Sudden Impact: Why Last Month’s Data May Mislead, While 15-Year-Old Data Can Help

The latest measure of home builder sentiment could not catch up in time with the super-charged pace of change in the past several days.

Still, National Association of Home Builders chief economist Robert Dietz, in comments about the latest NAHB/Wells Fargo Housing Market Index, cautions us in his views on the latest data release. To reflect both what the numbers gathered in the past several weeks support, and to telegraph a rapid change, Dietz tries to strike a balance. He writes:

Builder confidence remains solid, although sales expectations for the next six months dropped four points on economic uncertainty stemming from the coronavirus. Interest rates remain low, and a lack of inventory creates market opportunities for single-family builders. However, downpayment requirements are a limiting factor amid lower mortgage interest rates.

More fundamentally, half of the builder responses in the March HMI were collected prior to March 4, so the recent stock market declines and the rising economic impact of the coronavirus will be reflected more in next month’s report.

Overall, 21 percent of builders in the survey report some disruption in supply due to virus concerns in other countries such as China. However, the incidence is higher (33 percent) among builders who responded to the survey after March 6, indicating that this is an emerging issue.

The issue is this. This data takes stock of conditions, assumptions, and outlooks among home builders that you might say is dated. The guidance and value for decision-support those confidence indicators provided pre-COVID-19 transformed profoundly post-COVID-19. In some respects we should no longer look for month-on-month sequential trends, nor year-on-year comparisons. We should look to the levels–albeit more gradually reached–market activity wound up at in ’06, ’07, and ’08 for where we’re headed.

The forced shock-and-awe chain reaction from a “let’s take a business-as-usual stance” to a “full contingency preparedness” position has been sudden. The question for all of us now–apart from the compelling issue of keeping ourselves, our loved ones, and our team members safe and healthy–is how to model in a lightning-fast instant of inflection, and in a vacuum of information and insight. Scenario planning is sobering business, especially for a community characteristically prone to reality-avoidance when the news is bad.

Here’s how Matt Ogden, managing partner at sector-specific capital investment firm Building Industry Partners, looks at the re-forecasting challenge businesses face:

1. Focus on protecting the health of our families, associates and partners by following CDC guidelines.
2. Begin thinking through downside scenario plans w/ operational, HR and financial components and fin. projections (IS, BS, CF and debt covenant forecasts) to forecast cash/liquidity. BIP’s co’s are running downside cases that assume monthly business sales volumes drop to: (a) 75%, (b) 50%, (c) 25% and (d) 10% of ’19 average monthly sales volumes w/in the next 1-2 months, stay there for 2-3 months; then climb back to recessionary activity levels (perhaps 50-75% of ’19 annual sales volumes) for an extended period.

Depressing scenarios, but we believe thinking through and planning for these cases has little risk/cost in itself and can make all the difference in successfully navigating our businesses and associates through these scenarios if they materialize (which we all hope they don’t). I’m recommending friends and colleagues consider similarly sanguine circumstances/cases if they aren’t already.

Four scenarios: 1. best, 2. moderate, 3. severe, 4. worst. Many of us made the mistake in 2006 and 2007 to model the impacts in the second or third scenarios, versus #4. Now we’re trying to get eyes and ears on the ground with you and your partners, competitors, and a network of analysts, observers, and experts to bring forth real-time, conditions-sensitive data to help you and your teams.

This share had me at hello. Omarr Aleem, senior analyst, partner at Cleveland Research headlines a note to clients “Top 10 Insights From the Last 5 Days.” We’re grateful he’s given us a go-ahead to pass them along to you:

1. We have seen a significant step down in community traffic over the last 5 days. We estimate, on average, traffic count fell 55% (versus prior week) across roughly 70% of communities (broad based across US regions). Markets with the most “stable” traffic over this period included TX, FL, NC, SC, and TN.
2. Our work indicates this is translating to a 30% reduction in order forecasts over the next 30 days (reduction in orders is less than the decline in traffic, impacted by the quality of incoming customers remaining quite high).
3. While still early, we are seeing homebuilders evaluate a 50% reduction in full-year growth forecasts (now expecting ½ the growth rate for the industry in 2020). Note prior to the virus impact we were forecasting single-family housing starts up 7% for 2020 (with bias to the upside based on strong demand trends entering the year).
4. There is currently some optimism at the community level that orders are more likely to be deferred over the next 2 months versus canceled. Specifically, in 40% of cancelled community meetings/visits over the past week, we are seeing buyers delay the visit by 5 weeks, or request for a virtual home tour.
5. We are seeing some homebuilders be proactive with health of their communities. At this time, roughly 15% of communities are contemplating closing down communities indefinitely in response to virus concerns. This will translate into strategically staggering meetings (so customer home visits do not overlap) and shifting to a lock box preference versus open house events to reinsure safety for the buyers.
6. With home supply levels remaining at/near historic lows, along with significant pent up demand, we see (and builders are evaluating forecasts) for growth to return to a 5-9% increase looking into 2021 (single-family starts). The level of job loss obviously remains a key question mark between now and 2021.
7. Throughout our work the last 5 days, the concern for order and traffic declines were more muted across DR Horton and other entry-level communities. Within homes priced $250K or lower, we saw year/year traffic slightly positive across roughly 1/3 of communities.
8. We continued to see new home price increases implemented across the regions and buyer groups. ast week alone, we saw list price increases $1-2k across 45% of Lennar, DR Horton, and Pulte communities. We have yet to see incentives planned for this week in response to traffic trends, although these are being evaluated as we speak
9. Land impairment write offs has been a headline concern. Our work suggests this is an unlikely scenario at this time, even in the Houston region where builders are seeing a hit from both virus related traffic declines and the sharp drop in oil prices. We have seen land brokers in the Northeast, Midwest, and West Coast however pulling offerings off the table (deals discussed as recently as 10 days ago) to be considered after the spring selling season. There is an expectation currently for these deals to be revaluated over the next 90 days.
10. Our work indicates lead times for home closings are going to be pushed out 30 days (roughly) versus current run rates, given the dramatic shift taking place in lending assets/resources toward refi’s over home purchase loans. Suppliers should expect a delay in shipments of 3-4 weeks versus normal given this dynamic. If demand had not changed, we believe this would have cost the industry 2 points of growth in 2020

Our own sibling units, Meyers Research and Metrostudy have been recasting core field research initiatives to pick up vital decision-support data on the double. We have these top-line anecdotal observations, thanks to a flash survey the Metrostudy regional directors have put out to division presidents of home building firm clients over the past week.

David Brown, senior vp at Metrostudy offers these high-level take-aways from the initial flash survey:

Some high level takeaways.

• Traffic was impacted over the last week, but not a significant change in sales, yet.
• The primary areas impacted this past week were the high end and active adult buyers, who are impacted by the stock market volatility.
• The low end continues to see sales on plan.
• Many builders are encouraging corporate office workers to work from home to limit interactions. They are concerned about the wellness of their staff
• Some builders have reduced model home traffic to appointment only. Others are considering moving that direction.
• No significant supply chain issues appearing yet, but concerns expressed over items such as appliances, lighting, plumbing fixtures.
• No disruptions with subcontractors to date, but concerns about the future.
• In person events getting canceled.

“Concerns about the future” for disruptions among subcontractors is a red-flag for the industry right now. We should not only be concerned about the wellness of staff team members but of all our partners. We need to #protectbuildershealth. Now.

The #4, “worst case scenario” becomes almost a foregone conclusion, unless every measure possible gets taken to #flattenthecurve. We as a community must lead, not get reluctantly dragged into action to protect the design, construction, development, planning, manufacturing, materials supply, and distribution ecosystem from catastrophic damage.

That means you, me, swallowing bitter medicine now, to #protectbuildershealth. Any process–selling, production, operations, etc.–short of being able to ensure social distancing, ultra-clean, protected interaction should hit a temporary, but necessary pause. OSHA and other health and safety measures offer too few protections from the fast-moving phenomenon of COVID-19. It’s up to us to insist that our people, and their people, and the ones working for them–right along the invaluable human food chain of laborers on our sites–receive every opportunity to stay healthy and safe. We don’t want construction industry missteps to be part of any increased stress or overwhelm for our nation’s already-taxed health care systems.

Thank you!