Our still-young nation’s residential real estate and construction cyclical boom-and-bust business could go toe-to-toe with the

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Even though we can expect significant further declines in new home sales and single-family housing starts, the good news for the homebuilders is activity usually picks up quickly following an interest rate induced slowdown (as opposed to following the housing bust when the recovery took many years).”

Now, those are readings from which homebuilder operators – particularly privately held and capitalized firms – have been drawing a sense of hopefulness from the real-world stress and the models of data that aim at understanding where it’s all going.

Another informed and experienced insight believes that although Barry Habib’s macro view of the economy and rates may have merit, builders – rather than start to believe that they see “light at the end of the tunnel” – had better prepare to reckon with the possibility that that light is a freight train heading their way. Our strategic source of market intelligence looks at the stretch ahead as far more sustained and disruptive.

We’ll quote this executive extensively, and let our audience decide which outlook better helps to set a course through the next two to four calendar quarters of defensive strategies.

Just like builders have a tendency to not understand that a long-run undersupply does not mean there cannot be short-run oversupply at a price point, they here are misunderstanding their short-run problem vs long-term issues. Their short-run problem is not the resale market. It’s potential buyers having payment shock, needing time to adjust their expectations, and the behaviour of their fellow builders. I believe it’s likely if the builders were one giant cartel, stopped building specs and only started pre-sales, we’d have a rough fourth quarter and first quarter, and then go forward at some lower prices and lower volumes, but neither would be tragic.  

But we don’t have a cartel and Horton, Lennar, Pulte, et al will not tolerate a 50% starts reduction for nine months. They are going to keep discounting and they are going to keep starting homes. And so prices will fall, how much remains to be seen, but more than many admit. Which is not helpful to buyer psychology. Also, as builders re-tool product to take out costs, reduce spec levels, etc., all of this will help affordability but will be reported as a further drop in new home price, even if it is not apples to apples.

The optimists also are inherently betting on a very shallow and fast recession, or they think like in the pandemic, white collar workers (our buyers) will be immune. I don’t think so. I think as margins fall, after initial reluctance of businesses to cut, they’ll have to think about/act.  Not saying devastating, but I don’t think there will be a pass on the professional class this time.

So if your view is you can wait out the next six months, I doubt it. As a private, banks won’t tolerate just sitting on your hands. They want to see activity and paydowns. And it’s not going to be just six months. In the grand scheme of things, I don’t think this is a long one, but 18-24 months, while not terribly long, is enough to get people in a lot of trouble. Especially if they do not act.”

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