If the 2023 housing market were a Dum-Dum, it surely would be the Mystery Flavor. While the end of 2022 brought talk of a recession, the outlook for 2023 was nothing if not uncertain for home builders.
The year so far, however, seems to have delivered stronger-than-anticipated business and a mixed bag of buyer demand, mortgage rate fluctuations, and other variable economic factors that have left many builders “cautiously optimistic.”
One has to look no further than the firms on the Builder 100/Next 100 lists when wanting to know how best to describe the overall home building industry for 2023. When asked, surprising, challenging, resilient, cautiously optimistic, unpredictable, exciting, steady, and unlimited opportunity are a few of the responses received from leaders of various-sized U.S. firms. While those words might not imply business is booming, there’s also no doom and gloom present when discussing the trajectory of 2023 for these home builders.
“Even in difficult economic times, excellence is rewarded,” notes Joe Leal, founder and president of Visalia, California–based San Joaquin Valley Homes, which ranks No. 94 on this year’s Builder 100. While traffic is lower and buyers are taking longer to purchase in Leal’s markets, he says the year has started strong because the company responded to higher mortgage rate challenges with “higher incentives, lower hard costs, and we moderated price increases intelligently.”
Mohnton, Pennsylvania–based Berks Homes, ranked No. 128, also has seen a strong start, along with “tremendous” pent-up demand from millennials. “We’re on budget without giving too much away in concessions,” says CEO Mike Benshoof. The firm dropped prices about 10% in September, which allowed it to quickly find the market and get on pace to slowly bring prices back up. “We have scenarios showing the market improving and some doomsday scenarios,” he says. “Basically, we’re trying to prepare for anything that might happen.”
Tim McMahon, CEO at Erlanger, Kentucky–based Fischer Homes—ranked No. 30—says despite delivering “a record year in 2022, we entered 2023 battling rising rates, ongoing supply chain challenges, and affordability issues. Our sales expectations for 2023 were therefore conservatively crafted, especially for Q1 and Q2.”
Turns out, buyer demand remains strong in each of Fischer’s Midwest and South markets, and McMahon says the firm has had a favorable start to the year, with first-quarter results up approximately 25% versus plan. “We are hearing similar stories from other home builders and are seeing new-home construction make up an even greater share of home purchases than ever before,” McMahon says. “However, we remain cautious about the state of the greater global economy.”
Housing's ‘New Normal’
Joel Rhoades, CEO of Dublin, Ohio–based Epcon Communities, notes that “after the strong market the industry experienced during COVID through the end of 2021, a return to normal was expected as we entered into 2022.” Ranked No. 50, the firm primarily serves the 55-plus market. Its positive start to 2023 is partly because its demographic is generally less affected by mortgage rates.
“Many of our buyers are cash buyers and are therefore not directly impacted by rising mortgage rates,” says Rhoades. “Another segment of our buyers takes advantage of HECM [Home Equity Conversion Mortgage] for Purchase loan options, which also lessen the impact that mortgage rates have on their buying power.”
Garrett Martin, president and CEO of Austin-based MileStone Community Builders—ranked No. 72—says fluctuating rates have “without a doubt” impacted his company’s entry-level and move-up buyers.
“We’ve worked hard to give customers peace of mind through rate-lock programs and float-down offerings. The emphasis has been on removing any uncertainty from the buying process, and the results have spoken for themselves,” he says. “Entry-level buyers have a stronger sense of urgency than any other profile right now.”
When Steve Alloy, president and CEO of Reston, Virginia–based Stanley Martin Homes, was finalizing the company’s 2023 business plan in November, “the environment was extremely uncertain.” The No. 20 ranked firm had experienced six months of weaker orders, and he recalls experts were predicting a recession in 2023.
“We saw a lot of consumer hesitation in the back half of 2022, but home sales came roaring back in Q1 2023,” Alloy says, noting the firm’s consumer home sales were up over 50% in Q1 2023 compared with Q1 2022. While mortgage rates were a big factor in Stanley Martin’s markets for 2022, that seems to have passed.
“In my experience, after some number of months people get used to the prevailing mortgage rate, and it simply becomes the ‘new normal,’” he says. “Buyers have adjusted their expectations to match the current rates.”
Data from Zonda’s March National Housing Market Update supports that statement. Chief economist Ali Wolf noted during the webinar that spring selling season was off to a “pretty healthy start.” Over 50% of builders reported to Zonda a positive response from consumers to interest rates in the 6s compared with the 7s.
“The builders were saying there’s a positive response [to lower rates], but we had to meet the consumers where they wanted to be. We had to do some kind of change, whether to the price or to the interest rate, to drive some of the interest,” Wolf said.
At Houston-based Perry Homes, ranked No. 25, CEO Todd Chachere says first quarter sales were up well over 50% compared with the first quarter of 2022.
“Home buyers have accepted rates are not going back to 3% and recognized the relative calm in the interest rate market during Q1 2023 compared to the volatility we saw nearly all last year,” he explains.
In addition to interest rate acceptance, Chachere says limited housing inventory, lower home prices (the firm lowered its prices across the board about 10%), and pent-up demand have all been part of the year’s success so far. “We expect the market to slow from the pace we are currently on,” he says. “However, we’re optimistic the market will settle into something that looks more like 2019 and that we’ve seen the last of the large swings that started in 2020.”
Expansion Efforts
While some firms eye expansion and push to grow their business, others are content to focus on what it is they do and know best. Regardless of the approach to growth, all firms remain open to opportunities.
Sunrise, Florida–based GL Homes, ranked No. 43, builds and develops luxury homes, 55-plus communities, and family-oriented communities in Florida. Founder Itchko Ezratti notes the firm has no set plans to expand beyond state lines.
“We are a private company developing and building only in Florida,” Ezratti says. Though he also notes that if the firm sees “an opportunity, we take it.”
Stanley Martin, which expanded into Central Florida with its 2021 acquisition of Avex Homes, also sees opportunity in the Sunshine State. That deal included a “very small land position” in Tampa, according to Alloy.
“We are planning to expand our Tampa operations in 2023, and since we were so small there, I think of that as an expansion into a new market,” he says. Aside from that, the firm’s primary focus is to grow its existing markets this year in lieu of any mergers and acquisitions.
“Because we have been so active with M&A, we are on most people’s short list to be contacted, so we see most opportunities,” Alloy explains. “It is always possible that the right company in the right locations comes to market, and in that situation we would actively pursue it.”
Many firms are choosing to spend the year focused on markets they’re already in. Jake Eilermann, president of McBride Homes—ranked No. 69—says the company remains zeroed in on the St. Louis market and continues “to build competitive efficiencies” there. “We are not in the build-to-rent sector,” he adds. “We are focused on doing what we do best, and that is for-sale homes.”
Woodstock, Georgia–based Smith Douglas Homes, ranked No. 38, is similarly moving forward with the intent of “deeper saturation in our existing markets,” according to president and CEO Greg Bennett.
At Esperanza Homes, which ranks No. 124, CEO Nick Rhodes says the firm this year is focused on pacing its home starts and maintaining inventory levels. He adds that there’s no M&A activity on the horizon, but “we are looking for new areas to grow the company.”
For a firm like Columbus, Georgia–based Grand Oak Builders, however, acquisition is the name of the game. According to its website, it aims “to achieve national level significance in 2023 through selective and sequential residential home builder acquisitions and growth.” The most recent acquisitions for the company, ranked No. 181, include Lambie Custom Homes, Tradition Homes, Bellaire-Hagen, and Winslow Custom Homes.
“We are not locked into specific regional restrictions, and we have a broad range of market segments we are willing to work within,” says Dave Erickson, president of Grand Oak Builders. “We are constantly looking at new opportunities and discussing options with various building and finance partners in the industry.”
McMahon of Fischer Homes is likewise ready for any opportunities that arise. Following “numerous acquisitions over the past five years,” he says the firm continues to look “for those areas in the Southeast and Midwest that fit our strategy, including household growth, economic expansion, and markets where our home designs will seamlessly meet the buyer’s expectation.”
Berks Homes increased staff in 2022, in part because it is preparing for “large growth and possible acquisitions.” It also invested in a scalable enterprise resource planning (ERP) system and has spent the past few years documenting its processes and procedures, most notably in regard to sales and job cost control.
“The ERP and process mapping should allow us to move beyond our current three-region footprint without causing an unreasonable disruption to our current operation,” Benshoof says.
Investment In Talent
No company is growing without a strong employee base, and leaders of the country’s top home building firms are well aware of that fact.
“There is direct correlation for support positions that tie directly to increases in starts and closings, but we’ve also added strategic positions to help support the company’s growth,” says Chachere of Perry Homes, which expanded staff in 2022. “Growth over the last several years has been aided by the market, but we also have been strategically growing our operations in Dallas-Fort Worth, Austin, and San Antonio. That growth, combined with historic market conditions during the pandemic, has made recruiting new talent a high priority for us.”
Epcon also increased employee numbers in 2022, which Rhoades says was a natural result of the corporate company’s expansion into six regions (Atlanta; Charlotte and Raleigh, North Carolina; Columbus, Ohio; Indianapolis; and Nashville, Tennessee). “Scaling in each market takes an influx of talent through all levels of the organization, and retaining that talent takes a commitment of the company,” he says. “That comes in ways of employee benefits ... but also in providing a meaningful place to work.”
Eilermann notes McBride, which built a new office attached to its design studio in the past year, has a preference of hiring and growing from within. “We have a very strong culture in our organization and refer to it as the ‘McBride Magic,’” he says. “We always value and make a priority of keeping our top talent.”
At Fischer Homes, the firm’s five-year strategic plan and long-term succession planning are two reasons behind its employee-count boost in 2022.
“We remain focused on and continue to invest in recruiting and developing our next generation of leaders,” says McMahon, who himself moved into the CEO role in October from president and chief operating officer. “We have invested heavily in our college recruiting efforts in the markets in which we operate to ensure we have the talent to support this growth plan.”
Cautious Optimism
Zonda is forecasting declines in home sales and starts for 2023. Builders seem to also be prepared for the strong start to taper off a bit as the year continues.
Martin of MileStone Community Builders says the firm expects to close fewer homes this year “due to a slowdown on starts during the latter half of 2022. We have a high quantity of exciting projects in our land development pipeline so our emphasis in 2023 is to launch several of those projects, get homes started, and prepare for what should be our biggest year ever in 2024.”
McMahon notes the “short-term future remains unclear” but says Fischer Homes has “confidence in the long-term strength of the home building industry.”
For now, elevated interest rates have limited Grand Oak’s growth plans. Erickson says while its financials look good, “we’re keeping our goals in check until we have a better runway for expanding our growth targets.”
Keeping goals in check aligns with advice given by Zonda’s Wolf during the latest National Housing Market Update: “I’ve heard a lot of optimism and borderline exuberance about how housing is back for good, we’ve worked through the slowdown, and we’re in growth mode. What we all need is to have a little bit of humility about how things are changing so much in real time.”
