Since mid-2020, the housing economy's tides — as turbulent as they have been — pretty much lifted all homebuilders' boats.

Given the array of challenges, almost everywhere and all at once, homebuilders did better than expected. However, the forces gathering steam now in the economy suggest that the next few years will be more of a case of winners and losers. Resiliency and the ability to perform better amid ongoing volatility, stress, and uncertainty will filter one from another. Being public and/or gigantic has big or gigantic advantages, and private builders already feel the heat.

Fact is, for everybody — big, medium, small, and public and private — resiliency means you can perform better no matter what, or you don't. It also means that the tools, switches, and levers of incentives, concessions, and motivators that have been in play for 18 months may show signs of fatigue. There remains a shortage of homes and a surfeit of would-be buyers, so it's too soon to hit a panic button. But it's not too soon to lean into a resiliency plan capable of growth or contraction.

For many operators, a resiliency pivot means moving first and fast rather than waiting for others to move and then following.

Here's what that looks like, based on commentary and perspective on consumer behavior and trends drawn largely from consumer sectors outside of homebuilding:

Essential to resiliency are at least four non-negotiable attributes:

1. Exceptional Data-Powered Learning, Feedback, and Responsiveness Systems: Zeroing in on customers at the beginning of their new-home shopping journey is crucial.
2. Exceptional Team-Member Talent, Collaboration, Enterprise, Engagement, and Operational Excellence: Outperforming rivals in performance and doing so sustainably is essential.
3. Access to Capital Financing Channels: Builders must carefully and competitively acquire and develop land for new home developments and communities in 2025 and 2026.
4. Strategic Focus on Necessity-Driven Buyers: Target and engage buyers motivated by life-stage events and personal milestones that necessitate purchasing a home now, regardless of current home prices or mortgage interest rates.

Backdrop

In the past few years, the "bad-news-is-good-news" era has buoyed homebuilders' spirits and expectations, even as they've struggled to find price and financing options that could keep the pace of new orders where they needed to keep it to sustain cash flow. Each weak macroeconomic indicator has been interpreted by homebuilders and investors alike as a signal that the Federal Reserve might soon reduce its funds rate from the decade-plus-high mark and revert to a policy of quantitative easing. However, the Federal Reserve's steadfast focus on combating inflation — which remains above its 2% target rate — signals that any anticipated pivot on rates is unlikely before yearend.

This means homebuilders, anticipating relief from the Fed, will have to continue their wait, even as more negative macroeconomic news on consumer spending, consumer confidence, job formation, and corporate spending emerges each month and quarter.

At a moment when stresses and shocks are building up among consumer households most susceptible to financial challenges and most sensitive to elevated interest rates, tougher mortgage qualification hurdles, and high prices, homebuilding, enterprise strategic leaders have the critical need to shift focus toward discretionary home shoppers. These are buyers driven by life-stage events and personal milestones that necessitate purchasing a home now, regardless of home prices or mortgage interest rates.

This shift is essential for navigating market turbulence and ensuring sustained growth and success. Moreover, as they shift to marketing and sales precision focus on extra-motivated, discretionary customers, they have to rotate their entire building lifecycle to resiliency mode.

Understanding the Split-Screen Economy

The current economic landscape is characterized by a split-screen scenario where consumer behavior varies significantly across different income segments. James Quincey, CEO of Coca-Cola, aptly described this dichotomy:

It truly is a moment of the cup half full or the cup half empty, depending on what you want to – which bit of the world you want to look at...if you're in the lower end of the income spectrum in the U.S., you're under pressure from inflation.”

This sentiment underscores the challenges faced by lower-income consumers who are struggling with rising costs in essential areas such as food and housing.

Conversely, upper-income consumers continue to demonstrate resilient spending habits. Darren Rebelez, CEO of Casey's General Stores, noted,

We’re seeing pretty consistent behavior with the upper-income consumers - they’re continuing to buy as they normally have.”

This bifurcation in consumer behavior highlights homebuilders' need to precisely target their marketing efforts and product offerings.

Targeting the Resilient Buyer

In this new landscape, homebuilders must double down on targeting buyers motivated by necessity — those who can and will purchase homes now. These buyers are typically driven by significant life events such as marriages, births, relocations, or other personal circumstances that create an immediate need for a new home. To attract and engage these buyers, homebuilders must focus their entire build-cycle on this particular customer segment.

Strategic Focus and Operational Efficiency

From land acquisition and development strategy to product design, construction, marketing, sales, and customer care, every aspect of the homebuilding process must align to attract and satisfy these necessity-driven buyers. This means:

• Land Acquisition and Development: Strategically identifying and acquiring land in locations that appeal to life-stage buyers.
• Product Design and Construction: Developing homes that meet the specific needs and preferences of these buyers, ensuring quality and timely delivery.
• Marketing and Sales: Crafting targeted marketing campaigns and sales strategies that speak directly to the motivations and circumstances of necessity-driven buyers.
• Customer Care: Providing exceptional customer service to ensure a seamless and satisfying home-buying experience, fostering loyalty and positive word-of-mouth.

Insights from Industry Leaders

The sentiment of a bifurcated economy is echoed by several industry leaders. Mark Lashier, CEO of Phillips 66, articulated,

I think most people in this room feel pretty good about the economy, feel pretty good about what's going on, but...if you're out there more in a working class at the lower end of the economy, you're having to make choices every day about how to meet your mortgage, how to pay higher insurance costs, how to keep food on the table in a much higher cost environment.”

This perspective highlights the pressures on lower-income consumers, likely influencing their housing decisions.

Kecia Steelman, COO of Ulta Beauty, pointed out the broader impact on consumer confidence:

The macro environment is dynamic and consumer confidence is clearly under pressure. Inflation is a real issue out there.”

This dynamic is critical for homebuilders to understand as they navigate the current market.

Federal Reserve's Outlook

The Federal Reserve's outlook on inflation and economic stability remains cautious. Minneapolis Fed President Neel Kashkari stated,

It'll probably take a year or two to get all the way back down to our 2% target...getting all the way back to 2% is going to take a little more time, but I'm confident that we're going to get there.”

This indicates that homebuilders should brace for a prolonged period of elevated interest rates and economic uncertainty.

Preparing for Market Volatility

The current period of economic uncertainty requires homebuilders to prepare for turbulence and volatility by heightening their focus on performance towards buyers who are ready to make a purchase. This involves:

• Narrowing Customer Targets: Concentrating efforts on the most resilient buyer segments and reducing spending on broader, less effective marketing initiatives.
• Curbing Operational Expenses: Streamlining operations to eliminate waste and ensure resources are allocated towards activities that directly support sales and customer satisfaction.
• Building Strong Partnerships: Establishing and maintaining strong relationships with the best trades, suppliers, and partners to ensure quality and efficiency throughout the build cycle.

Becoming the Preferred Homebuilder

To thrive in this challenging environment, homebuilders must strive to become the preferred choice among necessity-driven buyers. This involves not only offering superior products and services but also building a reputation as a reliable and customer-focused builder. Additionally, being the preferred homebuilder among top trades and partners will ensure access to the best resources and talent, further enhancing the quality and efficiency of the homebuilding process.

Strategic leaders must embrace a new approach focused on necessity-driven buyers as the U.S. homebuilding market reaches this critical inflection point. By aligning their entire build cycle with these buyers' needs and motivations, curbing operational expenses, and building strong partnerships, homebuilders can navigate the current economic turbulence and position themselves for sustained success. This sea-change in strategy is not just a response to current market conditions but a proactive approach to ensuring resilience and growth in an ever-evolving landscape.