Forecast Season: Be Sure Your Shock Absorber Is Built To Last

I was a white-knuckled, eyes-squeezed-shut, short-of-breath passenger in a BMW 1800ti my younger brother rebuilt and had speeding before daylight at nobody-else-had-better-be-on-this-road miles-per-hour. Powerful bright-white CBA high beams flooded and flitted across the banks, stone walls, oak trees, and ditches by the roadside's tight turns, like a fast-forward video. He credited the new Koni shocks and new Michelins for keeping us on the road as he accelerated into each sharp, sloped, slippery curve.

Every morning, the harrowing deal was the same. I'd get my free lift to a drop-off spot a mile-and-a-half walk from my college in exchange for my consent to being treated as a 22-year-old human guinea pig in an experiment about centripetal and centrifugal forces at varying high velocities. My 21-year-old brother spent kind of an early version of a "gap" two years working as a line mechanic at a nearby Ferrari dealership. He lived, worked, and reveled in applied physics, mechanics, and engineering. I was wrapping up undergraduate studies at a state university campus a hitch-hike away from home – lucky for me – on roughly the same route he raced to work. I was studying humanities and grew to have doubts about the laws of physics during those death-defying rides.

That year, Peter Frampton's band released their best-selling studio album "I'm In You," and a couple of years in a row of wild success meant two or three of the band members bought Ferraris from none other than the dealership my brother worked at. He'd personally pick up and deliver their cars to them for the 30-minute rush in one of their 308s. But for me, it was 19 minutes or so at 6:30 am, hurdling under a canopy of 200-year-old trees across steeply twisting, heavily rutted, and loose-gravel backroads to the drop-off spot. Blaupunkt speakers, of course, blasted Frampton, or the Mahavishnu Orchestra's "Apocalypse," or Stanley Clarke's "Live," or Pink Floyd's "Dark Side of the Moon."

In 1977, my little brother inhabited his own Niki Lauda-meets-Roger Waters cosmos, living life – as he still does – as though everything starts and ends with a stop-watch, with nerves of steel; played at maximum volume. From the passenger seat back then, it looked like this: Rush. We didn't talk much, but I was relieved to learn about the performance characteristics of the Konis he'd installed.

I'd close my eyes, hold my breath, and when he screeched to a stop and said, "see you later," I practically had to tuck-and-roll to get out of the car. In a blink, I'd see his tail lights.

I've never stopped being thankful for those Koni shocks.

And speaking of best-of-breed shock absorbers, the 2024 housing projections season for new home sales, starts, and pricing has begun. The forecasts will, as is the case every year, undergo numerous revisions and re-forecasts, probably right up to and past this time next year.

Homebuilders of all sizes and capital structures need to get across the span of time between now and a longer-distant horizon of prosperity. For many of them, that span may feel just like that daily ride to the drop-off spot with my brother. You may actually be safe, and somebody may assure you that you are, but it sure doesn't feel a hell of a lot like that's the case at the time.

The "shock absorber" here – compliments of a term Lennar Chairman and Co-CEO Stuart Miller used this past year to describe the firm's leverage of its fiscal 2022 30-plus percent gross margin to secure and sustain a wide berth on asking-price flexibility to discover and maintain relative constancy on its pace of new starts production, completions, and settlements.

A '22 starting point healthier-than-normal margin would – temporarily – fund known and unknown additional costs of sales for an array of incentive tools, each specifically designed to stimulate a steady absorption pace in each submarket and subdivision, no matter what competitive, economic, or demographics.

In that context of a steady, predictable flow of production, the enterprise would then right-size each of its other expense fields to establish a gross-margin floor and then build on it. That would occur as operators "work" with vendors on their pricing in a slower, testier, and more uncertain backdrop, optimize local scale efficiencies, and retest pricing power wherever a hyperlocal market dynamic invites such growth.

Calculated Risk's Bill McBride highlights three key takeaways already evident in the preliminary forecasts.

A few key points from these early forecasts:

1. Forecasters expect house prices to increase next year.
2. Everyone expects multi-family starts to be down sharply in 2024.
3. 30-year fixed-rate mortgages rates are expected to be above 6% next year (MBA is at 6.1%, NAHB is at 6.4%, and Fannie is at 6.9%)

What this suggests – along with either relatively flat or down (with the exception of new-home sales projections) estimates for total housing starts, existing home sales, and multifamily starts – is that builders' shock absorbers had better be durable and braced for more of a marathon than a sprint.

Right now, although undersupply and constraints on future supply continue to mean would-be buyers outnumber available, for-sale homes, some of the math will get more adverse for builders before it gets better.

To stay on track, builders' shock absorbers – that full and flexible repertoire of price and promotion levers that eat at profit margins as a trade-off to keep orders flowing in – will get a road test that could get harrowing.

• The affordability hurdle for many households either priced out or on the bubble will make the math problem more difficult, not less so, in the months ahead.
• The "only-game-in-town" effect may lose some of its edge as more existing homeowners undergo non-discretionary lifestage changes – divorce, the birth of a child, multigenerational-home-formation for financial reasons, etc. – weighing more on new-home builders' leverage on the supply side.
• Unknowns – disruptive impacts to employment and income, oil prices, or the next surprise – could further dampen discretionary buyers' sense that it's the right time to purchase a new home.

Let's hope you're driving on something equivalent to Koni shocks.