Source: Leonard Kiefer, Freddie Mac

The canaries in the coal mine are singing.

The question keeps coming up, in a limbo of unknowing and doubt – when the tug, and traffic, and pace of order volumes continues to exceed the number of new homes builders can bring to the market – exactly what action is there to take?

The first “action” may be an acknowledgement that for each of the structural, positive, forward-driving components that make-up homebuyer demand, there are now – in motion, and changing at a sharp, volatile, concerning rate – elements of drag on that demand, be it inflation eroding household wherewithal, interest rates swinging monthly payments from the $1800s a month to closer to $2400s, etc.

That acknowledgment would be a shift from the widely held assumption that demographics destiny “has homebuilding and residential development’s back.” If that assumption were were to prove unfounded, what would that mean?

It would mean two forms of operational discipline that some builders have shown skill at in the past, but not very many of them. As one of our strategic-level homebuilding executive friends says:

Builders have a hard time intentionally shrinking investment when the market is hot.

  1. In land committee each week, anchor IRR models not only to Zero appreciation rates, but to a series of absorption pace scenarios – 10%, 20%, up to 60% slower than the past six-months to two-years average sales per community, per month.
  2. The other pivot – obvious and common sense to some, but missed by too many players – is from the order-taking to a full-on omnichannel engagement and sales array of skills. An “if we can build it, they will come” mentality has cloaked the new-home landscape, not only at the outset of 2020, but like a rocket once the pandemic momentum kicked into high gear. An action point right now is to gear up for highly targeted, value-driven, white-glove level customer focus, nurturing, and high-touch support to secure and deliver sales through a time many will be second-guessing large financial outlays of any kind.

After such a sustained period of time on an upward arc – a good number of your business’ early-to-mid 30s team members never yet experienced a serious, extended disruption to housing’s boom cycle – the natural tendency is to believe that trajectory is the norm.

That’s when it’s helpful to remember that a canary in the coal mine doesn’t sign out when carbon monoxide is in the air. It goes silent.

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