communities:
* Weekly buyer traffic.
* Traffic capture rate.
* Percentage of contingent contracts.
* Contract fall-out rate.
* Voluntary cancellation rate.
Once the trend lines start improving across those indicators, it may be time to stop retrenching and move forward. But don’t expect too much too soon. “The recovery will be slow,” Shinn cautioned. “The freefall will slowdown, and sales will stabilize before prices do.”
Alison Rice is senior editor, online, at BUILDER magazine.
Do you have good local sources for any of these indicators in your market? Feel free to post links to them online in a comment.