Depending On Your Market, Next 6 Months May Go Up Or Down

In forward-pitched residential real estate investments and commitments, you can be right, or right for a time, or right for being in the right place at the right time.

And – almost everybody has experienced – you can be wrong for all those reasons as well.

The back half of 2023 and beyond will likely feature some of each, at least a transitory departure from housing cycles where "a rising tide lifts all ships," and a "receding tide reveals who's got a bathing suit on."

We recently participated in a call that included a few senior level executives from major regional privately-held homebuilding operators. A couple of them made note of a distinct fall-off in traffic and interest in June following five straight months of gangbusters demand leading into that month.

We're still converting a large percentage of the traffic and leads," one of our strategic executive colleagues mentioned. "It's just that the volume of people coming into our funnel fell off a cliff. So, we're still selling, but the stream of demand has lost some strength, and we're not sure whether it's seasonal, or the start of a repeat of the kind of serious deterioration we went through around this time last year."

Other strategic level participants in the call voiced a similar dynamic in June sales and traffic activity. But the same call included a couple of company principals and senior leaders with almost diametrically opposite worries.

We held back on land spend in the second half of 2022, to conserve cash and reduce land financial risk with the expectations this year would be an uphill battle all the way," said one. "Now we're trying to put some of that cash into some of the same kind of positions we'd have walked away from, but the prices are a little rich for us now."

This contrast shows up in conclusions from this month's Private Builder Survey from Wolfe Research's homebuilder and building products team headed up by Truman Patterson. He writes:

"Based on current conditions (foot traffic, etc), do you anticipate 3rd Quarter Order trends to outperform/match/ underperform monthly seasonal trends?

The majority of respondents expect 3rd quarter Order trends to match normal seasonality with nearly an equal number of Private Builders expecting 3Q to outperform normal seasonality versus underperform. Most Builders appear to be experiencing the typically June slowing in traffic while some have concerns about the potential impact of higher rates. Net, ~65% of our contacts believe 3Q will be in-line with normal seasonality."

Within both the macro global economy, the domestic national economy, regional economies, local and submarket economies dynamics, tailwinds, and headwinds are all in play and in flux.

A professional friend who works at a strategic level with investors, developers, and homebuilding operators expresses the trickiness and nuance of the new-home for-sale and for-rent marketplace like this:

Still seems too 'easy' an adjustment, but facts say, at least so far, transitioning to normal. Obviously economy is the wild card. Watching in-migration by market very closely. Along with lack of inventory in the resale market,  the key has been in-migration has not slowed in many markets (Charlotte, Tampa, ATL TX, etc).

That's the canary in the coal mine."

The back-half housing market has its slew of big potential shocks to digest:

• Banks – the biggest of which are about to report Q2 earnings – need to navigate a treacherous "net interest margin" gut-check to understand how stable they'll continue to be in a sustained high-interest rate period.
• The resumption of student loan repayments will impact millions of young-adult households at a time a cost-of-living crisis, high interest rates, and high home prices already exert pressure on wherewithal
• While many have been doing backflips about consumer and business inflation rate trends over the past two days, some of the heavy-lifting remains, and base-effects could signal backsliding, triggering a more aggressive Fed response in the September timeframe, another potential mortgage rate headwind.

As these stresses work their way into, through, and out of what has been an astonishingly resilient economy, keep a weather eye on that "canary in the coal mine," and get accustomed to hearing about all the positives or a raft of negatives depending on where and when the builder who's speaking is describing conditions.