By Oren Jacobson, Market Analyst - New Home Star //
If you’ve been reading my editorials in the Star Report this year, you’ve probably noticed that I’ve spent a great deal of time writing about macroeconomic factors. Moreover, you’ve probably noticed that I’ve highlighted a series of concerns about the structure of the market. Most recently, I wrote a piece about the evolving affordability puzzle and noted that affordability is shrinking. I’ve also highlighted supply side issues that are pushing prices beyond their real value and the fact that there isn't really any incentive structure in the market to correct them besides a slowdown.
You may have been reading these posts throughout the year and found the concerns I’ve been raising to be out of line with your experience of the market. Certainly your market might be different, and I’m focusing on the macro factors only. However, the issues I’ve been highlighting are now being discussed in much more mainstream, prominent, and trusted business journals including CNBC, the Wall Street Journal, and Bloomberg, who published a piece on July 26th titled “The U.S. Housing Market Looks Headed For Its Worst Slowdown In Years.”
You may be wondering what is underpinning this concern beyond the aforementioned issues? Household debt is now at an all-time high, as well as credit card debt and student loan debt. Savings rates have fallen and mortgage delinquencies are starting to rise. Add to that condition the potential for real wages (incomes vs. cost of goods sold) to fall in spite of economic growth, which many macroeconomists predict is the likely result of a stimulus (tax cuts) at a time of full employment plus tariffs. This combination creates inflationary pressure that has the potential to push consumer goods pricing higher at a faster pace than wages, meaning the average consumer has less buying power. That concern, plus needing to create policy room to offset future recessions, drives the FED toward rate increases as the economy heats up to combat this inflation.
These factors combined provide the right recipe for an overall economic slowdown, with housing being on the leading edge of it, or at least providing a predictive indicator. This shouldn’t be surprising, though. We’ve been in a decade long growth cycle. To be clear, this is just a series of predictions based on traditional models and expected reactions to given factors. And, people like me (and the experts included in the various articles linked above) could be wrong. Economics is a social science, not a hard science, which means that we can never fully predict how people will react. In fact, this may be just a blip on the radar and not a slowdown at all, though the signs are starting to add up.
That being said, the point of this article isn’t to lay out an argument for what is happening, could happen, or may have started to happen. It is to make sure you are awake and thinking through the economic realities of the moment and the roadblocks in front of you. In the last recession the reaction of most builders was to dramatically reduce the cost side of their business. That meant layoffs, renegotiating land and material contracts, and other expense side tactics. What far too few builders did, though, was attack the revenue side of the equation. Today, there isn’t a reason to think that the next slowdown will be as painful as the last major slowdown. Supply levels and ownership rates are much lower and mortgages are much more regulated. However, builders will face the same set of challenges whether or not a slowdown happens now, or in many months down the road.
The temptation will be to focus on expenses: to cut costs, reduce unnecessary overheads, and renegotiate contracts. What will be missed will be the revenue side of the business. Specifically, how will your sales and marketing teams continue to maximize your results? Is your team ready for a highly competitive environment where they will have to negotiate much more to gain deals? How effectively is your market segmented? How well tailored to your consumers is your messaging and promotion strategy, not to mention the alignment of your product with your consumer which is also a revenue side question? If you’re not 100% confident in how you would answer those questions now, this is the time to invest in the revenue side of the equation. Prepare your business and your team to be able to take advantage of the next down turn, or your competition will.
If you’re selling 200 homes (or more) a year having a team of great negotiators could be the difference between making a loss, a break even year, and a seven figure profit. Having your market well segmented could be the difference between painful product adjustments mid-slowdown and continuing to move at an acceptable pace. Having strong, clear, concise messages delivered to the right consumer in the right way could be the difference between steady lead generation and conversion, or a major regression. None of these areas have anything to do with your cost structure, per se, but without these revenue side considerations, all your cost side efforts will be far less effective, and will do absolutely nothing to attract more consumers.
