As long as the economy stays healthy, there is no reason to fear a downturn
By GLEN RENNER
Each month, HomeSphere, in partnership with investment bank BTIG, takes the temperature of our builder members – nearly 2,500 local homebuilders that each build an average of 100 homes per year. We ask them about sales, traffic, pricing, labor costs, and other key industry metrics, and then compile exclusive and timely insights about the market.
Our mid-year survey (comparing June 2018 sales and traffic to June 2017) indicates that this year’s hot-hot-hot market might be cooling. But with demand outstripping supply, a strong economy and credit still available, we are optimistic that slowing sales are just that – a slowdown, NOT an indicator of a broader downturn in the market.
Our biggest concern is a substantial dip in sales and traffic trends. In June, 23 percent of our builders reported sales below June 2017, compared to an average of only 12.5 percent reporting down sales year over year in surveys January through May 2018. The number of builders seeing a traffic slowdown was up, too – 53 percent reported flat or down traffic in June, compared to just 40 percent in May. The dip also caught our builders off guard. In our June survey, 25 percent of builders said sales were lower relative to expectations, double the average (13 percent) for the previous months.
The whole industry seems to be feeling the same way. The housing market in our hometown of Denver, which has been one of the hottest in the country, dropped 15.6 percent in July from June, and the year-over-year decline is 8.5 percent, according to a monthly report from the Denver Metro Association of Realtors. Nationally, housing demand fell 9.6 percent in June compared with June 2017, the largest decline since April 2016, according to a monthly index from Redfin.
A big problem, according to our partner analyst Carl Reichardt, Jr., is price. Not ONE builder in the HomeSphere builder survey has reported lowering base prices since January 2018. They have good reason. Sixty-six percent of our builders noted that labor costs have increased since last year, and an incredible 86 percent reported increases in building materials in our June survey. Those numbers were even higher in May.
According to HomeSphere Vice President of Sales Kimberly Roos, whose regional sales team meets daily with builders, said, “Every month our builders are reporting additional increases in materials cost, and with lumber, price increases can be as frequent as bi-weekly. Some of our builders are preordering all of a home’s materials and housing them on-site, protected by a security guard, to secure pricing and availability.”
Despite the very valid reasons for home price hikes, consumers might be experiencing “price increase exhaustion,” according to Reichardt, who discussed the slowdown on July 31 at our annual Partner Summit.
“Today’s market conditions are unique,” said Reichardt, “with a relative overage of demand and lack of supply due to rising materials and labor costs, and a general uneasiness among builders caused by the recession. Price has bridged the gap, but that isn’t a sustainable solution.”
So, what does this mean for the remainder of the year? What are the solutions that will keep the market healthy for the remainder of 2018?
If the economy stays healthy, homebuilding may slow, but I don’t believe it will retreat. Credit supply is not overextended as it was during the crash, and those material costs, combined with land shortages, have prevented overbuilding. Millennials, too, are helping, as they are finally settling down and making that big (or “tiny”) home purchase. BTIG is also seeing a strong move-down trend among working-class baby boomers, who are beefing up the market for affordable products, and they are less rate-sensitive than other buyers.
Speaking of affordable housing, that market remains hot – the slowdown is concentrated in the move-up category. Also growing is the active adult category and almost any home in the more affordable “exurbs.” Builders that offer a diverse range of pricing, and that are interested in building in markets that aren’t saturated by the large public builders, will continue to thrive.
Technology will also continue to drive efficiency. We continue our work to digitize the home products inventory, from foundation to finish, inside and out, based on data collected through our rebate and incentive programs. Today, this information helps builders manage costs on manufactured products. In the future we see this central repository as a way to share ideas, trends and customer feedback quickly, benefiting the entire ecosystem. Access to data has affected nearly every business in nearly every industry over the last decade. Homebuilding has been slower to react, but the incredible pressures caused by labor shortages and materials costs can drive a real change for the better.
Glenn Renner is chief executive officer of Home- Sphere, the country’s largest digital marketplace connecting major building product manufacturers and local builders. He can be reached at firstname.lastname@example.org