After a decade of unprecedented growth, all signs are pointing to a significant slowdown in the residential housing market sometime in the next 12 months.
According to an article published by the online real estate powerhouse Zillow on July 25, “The longest uninterrupted economic expansion in U.S. history will probably end with a recession in 2020, according to a panel of more than 100 experts. ...The Q2 2019 Zillow Home Price Expectations survey, sponsored by Zillow and conducted quarterly by Pulsenomics, asked more than 100 real estate experts, economists and strategists for their views on the timing of the next recession and the evolution of home buying demand this year and next. Among those with an opinion, exactly half (50%) said they expected the next recession to begin at some point in 2020, with another 35% saying they expected the current expansion to end in 2021.”
Given a relatively robust economy, historically low unemployment, and a high demand for new homes, the foreboding predictions coming from sources such as these may seem counterintuitive. But there are several other factors in play that are tipping the scales in favor of economic slowdown in the minds of most experts.
“Trade policy, a stock market correction and a geopolitical crisis were cited as the most likely triggers for the next economic reversal,” the Zillow article explains.
And while some point to lower interest rates as a salve that will help prevent the next recession, a recent article in the National Association of Home Builders blog Eye on Housing cautions against that view.
“...Despite the [recent] approximate 100 basis point decline in the US 10-year [Treasury bond yield], which should reduce the average 30-year fixed-rate mortgage to around 3.5%, housing activity has not responded as robustly as history would suggest,” author Robert Dietz explains. “In part, this lack of response is due to the surprise associated with this decline, so markets will need time to adjust. For example, these rates are below NAHB’s forecast from the start of 2019. The lack of a home sales response is also due to the fact that rates are lower for the wrong reasons. These declines, while a positive for the cost of buying a home, are occurring due to the uncertainty produced by trade and growth concerns.”
“More fundamentally,” Dietz continues, “lower rates by themselves are not sufficient to generate a significant increase in home construction today because housing affordability is a function of rates, prices/costs, and incomes. And due to the significant supply-side headwinds of the last few years (worker shortages, materials and regulatory burdens, chief among what I’ve called the “5 Ls” – labor, lots, laws, lending and lumber), construction costs have outpaced income growth, leaving housing affordability at the start of 2019 near a 10-year low.”
“The increased cost of raw land, entitlement, development, labor, material, and overhead, combined with the nationwide trade shortage, drive the biggest concern of all: housing affordability. Simply put, according to most market analysts, we are overpriced at every level—not an easy problem to solve. Can we reduce sales prices when margins are already compromised?”
So there you have it—all signs point towards a market slowdown, probably sooner rather than later. But let’s face it, as experienced builders, we’ve all had a lot of experience riding this roller coaster, and just as we’ve enjoyed the exhilarating climbs to the market peaks like the one we’ve seen over the last 10 years, by making the right preparations, we’ve survived the perilous drops as well. So what can you start doing now to get ready for the inevitable market decline? According to Sedam, it’s time to buckle down and find ways to simplify your business so you can work smarter, not harder. It also means taking steps to cut costs so you can maximize profits. While that can seem like a massive undertaking, CBUSA’s dedication to our network of builders and suppliers will continue to keep supply costs lower than for non-members. With our collective dedication to Strength in Numbers, we have a wealth of tools at your disposal to help you make it happen.
Our Committed Purchase and Vendor Rebate programs give CBUSA Member Builders the collective buying power of a large national builder, helping ensure that they get the best prices on materials even in a time when costs remain volatile. And our Takeoff Service empowers Member Builders to order just the right amount of lumber, roofing, drywall and more at the best prices for each project. While programs such as these help our members save time and maximize profits on every home they build, the spirit of camaraderie and collaboration within our Local Builder Networks offers invaluable opportunities to share leads, references, ideas and best practices that will help us get through the lean times together.
There may be a storm ahead, but CBUSA members can rest assured that our unique combination of group buying power, cutting-edge tools to help improve efficiency, strong relationships with top national and local vendors, and the collective experience that comes with being a group made up of premiere independent home builders across the country will help us weather it together.
Interested in learning more about the benefits of a CBUSA membership can help your company thrive in every market condition? Contact us today! And to keep up with all our day-to-day happenings, be sure to join our group on LinkedIn.