In 2024, Homebuilders Face A Math And Psychology Challenge

Had your fill of top 10s for 2023 and predictions for 2024?

Let's instead start with an operational level-set. This way, you and your teams will have agency and impact on those matters you can control in a broad context of ongoing uncertainty and volatility in all those matters you can't.

Two simple – and difficult – challenges face one and all, big and small, among those whose livelihoods spring from making new homes and communities for people.

One is math. The other is psychology.

The math challenge – which saw promising glimmers of progress in 2023, but whose job is far from done – is developing and building profitably for a bigger pool of households that strive to own a new home, not a smaller one.

The psychology challenge has two-layers. One is to spark households who can buy now to put hesitation aside and take the plunge. The other layer – for each homebuilder's business viability – is to narrow the consideration set of purchase options to a single pathway forward.

The same two challenges set the terms and conditions for success in 2023, but those two essential business and operational questions will need to draw new and evolved responses for equal or better outcomes in 2024.

Here, from Calculated Risk host and analyst Bill McBride, is an illustration of why the same two challenges will require more nimbleness and agility among new residential real estate development and construction strategists:

I don’t expect inventory to reach 2019 levels but based on the recent increase in inventory maybe more than half the gap between 2019 and 2023 levels will close in 2024. If existing home sales remain sluggish, we could see months-of-supply back to 2017 - 2019 levels.

That would likely put price increases in the 3% to 4% range in 2024. I don’t expect either a crash in prices or a surge in prices. And as usual, we will have to watch inventory and adjust the outlook. Right now, my guess is we see price increases in the low-to-mid single digits in 2024 as measured by the repeat sales indexes." – Bill McBride, Calculated Risk

Whatever the external circumstances – higher-for-longer interest rates, global supply disruption-related materials price impacts, continued suppression of resale listings due to lock-in effects, even macro business cycle and employment trends – the difference between sheer demand and your own new and existing customers can either be daunting or almost negligible.

That depends on you and your teams, both of whom control the most essential delta between what you pay for the land, labor, lending, and materials you purchase and what you charge for the homes and neighborhoods you put on the map.

That delta is value, and that value can solve both the math challenge and the psychology challenge.

The good news entering 2024 is that homebuilding and its ecosystem – few would argue – have been turbulence-tested for several years now on the logistics and expense management front, on the access-to-capital front, and on the demand disruption front. By preparing, financial de-risking, being smart, and setting up resilient real-time data feedback loops that now play a role in more adaptive operations and customer- and team-member focused game plans, organizations played more from their hard-earned strengths than from their defense against weakness to weather the turbulence to date.

Here are signs of strength we've seen progress through the shocks and stresses of the pandemic and its Federal Reserve-induced economic aftermath, a resiliency that has been a result of intentional commitment and investment among many of the high-volume homebuilding organizations we follow.

• Customer care has evolved from a siloed marketing and sales discipline into a operationalized, business-wide endeavor.
• Team member focus has evolved from task completion, individual performance metrics and rewards, to more holistic accountability, opportunity, and team-achieved outcomes.
• Data-feedbacks have been activated in every dimension and stage of the investment, development, design, construction, and delivery life-cycle so that doing, learning, and doing better at every handoff can become an expectation rather than a pipe dream.
• Relationships of trust – often based on enlightened mutual self-interest – continue to prosper in a business culture built on foundations of both abundance and scarcity when it comes to resources. Trust can and does offset imbalances around money, time, land, labor, and materials, and is a bedrock element of lasting residential real estate and construction organizations.

When it comes to evolved responses to the two major ongoing challenges to homebuilding success in 2024 – the math challenge and the psychology challenge – the resource we sense will be most critical of all for builders to tap into will be time.

Like any precious finite commodity, those who need time most will pay a heavier price for it than those who enjoy lending and investment terms that build in more runway ahead. And those who need more time soonest will pay the heaviest price of all.

Collaborative Fund guru Morgan Housel recently wrote beautifully about a line he'd read in Will and Ariel Durant's The Lessons of History.

Learn enough from history to bear reality patiently, and respect one another’s delusions."

Housel focuses principally on the goldmine of wisdom in the second of the phrase's two truths, telling us how much there is to be gained from the advice, "respect one another's delusions." Especially now.

It's the first truth – "learn enough from history to bear reality patiently" – that contains the code for homebuilding and residential investment and development strategists to solve as they tackle the math and psychology challenges of 2024.

I find it almost as valuable a thought as the "respect one another's delusions" call to action, partly because we appear to have lost the ability to be patient about nearly everything.

A rush for a solution to either may appear to unlock the code. However, remember to build in time for you and your teams to get complete cycles of behavioral feedback before deciding that you've solved either your numbers riddle or scaled the psychological hurdles your homebuyer prospects face.

Head fakes come with the turf.