18 jun
ok meow, i have to make some comments about the current situation with new home construction thru the eyes of an ex-construction manager with 20 year's experience (retired at new years 2021). these views are from what ive observed as a construction guy and may or may not jive with a sales guy or a non homebuilding guy that makes charts and trendlines for a living that keeps telling me for the last 20 years that there has been a shortage of new homes.
the two big issues right now as i see it are interest rates and the price of a home .. a new build.... this is a typical size home i built from our competition.
$600k now, was low $400s last year ... $600k gets you alot of house in texas. First off, interest rates, you see the twitter comments or CNBC hits about 7%+ interest rates .. ok , maybe.. .but if youve bought a house before or flip side if you've been in the business, you know rates are flexible and may be negotiable. likely a better deal is available if you use the in house lender from the homebuilder. each builder has either a partnership with a lender or its actually part of the homebuilder umbrella of services. Lennar for instance has a developer portion, have their own lender, their own title company. KB home is similar. so there is an inherent efficiency for the customer by staying in house.. some customers, maybe based on a realtors recommendation, will say no im using my own lender, Bank of America or whatever.. ok your choice, but in hindsight you are at a disadvantage using an outside lender. with in house lender, EVERYONE is working together to get you closed, lender talks to my sales lady, who talks to me, etc. everyone knows each other. heres the point.. i just pulled this off a builder website that i will cut and paste:
Up to $12k in closing costs & 4.750% (4.963% APR) interest rate* for quick move in homes.
thats today 18 june.. but.. but.. cnbc said 7%... unless you walk in with a briefcase of cash, it will best case still take about 2-3 weeks to get you to closing. approvals, appraisals, paperwork, etc.. all that behind the scenes stuff i dont see but hear about in conversation from my sales ladies.
so this builder that advertised this buy down incentive has some homes that are not sold, either finished, or about to be finished likely by end of July.. getting to be too late for June.. and the carrot for the customer is they will get $12K off of closing costs (thats about 3%) and 4.75% interest IF THEY USE THE IN HOUSE LENDER.. want Bank of America.. you get full price and whatever interest rate BOA has.. But builders can also say NO OUTSIDE LENDERS... at all.. that happened last year. by far the most pain in the ass (unprepared) customers are via outside lenders. Via in house there is a somewhat pre approval process.
so no outside lenders somewhat culls out the less qualified customers that might not get the home anyway during that time when it could have been sold to a legit customer. Customer is at the mercy of whats available of course during the time frame, but its an example of how the headlines online and CNBC are not necessarily accurate. but if you walk in a sales office and want to buy that cul-de-sac lot that has not started yet, i will bet you a Coke Zero you will be paying full price.. plus a juicy lot premium and will have to wait a year till i can get it finished and then pay the prevailing interest rate a year from now.. no quick move in discount for you.
secondly with rising interest rates, there starts to be a fear of missing out feeling start to build up. if you really think about it, what drove that huge increase in home prices the last 18months.. material costs go up and down. most of the increase, IMO, was just straight up more buyers than sellers, crazy numbers, maybe covid driven once the silly lockdowns ceased.. customers working from home realize they DO need a bigger house if they are trying to work in the study, but their kids also are home schooling being a pain in the ass in another part of the house, and your wife is home all day too, etc
i did an informal survey of my last 12 months worth of customers when i had my prestart meeting with them simply asking what brings them to wanting a new build right now... had zero investors, 10% relocating from another area/ another state and 90% just wanting a bigger house and or their current house is nearly 20years old now and they have had 4 kids since, ie bigger house needed.
the argument of Blackrock buying up all these homes at least where i was is bullshit.. maybe thats existing homes. dont get me wrong, there are those types of deals out there. whether its Blackrock or Berkshire doing the buying. my builder had a deal going that one just-started subdivision was going right to a Blackrock type company who would immediately rent out.. advantage to the builder.. easier to build since you dont have 168 customers to ass kiss, everything sold up front, no marketing needed, no customer walks, no realtors to deal with, no sketchy loan applications. i would have volunteered for the work but was too far a drive. Back in the day, pre financial crisis, an investor would be sometimes solicited.. need 2-3 more closings to make the fiscal year.. the director of sales would call Mr. Jones, an investor who has purchased 28 already this year, and see if he can take 3 more at 25% discount. but thats the old timey days.
the fear of missing out caused many to start over bidding, over paying and caused more sellers to hit the markets when they saw the demand. IMO the crazy demand pulled in sales just so many could get top dollar on their current house.. but then THEY would need a NEW house.. causing increased demand for new houses. now back to interest rates, the media has flooded the airwaves about rates increasing, the Fed raising rates several more times. now that gets into a situation where those on-the-fence customers either from price/availability/ just looking might get forced into making that purchase. The wise sales team will convey that to them.. waiting another 6 months might mean mortgage rates are at 7%. So rising rates starts to convey a sense of urgency with some customers. of course thats offset by those people who straight up will not be able to afford the current monthly payments. point being that customers are still there, those promotions of 4.75% will still be there. the builders will get their closings while getting decent margins still.
if you are savvy and are aware of when the end of quarter / end of fiscal year is for the builder you might be able to negotiate an even better price.. for example customer A cancels for an August closing, customer B has same plan down the street but his home is 5 months later in the pipeline with a tentative January closing.. sales team talks to customer B to see if he will transfer over. probably a slight discount is offered, can lock in interest rate now vs 6 months at potentially higher.. Customer B knowing that August is end of quarter might be able to negotiate that price down some.. offer 25k lower, play the "my wife really likes the other lot better", "wasnt ready to close next month" "kids are still in other school" type excuses that a $25K discount would solve. worth a try. better than a coin flip the chain of command will accept that deal in order to "make their quarterly number" and not show an unsold finished home... ie, the builders will get their closings
Let me paraphrase a conversation between our division president and our CEO from years back as it was told to me.. the CEO has a reputation for flying off the handle and being a no bullshit abrasive guy. at end of fiscal year all the DP's will meet with CEO.. our division fell 2 closings short of the build plan goal.. DP gave some answers about some cancellations.. blah blah.. CEO essentially says (yells).. "you couldnt get 2 more closings.. 2 fucking closings... you couldnt have discounted 2 homes $100,000 each to get 2 more closings" ... again those were the old timey days when closings were the only thing that mattered, now the metrics are shifting to margins.
18jan2023
going to finish up this rant today since i just saw a cnbc clip with the talking heads tap dancing about housing.. key points that "bottom may be in" , interest rates about to tick under 6% for a 30 year, and limited supply. cnbc and most of twitter has been on the wrong side of homebuilders for 12 months, continuing to cheerlead that housing is crashing and prices are coming down and honestly being pretty happy about their forecasts despite the millions of jobs homebuilding provides. all the while some homebuilder stocks are near 52week highs.. the lack of acknowledgement of being wrong is comical as stats get thrown out there to make the easy headlines.. cancellation rates, housing shortage, prices plunging. so many "bears" i see on twitter post ad nauseum stats and charts and rates but likely have never worked in the business.. worked.. not being an analyst.. worked as in getting up at 4am for a slab pour, filling up truck gas tank every 2 days, and routinely eating lunch at Circle K or sitting with a customer until midnight to get their contract squared away to be able to turn it in to corporate the next day.
for nearly a year ive been consistent in saying the homebuilder stocks are detached from "housing" headlines.. much of which is focused on the existing home market.. one forecast i had (keeping in mind i still have buddies that are construction mangers and sales ladies) is that demand is still strong and will pick up as 2023 passes... after 20years of doing the grind its clear that management doesnt always have the correct forecast for the next 6-9months. they try their best of course. my forecast is that as interest rates normalize and tick lower (note why is the 30 year rate down to near 6% from over 7% but the Fed has raised rates).. point being the rates float around up and down.. currently down off the peak.. that the pent up demand (up top i mentioned my customer survey i did that most needed a bigger house.. MOST of those were already living with someone else.. parents temporarily usually awaiting their house to be complete. so the vast majority of the customers were not contingent on another house selling).. so pent up demand is starting to hit, timed with some decrease in prices, timed with some available buy downs by builders to keep homes moving will cause a surge in sales and cause the builders to ramp up starts over this year.
if been thru that before, was maybe 2015 or so, in early part of year management redid their build plan at direction of nationwide managers and they realized there would not be enough on the ground to make the "new" numbers. so word comes down that starts would increase.. and no bullshit, they tripled.. we called it The Jungle Rush... i argued with my supervisors that my pace is one start a week/ 3-4 a month. seeing how each CM has their own crews (framers, cornice, masons, painters, cleaners, carpenters) and they only work so fast. Giving me 3 starts a week for 8 weeks straight doesnt mean 3 frames start seeing how i have one frame crew. occasionally you can get a 2nd crew or your guy as another crew he subcontracts, but that doesnt work if the whole city is doing that. so starts 2 and 3 get stacked up, then come the following weeks 3 starts. so after a month i have a whole street with poured foundations and only 3 frames complete/in progress and of course management shitting bricks that nothings happening. Oh and it piles more work on the construction managers, causing build time to increase
Point of all this is i think this will happen this year. surge in starts because of heavier demand. will cause lower or no price incentives. will cause higher prices, will cause higher margins (even during the grim 2021-2022 days the builder margins in high 20% range. thats huge)
now having said all that essentially im in the camp that homebuilder STOCKS outperform in 2023
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