Shifting demographics and lifestyles have created the current dip in housing.
The slackening demand for housing was cast years ago by declining birth rates, a decrease in family formations, changing regional migration patterns, and a liberal immigration policy, not because of the recent terrorist activity.
The issue facing housing now relates to how the trajectory line representing economic activity will be drawn in the coming months. The course this line will take is dependent on business and consumer confidence: It will be more like a "V" if businesses and consumers are able to shake off the malice brought about by recent events and quickly establish a new normalcy incorporating heightened security. Or it will be like a "U" if issues of security cause a bunker mentality to set in, which will restrict business investment and consumer spending on goods, travel, and entertainment.
The United States has faced recessions before. Typically, housing is a leading indicator of recession. Though the events of Sept. 11 hastened a steep drop in the economic numbers reported in the fourth quarter, the reported numbers would have been poor anyway.
With the economy now being stimulated in the form of new government spending and with interest rates at historically low levels, signs of improvement in the economy should start to appear before the end of the second quarter. However, housing industry participants should not just wait for the good times to return because the immediacy of the improvements in the economy are still too unclear to bank on.
Many industry participants may have never experienced a bad housing market, and others may have forgotten the drill that builders implement in bad times. Housing will always be a cyclical industry. Nevertheless, what industry participants must do now is what builders have always done when confronted by a downturn, but with a different emphasis because of the somber mood of the nation:
Concentrate on today's business today. First, address the question of how to survive, if not thrive, until the economy recovers. Then, get back to business and don't try to figure out what will happen to the economy in the second half of this year or next year or the year after. The economy has always pulled itself out of recessions, though some have been more prolonged and painful for the housing industry than others.
Add to your share of the business. This drill relates to protecting backlogs and taking the necessary actions to move inventories of housing and land, moderating land acquisition and development, reducing outstanding debt, and maintaining a reasonable level of new-home sales. Sales never go from 10 to zero in one year; sales go from 10 to eight. Buyers continue to shop in every market. What builders can plan for is adding to their share of the available business, recognizing that what was done last year is certainly not enough to keep sales moving forward this year at the same or only a modestly reduced pace.
Appreciate different markets. The last few years saw an economy that was good in every geographic area of the country; a historic rarity. We are now likely to see greater regional differences in housing markets over the next few years, and builders should be attuned to issues concerning their local economy. Higher-priced housing and housing in certain locations like Orlando, Fla., Las Vegas, Austin, Texas, and Dallas will take more of the brunt of the slowing economy than other locations. However, what is already being felt is that first-time home buyers are still in the market for houses and will remain in the market as long as they are comfortable with their job prospects. Potential home buyers who could not afford to buy in overly hot markets, where housing was in short supply, and prices accelerated rapidly over the last few years, are also in the market. Move-up buyers are taking more of a wait-and-see attitude to home purchases.
Market to the 2002 buyer. Evaluate your presentation to the buyer--models, signage, and marketing materials. Will they appeal to your market in 2002 when the mood of the nation may dictate less ostentatious surroundings and a potential emphasis on security?
Look at pricing. Work with the subcontractors on tighter pricing and on reevaluating crew size and construction scheduling. In addition, develop an open dialogue with your trades to evaluate the components of pricing made up of labor and materials. If the supply chain is ever to become more efficient, it must happen in this time of make or break pricing efficiency. Take advantage of better pricing and quicker construction times to find the additional savings necessary to make your homes more competitive without forfeiting margins in giveaways.
Let's make a deal. Your marketing should certainly reflect this era of unprecedented low interest rates. However, recognize that your customers will also be bombarded with deals from car companies for zero interest loans, from merchants trying to jump-start their sales, and from airlines and other travel companies offering specials. Home buyers will expect deals from you, or they will find a deal from one of your competitors.
The trick to riding out these volatile times is to develop targeted, flexible programs you can deploy quickly to keep your sales momentum in an acceptable range. While you get your plans in place, it's important not to overreact: Sales are always slow in the fourth quarter. When comparing the last quarters of this year and last, keep in mind that 2000 was a record year for housing sales. January always brings out traffic, and 2002 will be no exception. Your challenge is to develop these lookers into buyers.
Isaac Heimbinder is a housing industry consultant based in Houston.