Home builders’ foot race with toughening supply-related conditions is on. But not without a helping gust of tailwinds that could add both demand velocity, intensity, and peril to the contest.
Already contending with stubbornly high costs on their land basis, and volatility that translates into greater expense and scheduling challenges on labor inputs, more recently pronounced producer price pressure–and forward-looking threat of an inflationary rout on building materials–is the last thing builders want right now.
They’ve hacked away and value-engineered products and ratcheted down square footages, hammered away at vendor unit pricing, and pushed their sub-market land positions into C and D lot territory–farther away from job centers, and at a greater level of exposure to any sudden demand fall-off–finally re-engaging the operational systems and models that enable them to build at higher volume and velocity, lower unit costs, and scale-ability.
All these efforts designed to fully re-ignite the entry-level market–where cost inputs need to be predictable, stable, optimized for volume and scale, and rigorously managed for there to be any hope of profitability, since margins are thin to begin with.
What’s more, this massive mobilization among production builders aiming at lower selling-price tiers of the home buyer market hasn’t happened overnight. Rather, with relatively few exceptions, it’s taken two to three years to access lots, acquisition, development, and construction financing, local approvals, a management team, a subcontractor network, and put operational processes and new, tech-enabled marketing and sales systems in place to execute profitably.
It all looked so simple, as demand for sub-$300,000s homes seemed to be a limitless, open spigot, rents skyrocketed, reasonably-priced resale inventory kept shrinking to oblivion, and mortgage rates remained dirt cheap.
What’s more, demographic forces–coming of age Millennials and aging Baby Boom generation adults–combined with better economic times, improved household balance sheets, reduced college debt, and signs of a return to agency on the wage and income front all spoke of a sustainable wave of demand whose height and power were only limited by constraints to new supply.
Then came the massive tax law reshuffle–which gives here and takes away there and whose ultimate impact on both real available household means and the behavioral economic psyche of consumers is, as of now, an unknown.
Add to that mortgage rate risk, tariff risk, turmoil risk, headline risk–not to mention wage-inflation risk–and fear of risk risk, and you’ve got a market heavyweight boxing prize fight odds-makers love most–a closely contested battle that could go either way.
Now, policymakers seem to want to do their part to make the engagement between helping and harming forces even more combustible. Yesterday, the Senate voted to pass new laws that would roll-back 2010 Dodd-Frank Act rules and regulations constraining banks in the wake of the financial meltdown in the latter part of the prior decade.
Although, the Senate bill faces debate, revision, and possible derailment in the House, the underlying message is that Congress wants to de-regulate business and finance, including mortgage lending, in ways that cause worry among those who believe housing could wind up back where it was in 2005 and 2006.
The bill will also give the Fed some discretion to keep a closer eye on banks in the $100 billion to $250 billion range, depending on their perceived risk levels.
Another provision—a flashpoint in the debate over the bill—would exclude banks that originate fewer than 500 mortgages annually from having to report certain racial and income data on their mortgages, unless they perform poorly on tests of lending discrimination.
Critics charge the provision could make it tougher to police racial discrimination in lending, though supporters deny the charge. They point to a Fed Bank of Kansas City analysis that found only about 3.5% of total reportable data will be lost, while roughly 75% of banks will receive relief under the provision.
Remember in the middle part of last decade? Buyers were desperate to buy. Builders were desperate to build. Lenders were desperate to lend. It all seemed wonderful; and then it wasn’t.
