Public Firms Seize Advantages; But Private Builders Hold An Edge

There are 36 quotations in Morgan Housel's latest Collaborative Fund blog posting. He starts ... "lines I came across recently that got me thinking."

Each nugget seems to be better than the one that precedes it. But, as the dots of all this wisdom connect to homebuilding today, the line we come back to is this one, No. 2 of 36.

Survival is the ultimate performance measure.” - Vicki TenHaken

When you look up who Vicki TenHaken is, you see that she's a former corporate executive of firms like Herman Miller and General Electric, and a retired professor of management at her collage alma mater Hope College, Holland, MI.

Her specialty? Corporate longevity.

Her line, "Survival is the ultimate performance measure," strikes a chord in today's uncertain and volatile homebuilding marketplace. We're prone to say — and for good reasons — that competitive and business advantages go to big, national, public homebuilders in times like these. We're prone to dismiss privately-held homebuilding operators as having the depth and patience of resources it takes to withstand the latest battery of market challenges.

Then, there's wisdom, like that voiced by TenHaken and affirmed day in and day out by legions of privately-capitalized and operated enterprises that live their testament to her assertion: "Survival is the ultimate performance measure."

They live to tell the tale.

Performing better, it turns out, is a deep, often unappreciated resource private homebuilders bring to bear in markets that swing violently, every which way. And often, performing better – irrespective of land position, local scale, capital access, depth, and efficiency, etc. – draws as often and as profoundly on character and focus as it does on deep pockets.

A friend, the founder and president of a large regional private homebuilding enterprise tells us that performing better often goes hand in hand with trusted local relationships:

I think private homebuilders' most significant advantage is that local governments and buyers are biased in favor of local businesses," he says. "This becomes most apparent when buying property, zoning, or getting city’s help with permits, signage and variances."

In July 2024, the U.S. housing market faces a three-headed hydra of challenges: high mortgage interest rates, soaring home prices, and a critically low inventory of homes for sale. This especially impacts lower-priced homes, traditionally the choice of first-time homebuyers. According to Fannie Mae data, more than four out of five home seekers think it’s a "bad time to buy." This sentiment is driven by "affordability challenges" and "affordability concerns" that highlight the growing gap between the monthly payments homebuyers need to make, their household incomes, and the actual costs required. Additional factors like rising home insurance costs and property tax hikes following recent home value gains further complicate the landscape.

For homebuilders, this "bad time to buy" sentiment is one of the biggest challenges. However, the resilience and strategic advantages of private homebuilders often shine through in such turbulent times. They perform. They survive. Private homebuilders, despite the overwhelming advantages held by national, public builders, tend to leverage their unique strengths to attract new-home seekers when the market seems least favorable.

The Strengths of Private Homebuilders

Although private homebuilders are limited by their capital stack and reliance on bank lending, they possess three core advantages that enable them to thrive even in challenging market conditions.

1. Trusted Local Relationships

Private homebuilders often have deep-rooted relationships with local construction crews, suppliers, and generations of homebuyer customers. These trusted partnerships allow for smoother operations and greater flexibility. Unlike national builders, who may face delays and logistical challenges, private builders can quickly mobilize resources and adapt to changing conditions. This local trust and reliability can particularly appeal to homebuyers seeking stability and assurance during uncertain times.

Lawrence Yun, Chief Economist of the National Association of Realtors (NAR), speaking during an NAR Real Estate Forecast webinar today, emphasizes the importance of local inventory in this context. He notes that while national builders can create inventory, a significant issue continues to be a lack of existing home inventory due to homeowners being locked into low mortgage rates.

Yun states,

Builders create inventory. Builders do not have to worry about the lock-in effect. They just have to think about the buyers. Just bring them more supply, more inventory, and they can get more sales done."

2. Nimbleness and Agility

Private homebuilders excel in recognizing and seizing smaller, narrower windows of opportunity. Their ability to take on "hairier," more complex properties and guide them through planning and development stages into new subdivisions is a testament to their heightened skill sets. This agility allows them to respond swiftly to market changes, offering tailored solutions that meet the specific needs of their local communities. In a market where adaptability is crucial, this nimbleness gives private builders a distinct edge.

Jessica Lautz, Deputy Chief Economist at NAR, highlights the importance of flexibility in today's market. She notes that builders focusing on smaller, more affordable homes are responding well to market demands.

3. Entrepreneurial Spirit and Talented Teams

The entrepreneurial spirit and commitment of directors, managers, supervisors, and team members in private homebuilding firms set them apart from their counterparts in large, bureaucratic public builders. These teams often demonstrate a high degree of loyalty, talent, and dedication, enabling them to deliver exceptional results. Their ability to operate without the constraints of corporate silos fosters innovation and a customer-centric approach, which can be especially attractive to new-home seekers in a challenging market.

Leveraging Strengths in a "Bad Time to Buy"

Despite the prevailing sentiment that it is a "bad time to buy," private homebuilders can position themselves as the preferred choice for new-home seekers by emphasizing their unique strengths and focusing on key buyer segments.

Says NAR chief economist Lawrence Yun:

The upper end is doing fine because they have more inventory. So as we get steadily more and more inventory, expect more sales to occur."

Engaging the 55+ Active Adult Buyer Segment

One significant buyer segment that remains active even in challenging market conditions is the 55+ adult households. These buyers are often less sensitive to high interest rates and high prices as they are searching for their dream home or "forever home" to enjoy an active lifestyle or retirement adventures. Private homebuilders, with their personalized customer care and local expertise, can effectively engage this segment by offering tailored solutions that meet their specific needs and desires.

Private builders can highlight their ability to provide customized options, including age-friendly designs and features that enhance comfort and convenience. By focusing on the unique preferences of this buyer segment, private homebuilders can create a compelling value proposition that appeals to 55+ buyers looking for quality and lifestyle enhancements.

Addressing the "Life-Happens" Buyer Segment

Another crucial buyer segment that continues to seek new homes despite the market challenges is the "life-happens" group. These buyers are driven by significant life events such as the birth of a child, a sick parent, job relocation, or a hybrid work situation that necessitates a move. For these buyers, the need to find a new home is pressing, regardless of current market conditions.

Private homebuilders can leverage their agility and customer-centric approach to hand-hold these buyers through the process of searching, deciding, committing, and closing on a new home. By offering flexible financing options, personalized support, and efficient processes, private builders can address the immediate needs of this segment and provide a seamless homebuying experience.

Building on Trust

Private builders should highlight their longstanding local relationships and reputation for reliability. Marketing efforts can focus on testimonials and case studies from satisfied customers, showcasing their commitment to quality and community. By emphasizing trust and stability, private builders can alleviate some of the concerns that homebuyers have in a volatile market.

Showcasing Agility

Private builders can be distinguished by their ability to quickly adapt and deliver personalized solutions. Highlighting successful projects that navigated complex challenges can reassure potential buyers of their capability to meet diverse needs. Private builders can also emphasize their flexibility in offering customizable options and tailored financing solutions, making homeownership more accessible even in a tough market.

Celebrating Entrepreneurial Excellence

Private builders should take pride in their teams' entrepreneurial spirit and exceptional talents. Highlighting stories of innovation and customer-centric solutions can resonate with homebuyers seeking a more personalized and responsive home buying experience. By celebrating their unique approach and commitment to excellence, private builders can differentiate themselves from larger competitors' impersonal, bureaucratic processes.

The Power of Character and Leadership

One of the most compelling reasons private homebuilders tend to find ways to be resilient, opportunistic, and sustainably impactful is their strength of character, brave resolve in the face of tough times, and qualities as business leaders. These builders are not just constructing homes but building communities, fostering relationships, and creating legacies. Their leadership goes beyond business metrics—it’s about making a lasting positive impact on the lives of their customers and their communities.

Conclusion

At a moment high mortgage interest rates, soaring home prices, and low inventory create significant challenges for homebuyers, private homebuilders show time and time again that they can shine. Their trusted local relationships, nimbleness, and entrepreneurial spirit enable them to navigate the complexities of the market and provide exceptional value to new-home seekers.

By leveraging these strengths and focusing on key buyer segments such as the 55+ active adult households and the "life-happens" group, private builders can be the go-to choice for buyers looking for stability, personalized solutions, and a customer-centric approach. As new-home seekers navigate a market fraught with affordability concerns, private homebuilders offer a beacon of reliability and trust, making them the preferred choice when all the headlines say it's a bad time to buy.

Again and again and again, private builders prove out Vicki TenHaken's simple syllogism. They survive and it's because they perform.