Question as to whether the late-2018 slow-down in single-family new home activity was a blip or a trend can be put to rest.

It's a trend.

Here's two things that are true about the year just past.

  • One, is that most single-family production builders--local, regional, and multiregional--better have closed in December with the best unit year-over-year volumes they've had since the Great Recession, eclipsing lackluster national year-on-year datapoint increases of 4% to 5% by a longshot.
  • Two, along with the unit volume achievements, margins and total profitability for 2018 had better have been your best performance in a decade. And, as a corollary to that, you had better be pretty damned smart with what you did with that 2018 profit.


For starters, here's the verbiage from the latest The Z Report from the team at Zelman & Associates, dramatically adjusting its outlook on the 24 months ahead.

"Given the significant deceleration in activity exiting 2018, our prior forecast of an 11% increase in production single-family starts in 2019 would be extremely difficult to achieve absent a significant snapback in activity over the next several months. Accordingly, we now estimate just a 3% increase next year, with 2H19 stronger than 1H19... In total, our revised single-family starts estimate of 915,000 in 2019 would be up 3% year over year and is 8% lower than our prior view in absolute terms.

"With momentum expected to build through 2019, we continue to underwrite solid growth in single-family starts in 2020, increasing 8% to 990,000, below our prior growth forecast of 11%. We still expect a demographic tailwind, significant pent-up demand and still-favorable absolute levels of affordability. However, the recent choppiness in demand is likely to stall incremental investment in land development, which could limit future new construction supply on the margin. Importantly, we still expect cyclical upside beyond our explicit forecasts, as our 2020 estimate sits 10-20% below our view of normalized demand."

Key to the Zelman hypothesis is that--all economic forces being equal--favorable year over year comparables on mortgage interest rate change could reignite buyer momentum, and, like the recent slowdown, build on a life of its own. All in, however, given the macro deceleration and the still-opaque nature of its root causes, those 2018 firm-by-firm unit volume benchmarks are going to be pretty close to impossible for most mortal enterprises to match in the year ahead. And gross margins from 2018? Kiss those good-bye.

Our friend, sage, and brutal realist-in-counsel Fletcher L. Groves--who's next Builder Velocity Pipeline Workshop takes place March 20-21 in Ponte Vedra Beach, FL--has an expression that especially suits what we'll see as builders get 2019 operations up and running: life on the Serengeti.

Survival of the fittest tends always to be a stretch of the imagination for many home building firms, who believe their business fates tie more closely to rising and ebbing tides of housing cycles, but this year ahead, we see a harsh macro trend sharply separating firms from one another, almost like setting up quarantine for those of failing health.

One of the big differentiators, of course, will be the profound contrast among home building companies that may have been gloating over their income statement performance, versus those who've been hyper-focused on their balance sheets.

Less systemic but equally important differences will take shape not only around how much exposure to lower-price-range home buyers builders managed to put into their business model and land focus, but on how well-oiled and ready-to-fire on all cylinders those land, community development, and construction operations are.

One regional single-family powerhouse builder we know--whose single-family home selling prices have averaged in the $500k-plus range--is roaring into 2019 with 21 community openings in 19 locations, unveiling new land positions, product, density, and an operational process to price homes at a top range of the $350s, with entry-level offerings as low as $260,000.

Builders--on an enterprise-by-enterprise basis--will kick into a ferocious mode on pricing, incentives, operational velocity, and land positioning, looking at every turn to block out competition and seize a bigger slice of a shrinking pie.

The "deep local scale" strategy many of the biggest, most well-heeled players have pursued during the upturn--which garnered clout and operational efficiency among trades, land-sellers, distribution nodes, etc.--now kicks into gear for rougher, take-no-prisoners, going.

Clearing competitors out of the way to get what builders need most--access to, connection with, and dealings with home buying customers--will resemble, as Groves puts it, life on the Serengeti.

Who's tuned into the Discovery Channel, ready to take in the drama ? We are.