The New-Home Absolute Inventory Endgame–Steal Share or Perish
You should be concerned about two groups of people who may not buy your new homes today.
One of those groups, you may be able to do something about before the end of the year; the other, probably not.
One group is the afraid. They fear that evil in the U.S. economy lurks in nearby waters, and could strike a lethal blow to household income prospects at any moment with no warning. Private companies have no conviction about whether to conserve cash or invest it in 2011 growth. Public agencies and local governments are taking a chain saw to their budgets, pink-slipping scores of workers each day. If a household eluded the mass layoffs of 2008, its earners can hardly take comfort from the pulse of the U.S. economy’s current recovery. Plus, more likely than not, people have immediate friends, family, and colleagues who number among the unemployed, the unemployable, or the growing ranks of those who don’t even hope to work.
GDP’s faintest flicker of recovery didn’t do much of anything to assuage that fear. So, one of your buyer groups–count them among those you can regard as “pent-up demand” for some future economic cycle–is, after all, not going to respond to the appeal of owning a new home in today’s (i.e. the balance of 2010, through 2011, and into 2012) housing enviroment.
Which leaves the other group who may not buy your new homes this year. Opportunists. They could buy, and they don’t suffer the paroxysm of fear that the other group does, but they still may not pull the trigger on a purchase. Why?
Prices. They’re waiting. Waiting now proves to be the smart thing because if they wait, prices go down, and then they can wait some more, so that prices can go down some more.
Opportunists are your best hope for the moment on the margin. They’re motivated, but just as the Uncle Sam home buyer tax credit pulled buyers forward to meet the cutoff deadlines, the probability that prices will succumb to downward pressure for an undetermined time in the future is pulling buyers backward from today’s market.
Overcorrections hurt.
Still, when we talked with home building company executives in December 2009 and January 2010, we got a clear sense from most of them that this week’s existing homes and new-homes sales data was a distinct possibility they were trying to gird themselves for. So, we don’t think many in the ranks of home building company managements are surprised by the headlines.
New-home sales for July, on a not seasonally adjusted basis, came in at 25,000. An industry community whose capacity in July 2005 was 117,000 not-seasonally-adjusted sales is wondering just what to do with itself, having lost almost 80% of its business.
In 2005, the top 25 home builders probably sold 25,000 homes in a single month, and now, thousands of companies are trying to remain viable while half of the demand pool is in duck-and-cover mode and the other half is playing hide-and-seek as prices erode. Absolute inventory is low–at 210,000 or so–and a good sales month or two will change that number from bloated to undernourished. Scarcity is a Spring Selling Season away from right now.
What to do?
Well, even the reactive Wall Street analysts are reporting that their in-the-trenches home builder sources are telling them that there’s a widening spread between government-released national data and what’s happening at the store level.
Hanley Wood’s own Hanley Wood Market Intelligence–which this week unveiled its new Housing IntelligencePro market analytics tool–notes that public home builders, through the first half, anyway, notched impressive year-over-year gains, and are continuing to report that same-store sales (sales per month per community) are holding somewhat steady after a downward gyration in May.
What we see ahead for enterprise home builders–perhaps woefully–is a two-year share war. Advantage goes to whomever can 1) take dead-aim on the likes of the 25,000 intrepid souls who remained in the market as buyers in July, 2) win over a share of probably an equal number of the Opportunists who are apt to await the best deal in kingdom come.
Those who can bring the Opportunitists back in–even against a heavy tide of foreclosure and distressed sales–will be guaranteed a seat at the table when the cards get dealt this time next year.
A tactic that may be worth trying is this. Don’t give in on pricing. Focus your best sales associates and your biggest marketing push on communities that have kept up a pulse and push them for all their worth without conceding pricing. On the other communities, do what the rest of the world is doing–extend and pretend. Don’t capitulate.
Let buyers–especially the Opportunists–know the bottom is in. If it’s not going to get better than it is now, then there’s no reason to wait.
If the bond market’s in a bubble and the equity markets continue to underdeliver, homes’ value may start looking like a good healthy place for dollars.
Just a thought.
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