This business of timing housing's boom-and-bust cycle can get old fast, can't it? The guesswork and anxiously-placed wagers on what may come during the week or so after February 3rd's Super Bowl LIII in Atlanta, and how it'll impact the 2019 plan can keep folks tossing and turning many a night away.
It's no wonder, then, why home builders and developers--especially the few dozen with very deep capital pockets--have focused so intently on playing themselves out of the speculative cycle-timing game altogether.
Come the cocktail of macro-economic shifts, global trade dislocations, Fed monetary policy adjustments, consumer confidence's roller-coaster, and media risk, these enterprises, if they're successful, will have shifted from models with heaps of exposure to burdensome--or perilous--oversupplies of lots to more sleek versions of themselves. This model, practiced so skillfully by NVR, accesses land--and its myriad costs--only as the pace of inventory turns requires them to add to the pipeline. A more direct investment and return.
Key to doing this is operational excellence and excellent use of data. Understanding and being able to directly activate real people's real-world, real-time journey--from inkling, to dream, to exploration, and voila! a home buyer--is the transformational piece here that builders are so keen to put to work. A few are relatively far down the path to that transformation.
And then there is the rest of us.
Fortunately, thanks to our brand new relationship with the team at Meyers Research, I got to connect directly with Ali Wolf, director of economic research at Meyers, for a bit of a mind-meld on which tea leaves she's reading right now, what they're telling her. Our conversation occurred right around the moment of the year's super, blood, wolf lunar eclipse, so it might be apt to call this first go-round Wolf Eyes.
From the highlights of that conversation, which i'll summarize here, we can take away a few really important things to know and things to do to make 2019 a "build year" for you and your teams. Some of us, otherwise, might be looking back at the trials and tribulations of the past few years--labor shortages, materials price volatility, land fees--and wish we had those kinds of problems to deal with rather than the gnarlier "radio silence" issues that may come to the fore.
In each "tea leaf" topic area, I'll phrase a question, and relate Ali's verbatim commentary. Then, I'll try to connect that insight to what it may mean for builders' plans, tactics, and strategies in the weeks and months ahead.
We begin at 40,000 feet, with focus on one of the structural economic areas we've continued to see strength, momentum, and cause for optimism in the months and quarters ahead: Jobs. Now, here, Ali affirms that cause for a constructive outlook, but adds a note of caution. Here's what's she's paying close attention to in that data.
- "I think the jobs data is often used as a relief point in today’s economy. The labor market is undoubtedly healthy, but past performance doesn’t indicate future economic growth. In fact, job growth was still positive heading into the official start of the past five recessions. For example, the peak of the expansion in 2007 was the same month as the peak in employment. Peak of an expansion, as defined by the National Bureau of Economic Research, is also the month a recession begins and an expansion ends.
- "If one wants to use non-farm payrolls as a leading indicator, looking at the six-month average compared to the prior six-month average has showed a pullback ahead of four of the past five recessions. Using that methodology, today’s figures are still positive, but even this gauge has its nuances."
So, whether or not we've hit "peak jobs" and where we go from here has powerful implications, not only at a fundamental, structural economic level, but as key influencer of consumer household confidence. What are some of the other macro-economic forces you're paying particular attention to right now?
- "Beyond nonfarm payrolls, full-employment, the yield curve, the ISM Manufacturing Index, and housing permits are strong leading indicators."
In each of those macro-economic buckets, there's a tale of two recoveries, really. One is duration, where the upward trajectories may begin to be viewed as long-in-the-tooth, and the other is total change from trough to current levels, where many may look ahead and see considerable headroom for more growth. As you look, more specifically at housing activity measures, and what happened during the course of 2018, what jumps out at you in the data, and how do we apply that to what to know about the first half of 2019, especially as it connects to new housing supply and demand?
- "The non-seasonally adjusted new home sales figures from the U.S. Census Bureau for 2018 show 2018 outpaced 2017 January through September with one exception: activity was flat in June YOY. September data showed a considerably drop off as did October. "
- With the government shutdown, we aren’t able to know the November or December data, but we have Zonda to fill the gap. Using Zonda, our proprietary housing data that tracks over 16K actively selling communities, we know on-the-ground trends for the housing market.
- "Nationally, November showed a double-digit drop compared to last year. 40% of markets across the country had a better 2018 compared to 2017, while the balance were down when looking at year-to-date new home contracts through November. Of the top markets, place like Phoenix, Raleigh, Denver, and Dallas had slight positives on a year-over-year basis. Los Angeles and Seattle were among the lowest performers.
- "The data shifted considerably starting in September. September, October, and November contracts looking at 2018 to 2017 were down in most markets. Looking at a two-year timeframe paints a more market-specific picture. Phoenix, Austin, Orlando, Denver, and Las Vegas were among the markets up, while Los Angeles and Seattle were still down.
- "The supply discussion today is fascinating. Are we undersupplied, oversupplied, in balance? You can ask experts across the housing industry and it’ll depend who you ask, when, for which geography, and at what price point. The higher-end market has experienced a buildup in supply as transactions take a bit longer to sell. If you look at entry-level price points across the country, the shortage is real and concerning. While the rate of price appreciation is slowing, Zillow’s data shows the lowest price tier still has 10%+ YOY growth."
That last take--that both the huge challenge and the yawning, hugely lucrative, largely untapped opportunity at entry-level price points, practically no matter which market or submarket you look at--squares so powerfully from the commentary we've been hearing from home building company leaders and observers the past several months. Now, what with the known pricing and profitability challenges already a battle for most builders, mortgage interest rates have, of late, become a wild-card, playing on both the psyches and the pocketbooks of buyers--most particularly those buyers in the very entry-level market we'd just observed is still so under-served. What's your take on the impact of the change in rates, whether buyer demand will sooner or later trump that relatively benign increase in rates, etc?
- "Rates are in an interesting spot. Just 10 weeks ago rates hit 5.0% right around the time that the 10-year Treasury yield was at 3.2% (the two are highly correlated). Since then, rates have retreated 50 basis points. This comes at a time that buyers have hit pricing ceilings across the country, even in the traditionally more affordable markets. Historically, there hasn’t been a strong correlation with mortgage rates and sales, and even earlier this year sales started slipping before mortgage rates considerably picked up. That as our caveat, we need to reflect on the data we’ve seen so far this year. Purchase mortgage applications are a weekly gauge of housing activity and the latest read from the index shows that January is starting off as the best January going back through 2009. Furthermore, the index value is at the second highest level since 2010. This suggests that the reversal in mortgage rates so far has helped move some demand off the sidelines to take advantage. Lower rates could not have come at a better time; Super Bowl Sunday is next weekend!
All in, Ali qualifies herself--vis a vis the supply, demand, economic, and housing indicators she's paying most attention to right now--as a "cautious optimist." For access to Ali's archive of insights, just click here.
Okay, so a few operational and tactical take-aways to draw from a relatively even 50-50 split on pluses and minuses at work in the marketplace right now.
- Your firm--pick-up truck company, local subdivision builder, multi-market player, or multiregional enterprise--offers value, well-being, and a chance to experience new-homeownership on a granular, one-to-one needs basis. Macro data and your success are two separate deals right now, and, especially while there's a great deal of noise in the macro data arena, it's an ideal moment for hyper focus on the people for whom your homes, your communities, your solutions can make a life-altering difference.
- Two, entry-level exposure. If you have it, great. It's time for pedal-to-the-metal decisiveness, operational focus, and a bring-it-on attitude to competition and challenge. If you're still working to get traction in the high-velocity, higher risk, higher volume, tighter margin world of entry-level, it's a moment for the "big-boy pants." Indecisiveness now is not an option."Peak Land?" and M&A. The age-demographics of home building company principals, and step-change momentum shift in market dynamics, some of which Ali mentions above, tell us that we're going to see lots of activity in the first half of 2019. That exposure to entry-level is something strategic publics covet and want more of, and at the same time, their bargaining position strengthens as uncertainty looms larger for privately capitalized builders whose debt, in many cases, is still personally guaranteed.
- "Peak Land?" and M&A. The age-demographics of home building company principals, and step-change momentum shift in market dynamics, some of which Ali mentions above, tell us that we're going to see lots of activity in the first half of 2019. That exposure to entry-level is something strategic publics covet and want more of, and at the same time, their bargaining position strengthens as uncertainty looms larger for privately capitalized builders whose debt, in many cases, is still personally guaranteed.
We think that like the housing activity marketplace itself, buyers will be in an ever stronger position when it comes to land assets and local operation entities.
That said, we really like the prospect of builders getting smart enough and sourcing the private data they need to exit the cycle-timer merry-go-round once and for all.