For every new home sold in the U.S., it takes about 10 existing homes to sell. Historically, the ratio is about one new home to six resales, as Calculated Risk’s Bill McBride notes monthly. When housing was at its worst, 15 used homes sold for every new home.
What will it take to go back to the historical ratio? Or will that happen at all?
Builders are more confident than they’ve been for 12 years, and single-family for-sale starts and permits numbers bear out that optimism, as more builders go vertical. The challenge is to meet the challenge of released, pent-up demand from Federal Housing Administration-backed buyers, who’ve gone from wobbly to more-sure-footed, from jobless, debt-ridden, grads to up-and-coming community members, and from dazed and confused to directed and focused on new career paths.
Broadly, home builders are starting to see a phenomenon kick in they normally see after recessions and housing downturns but haven’t spotted evidence before now: a re-coupling of job and income growth with household formation and home purchases.
Today’s dynamics as residential developers and builders to foresee–sometime in an inevitable yet indefinite future–two big clashing forces play out.
One is a downturn. The other is a housing boom.
Both are likely within the next five years. Either one could easily precede the other.
So, what builders need to be doing in the middle part of 2017 is to have a foot in the present and a foot in the future. Now, execution matters. Every home needs to get built better than the one before–more quality, more appeal, more profitability. Each house you build today matters toward whether you’ll have the resources to build tomorrow.
At the same time, really important questions confront builders and developers as to how much investment they make in 2019 and 2020 and 2021. For, if builders don’t make those kinds of investments now, chances are that they’re conceding that they’re going to pay more for the land assets later, which may challenge either gross margins or home buyers’ ability to ante up what it takes.
The deals we’ll be seeing go down–the big land deals and some of the m&a transactions we see–will become a kind of proxy for just how confident builders are that the boom in housing will come before the next downturn or not.
So here are 10 “burning issues” that have got to be on the spinning-hamster-wheel brains of many of the leaders in the business community right now.
Let’s start with the most important:
- Policy or Productivity? Which matters more to a home building firm’s success right now?
- Land position or Execution? Again, which is more material to winning, an A lot for a good price, or a great team mining value in a B or C lot community?
- Strategy or Culture? This is a question of focus and leadership, and is meaningful in how organizations can attract and retain talented young men and women.
- Price or Choice? Are they mutually exclusive? We explored this yesterday.
- Present-day focus or future investment? Can you afford not to excel at both? Do you stick with what works and what has always proven to work, or do you try new stuff?
- Asset light or path-of-growth? With pent-up demand pools running as deep as they are, is it time to invest in 36-, 48-, and 60-month land pipelines, vs. the 12- to 24-month tracts everyone’s been after for the past couple of years?
- Labor crisis or capital investment? Housing’s reaching its inflection point: either pay more for human skills or invest more in automation, robotics, 3D technology, and offsite manufacturing capabilities to offset rising labor costs.
- Growth or value? As buyer mix shifts from emphasis on upscale and move-up buyers to the middle and lower tiers of the home buyer spectrum, most builders’ business models need to be able to operate and thrive serving higher-volume, lower margin markets. Where do you fit in?
- Big or little? It seems a winner-take-all era has begun to play out, where scale advantages, capital, and consumer data lie with bigger, more clout-endowed players on one end of the spectrum, and a few facile, high-touch, strong reputation smaller players can do okay, but not in between. Where does that leave you?
- Trust or challenge? Questions, skepticism, and cynicism have arisen around the credibility of long-established sources of insight, intelligence, and decision-support. Whose numbers can you bank on?
We’ll be tackling these issues, looking at mergers and acquisitions buyers and sellers, zeroing in on exclusive, personal takes on a “lesson-learned” from the early recovery, and having a lot of fun at our upcoming Housing Leadership Summit, May 8-10, at the Ritz Carlton Laguna Niguel, at Dana Point, Calif. You can register here.
We hope to see you there.
