A red-eye from Las Vegas last night flew a pretty darned near direct path over Punxsutawney, PA, as dawn broke over an orangey-pink eastward horizon.

Shadow? No shadow? 30 days? 42 days? Punxsutawney Phil – a Harvard Business Review-caliber case study in aggravatingly mixed-signal guidance – gives air cover to all of us who remain ambivalent about what's ahead in the market-rate single- and multifamily ground-up real estate, development, and construction landscape.

His day celebrates "turning a corner." It is the muted persistence of the question of "toward where" that keeps gnawing away at a sense of clarity or full confidence about what we're in for.

Even after a three-day immersion in the everything-everywhere-all-at-once-ness of the International Builders Show and Design & Construction, using every possible minute, and every square foot of the event's two-mile footprint to listen and learn

With all the predictive, unequivocally reliable consensus around what it means when Punxsutawney Phil sees – or doesn't – his shadow at dawn, Fed chairman Jay Powell's caution yesterday that it "would be very premature to declare victory" spurred many investors to do just that – backflips.

Whether feel-better surge that started with shootlets in December and continued into feisty harbingers of Spring throughout the month of January holds up or not is for some to say they know and others to say they wonder about.

An amalgam of hope, belief, behavioral data, and some spit and vinegar characteristic of homebuilders everywhere supports an uber spidey sense that the worst the economy's and housing market's remaining shocks and stresses will amount to will dial the business back to, say 2018, or so.

Such a fate, while it would be a big come-down from the roaring 2020s builders and their partners have experienced since just after Covid's initial spasm, would be more than tolerable as a market floor from which to reset.

That's the high-level, between the lines take-away we picked up again and again in our conversations on the show floor and the corridors of this week's IBS event in Las Vegas.

2018 was a good year for homebuilders," a senior strategist who does business with many private and public homebuilding firms told us on Wednesday. "It's nothing like mid-to-late 2021, certainly, but they'll take it. For some, the descent will be tougher than for others, depending on their submarkets and their leverage. Patient capital right now rules."

So too, does getting a lot of things right. If you back out a hamster-wheel of preoccupation with "things we don't control," and train focus on only those matters in a domain one does hold sway over, the laundry list would have to be set to an extra large load.

Net, net, if a homebuilder expects to be deft enough to navigate the '23 selling season to a relative best-case financial and operational performance level circa 2018, almost flawless piloting is not optional.

The good news is, get every single one of these fifteen non-negotiable priorities right on the nail and that relative success measure of 2018 performance is gettable. Those who don't or can't execute, implement, and practice on all 15 of these spinning plates may see 2018-level performance as a fleeting pipedream.

• close backlog sales, reduce cancellations
• micro-manage – at submarket/neighborhood level -- incentives/mark-to-market pricing to spur orders
• fund ASP cuts from "the bank of Gross Margins," ... temporarily
• cut Sales, General, and Administrative expenses, including people
• pressure trades and suppliers to lower new contract charges, ... or else
• redesign/value engineer product to bend ASPs to re-price-in entry-level buyers
• improve operations with data and people-focus, i.e. because you can
• improve construction cycles with on- and offsite building technologies
• keep banks and investors on board, i.e. pay them what you owe them, ... or else
• tilt towards quick-move-in "spec" inventory, despite risks, i.e. because people want to close sooner after they put their deposit down than not these days
• improve "best-place-to-work" standing on all job sites and workplaces
• portfolio-manage owned and optioned land to align with '23, '24, '25 demand
• better understand customers' journey, beyond lifestage, demographics
• care more for customers than you believe you have to, i.e. because you can
• then, stop tossing and turning all night and get some sleep

A potential red-flag – which will flash until we how buying behavior tracks through February into March, April, and May – is recurrent theme, at least among public homebuilders in their quarterly earnings reporting commentary and among some of the privately held company principals we spoke with at IBS this week is emphasis on a pivot to starting more specs to align better with what buyers prefer these days, given heightened volatility.

We're going to tap into yesterday's M/I Homes earnings call for strategic and tactical color that ties to many of these 15 issues, in large part because we've found reason to expect more candor from the M/I strategic team than we pick up from some of the peer company team.

We're confining our quotes to those Bob Schottenstein, chairman, president, and CEO, and Phil Creek, executive VP and CFO, gave during yesterday's earnings call presentation and Q&A responses.

The Six Week Pivot: Bottom Or Not?

Bob Schottenstein, chairman, president, and CEO

We saw our sales and demand begin to improve during the latter part of the fourth quarter despite the higher rate environment.

Moreover, and importantly, the improvement and strength in buyer demand, traffic and sales has continued into 2023. Specifically, with noticeably stronger levels of traffic both in our models and online, we sold 633 homes in January. This is our best sales month since April of last year. And though down 18% from a year ago, this represents an approximate 60% sequential improvement over the average monthly sales we recorded during the last half of 2022.

Clearly, we are encouraged by this recent material improvement in our traffic and sales and similar commentary from select other builders adds to this encouragement. While there remains much uncertainty in the market and no one really knows whether this recent strengthening and improvement in demand and sales will continue, we do believe it underscores and confirms the underlying homebuyer demographics and desire for a new home.

2023 Demand Signals

Bob Schottenstein, chairman, president, and CEO

There could be some group of buyers that are beginning to settle in with rates now hovering in that low to mid 6s. Having said that, we have aggressively tried to generate traffic by selectively promoting bought-down interest rates not in every community or in every market but in enough divisions that we can headline advertise it on our Website. That has helped draw traffic and gotten people into the models. We do expect our margins to come down this year. We've historically said that this is a 21%, 22% business. And, of course, we were running at 25% or 26% across the board for quite some time. This is strictly intuition. It feels like things might be leveling off somewhat.

Every market is different. There appears to be more strength in certain of the Texas and Florida and Carolina markets than perhaps in some of the others. But as I said in my comments, even though four weeks does not a season make, it is a strong start to the year. We had averaged during the last six months of last year, you can do the math, about 390 sales a month from July through December. And we sold 633 in January. And some of our Midwestern markets posted very strong sales. And we saw a noticeable uptick in traffic, both Web site and foot traffic, beginning during the latter part, really the second or so week of December through the rest of the month, and then it's picked up even more so in January, and seems to be leveling off now at a level that produced 633 sales. It was down 18% from January of a year ago, but that was a runaway month in many respects where we were limiting sales in virtually every one of our communities. You all remember those days. And now across our near 200 or so communities, I am happy to report that we're limiting sales in a couple of spots, but 90% plus of our communities, there's no limitation of any type. But it could be a little bit of a leveling off. But it's too soon to really know for sure. There's so much uncertainty.

Price Tactics

Bob Schottenstein, chairman, president, and CEO

It's a lot more art than science. Look, we try to get two to three on average. First of all, it's a subdivision business. Some communities you want more pace than two to three. But whatever the desired pace is based upon the underwriting, we try to find that price point where we think we can hit that pace. And we come into this year maybe a little bit more aggressive with our pricing to try to see if we can hit that."

Phil Creek, executive VP and CFO

We opened 100 new stores last year, with about half of those opening in the second half when things started getting difficult. So not having to deal with any kind of big backlog and so forth, and we did focus on what's the right product? What's the right specification level? Let's get to the best price point we can to be competitive and get decent pace and margin."

Spec Check

Bob Schottenstein, chairman, president, and CEO

We're not an all spec builder and we're not an all to be built builder. We never have been. We've always tried to have a mix. As the demand ramped up at such a torrid pace through the better part through all of 2021 frankly and the first parts of '22, we increased our spec levels in every community to try to help us better manage deliveries and all of the subcontractor trade, pricing issues and so forth. On a go-forward basis, I think that percentage could move a little bit. My guess is that throughout the year, we'll be a little bit higher than 50% on the spec side and a little bit below 50% on the to be built side. There may be some intra-quarter volatility there. Where we were successful in buying up bought-down rates, the value of those bought-down rates was not only in drawing traffic, but those rates were only available with relatively quick closing. In other words, only on specs, we couldn't hold those rates for six or seven or eight months. So most of those bought- down rates had to close within 30, 60, maybe 90 days. So those were particularly suitable for specs.

Phil Creek, executive VP and CFO

The last couple of years, we were kind of running specs in the five, six per community with maybe one or two finished. And it happened for different reasons. With all the supply chain issues, it kind of got to the point where you kind of had to get the house in the field by March or April to get it closed. Now we have seen a slight improvement in cycle time. And we're thinking we should get further improvement this year, which should help us, but it still takes a fair amount of time to get houses finished. Also, we're doing a few more attached townhouse communities. And by its nature, you get a few more specs there. And in general, the Smart Series, our most affordable offerings, we put a few more specs on the ground. But interestingly, if you look at the last couple of quarters, margins really have not been very different at closing between specs and to be built. So we do want a good mix of business. And some customers do want to go through the selection process and go to our design center and personalize the home. Some people want to do that. So we tried to have diversity in our price points. Our product offering, we think that really helps us. But having a few more specs right now, I think that's really beneficial. We're managing it very closely. But like Bob said, I think you'll see us continue to have seven, eight, nine specs per community as long as that's working."

Build-Cycle Improvement

Bob Schottenstein, chairman, president, and CEO

We expect to see cycle time improvement in almost all of our markets in 2023 versus 2022. We have started to see a little bit of that during the last part of 2022. It's different in every market, because frankly some need to improve more than others. But my guess is that we'll see anywhere from one week to four weeks in all of our markets this year. And if the average is two or three, that's -- we're going to try to get more. We're trying to get back to the pre-pandemic levels. And there's a lot of landmines, some are on the land -- on the municipal side, some are on the supply chain side, although a lot of that's really gotten -- it's not completely behind us, but a lot of it is.

Sticky Land Prices – Strategy

Bob Schottenstein, chairman, president, and CEO

When things get tough, a lot gets revealed, as they say in life. And one thing that gets particularly revealed in our business is whether or not A locations are really A locations. Because when things get difficult, you really find out what your A locations are, because they still perform at a pretty darn good level. All those other deals that you thought were As or A minuses are probably Cs. So what you've seen, and you've seen this with us and I suspect from others, most of the stuff that people are walking away from are deals that really don't pencil well, or at least it's perceived will not pencil well under current conditions. I think you may see a little relief on those, because no one's going to buy it. And there's an anecdotal -- there's a small example here or there of some moderation or more terms. You don't have to close in -- you don't have to take it down over three years. You can take it down over five years. And there's no escalator. That to me is a relaxation of terms. So we're starting to see a few examples of that. But for the sites that we believe and our competitors believe raise, I think there'll be very competitive. But for the stuff that's the more normally B kind of locations, I think that there may be some advantages there. But we'll just have to see how that plays out. We have a great land position. We don't need to buy a whole lot. We're very well positioned this year, next and the following year. The vintage of almost everything we have on our books is a good vintage. By that I mean I like when we bought it. But we'll watch and wait. And we've always been able to get a -- to generate a good return paying retail, as they say. And so we don't have to go out and buy a whole lot now. But we're looking at things and if there's bargains out there, we're going to jump all over them. Our financial condition is the strongest it's ever been. Our debt levels, we have zero borrowings on our bank line. And we're sitting on a lot of cash."

Entry Level Focus – Affordability Mix Shift

Bob Schottenstein, chairman, president, and CEO

A year ago, I think we were in the low 40s [share of M/I's product mix]. The most recent quarter, I think our Smart Series was in the low 50s. So it jumped up quite a bit. During these difficult times, we disproportionately sold even more than we thought Smart Series homes. My guess is for this year, it will settle in at that 50% to 55%. And we're very comfortable with it being there. We've put out some new Smart Series plans. We've got some new community openings this year that will be -- that are fresh off the shelf that we're really excited to get open during the first few months of the year in a number of our markets. We've got some narrower lots Smart Series stuff coming on in select markets. So yes, it's a big part of our strategy on a go-forward basis. It's not the only thing we do. But it's something that we think we've -- even though we were a little -- we wish we had started it earlier, we launched it in 2016 and it's been a huge plus for the company."