This week's two key housing benchmarks, Pending Home Sales as released by the National
Association of Realtors on Monday, and yesterday's Case-Shiller home price index individually and together speak to a housing market on the mend.
Pending homes sales count contracts and look forward to completions of home sale transaction at the closing table. Case-Shiller numbers look backwards at a previous three-month period, ending in February of this year, and track the trend line of prices in major buckets of 10- and 20-cities.
Clearly, home builders have liked what's been happening, and comparatively, they'd rather be where they are now than at any time in about seven years. This Wall Street Journal headline would have been unheard of since way in about 2006, had not things improved profoundly from where they were.
Still, a pervasive "we're not out of the woods" sentiment reigns. Many of the folks we talk with these days stay very cautiously optimistic, allowing that "it's better than it was, but it could still go either way."
BUILDER PULSE sister company, Hanley Wood's Metrostudy intelligence and analytics unit has chief economist Brad Hunter, who sees three key "headwinds for housing" pinging against home builder confidence that recovery has staying power. Here's Brad's take on the X factors that could offset housing's new-found mojo.
1) The rising tide brought by low mortgage rates is lifting all boats, and pushing up home prices. Case-Shiller is up 9.3%, and we are seeing builders raising prices by 15% or more in good neighborhoods. What happens, though, when 3.5% (prevailing 30-year mortgage rate) becomes 6.0%? The monthly payment (principal and interest) goes up 34%. This will mean a slowdown in home price appreciation/escalation, possibly beginning in 2015/2016.
2) Builders’ profit margins will come under pressure as the costs of lots, labor, and materials continue to rise. This will probably mostly be a 2014/2015 problem.
3) The economy is still shrugging off the negative effects of a slowing world economy, but there is ‘spillover’ risk from Europe’s deepening recession and the high likelihood of a slowdown in China.
Now, how many Spring selling seasons before have builders gotten revved for a market rebound only to see fearful buyers move back to the sidelines? No one likes to get taken for a sucker. In addition to Brad's three macro "headwinds," we've tried to outline the higher-volume home building community's most important questions of the moment.
We tallied 25 questions central to 1) understanding the current housing market, and 2) building a plan and organization to thrive, despite the good chance "it could still go either way." Come up with a better question than one of these 25, and email me at firstname.lastname@example.org and you'll get props in this space and a personal invitation to our Housing Leadership Summit, May 13-15, in Scottsdale, where 300 of home building's best and brightest will be tackling these questions one by one.
Home Building’s 25 Biggest Questions … What’s new, what’s next, what now?
1. Recovery and winning … is it “everybody wins”? or “winner-takes-all?” Who wins and who loses as housing’s recovery gathers momentum?
2. As signs of recovery spread through home building’s landscape, who’s the biggest winner to date?
a. Home buyers
b. Home builders
c. Mortgage lenders
d. Real estate investors
3. Is housing’s 2012/2013 recovery
d. Don’t know
4. What factor is more important right now in the single-family recovery?
a. Institutional investors plowing money into single-family rental business
b. Owner-occupiers looking to move back into homeownership
5. Do you believe the second half of 2013 and 2014 will
a. get better
b. hold steady
c. get worse
6. Which plan more accurately describes your intent for 2013 going into 2014?
7. I plan to …
a. Push my program to open more communities and generate more volume in 2013 and 2014
b. Take a wait-and-see attitude before I commit to putting more investment in place on lots, land development, and upfront community costs
c. Hold up on investment and spending on new land and neighborhoods until there’s less uncertainty risk and the economy’s clearly gaining steam
8. In today’s market--which is full of uncertainty and mixed signals--it’s best to focus carefully on
a. The next three to six months
b. Six to 12 months out
c. Strategy for the longer term, 3 to 5 years
9. Which is the most critical X-factor force that will affect your team’s financial and operational performance in 2013?
a. Consumers’ access to mortgage credit
b. Government housing finance and taxation policy
c. My company’s ability to match current consumer needs with profit-making new-homes
10. Rank the following eight factors in order of their importance to your success and profitability over the next 12 to 18 months:
a. Housing finance and taxation policy … i.e. mortgage interest deduction, low interest rates, caps on conforming Federal Housing Administration loans, etc.
b. Local jobs and household formations
c. Local/municipal regulation, permitting and fees
d. Access to right-priced lots
e. Access to qualified right-costing labor
f. Access to right-costing materials, supplies, and manufactured products
g. My competitors’ performance and opportunistic moves
h. My ability to balance my costs and house prices, design product and communities
11. In 2013 and through the first half of 2014, I expect my business to
a. Hold steady
b. Grow by 0% to 10%
c. Grow by 10% to 25%
d. Grow by more than 25%
12. Which challenge is bigger and more difficult right now?
a. Managing my operational costs in land acquisition, materials sourcing, and labor
b. Securing labor/contractors, materials, and lots to meet current demand
c. Designing products, pricing, and locating my communities where home buyers will buy
d. Qualifying prospective buyers for the mortgage products and credit access they need
e. Building my company’s culture with talent, resources, resilience, patience, and to weather continued tough circumstances, remain nimble, grow opportunistic
13. At next year’s HLS meeting, we’ll be
a. Talking about more case studies in what’s working in the marketplace
b. Asking where the momentum went
c. Discussing how more companies need to innovate for success in the current market
d. Getting ready for new headwinds affecting the housing cycle
14. How are you securing the capital and credit you need for operations, acquisition & development, and construction of projects?
15. Given that the current environment presents capacity constraints to some degree or other, how are you dealing with the asymmetry of emerging demand, quality assurance, cost management, materials or lot supply challenge, construction cycle variability, etc.?
16. Are price increases your friend or your enemy? (i.e. is your ability to raise your prices greater than the concessions you must make on input costs and labor?)
17. Let’s talk about each operational discipline for a couple of minutes and discuss where there’s an opportunity area, and where your biggest challenges are…
b. Land Strategy
c. Marketing & Sales
d. Customer care
e. Manufacturing and Construction operations
f. Financial management
g. Purchasing and Sourcing
h. Talent & Recruitment & Retention
18. My organization/ team’s success depends more on
a. Being better than other builders at meeting a consumer population need and making money
b. Being luckier at timing the market tide rise, which will lift all ships
19. How have you made your company stronger?
20. How does your team learn from mistakes, your own and others’?
21. How do new technologies, big data, automation, and figure into home builders being able to build better, faster, and less expensively?
22. Would you rather your home buying customer be a) anxious to buy now, or b) afraid not to buy now?
23. How are you preparing your team to leverage the value of new-home construction, including operational costs and maintenance, when interest rates start to make monthly payments go up?
24. Who’s your buyer? How would you describe your prototypical home buyer? How do you figure people patterns—aging Baby Boomers, Millennials/Gen Y moving into their 30s, first- and second-generation immigrants—will impact demand for your neighborhoods and products?
25. New-homeownership among Millennials/GenY faces the challenge of extremely tough loan qualification criteria, college debt, and, often, the need for geographical flexibility in the earlier parts of a career. How will you tip the playing field in your favor when it comes to gaining traction with this important audience? What types of products? Real estate localities? Price points? Financing options? … do you think will swing the balance from rentership to ownership? Will “new” be part of the ownership swing once GenY settles into more permanent/family household formations?
26. Your better question(s) here.