Strength In Numbers: What The Healthy Jobs Report Means For Builders
Stick around. Something like this happens. You hear someone say something, and you may think nothing of it at the time, but the remark lodges somewhere in your mind's recesses. Until later.
Almost three decades and a lifetime ago, I worked with a young writer, wiser than her years and funnier each passing hour with a few huddled work friends and an open tab. Her rants were comic vignettes. Her mind was a razor and her mouth was its match -- most of what came out of it was soundbite ready for primetime. And she wrote words that made you nod, and smile, and choke up all at the same time.
Customers, consumers," Debra said or wrote -- I'm foggy on which it was. "Every business desperately wants them. But nobody would really wish to have one as a nextdoor neighbor."
It may sound cynical, but when you consider that the term "customer" itself came to us from a Medieval Latin word "custumarius," which stood for "a toll-gatherer, tax-collector," you think, 'maybe she was on to something.' By the 1540s, the meaning evolved to "a person with whom one has dealings," often riding with a defining qualifier, "tough."
So, Debra's observation, it seems, may have been more astute and less ironic than she may have intended.
All this by way of providing a context for Friday's good-news-bad-news employment situation report from the Bureau of Labor Statistics.
From the standpoint of homebuilders and their ecosystem of business partners and associates, the release is bittersweet. Its headline boast an above-pre-pandemic era level of payroll growth across a broad base of services, manufacturing, and other occupational categories, and solid wage growth. Although, it's data that looks back, it's one of the fresher indicators of a broad economy that's chugging along in spite of itself, with a tight labor market and rising household income levels.
Here's the topline take-away from the BLS September jobs report:
Total nonfarm payroll employment increased by 263,000 in September, and the unemployment rate edged down to 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality and in health care.
Just over a decade ago, a report like that would have warmed the hearts of just about everybody running a company or earning a living in the business of making new or improved homes and neighborhoods for people. The big catch now, however, is what that jobs and economic indicator carries with it is that the strength in the data increases the likelihood the Federal Reserve remain on an aggressive track with respect to its Funds Rate increases and its moves to shrink its balance sheet – further tightening access to financing and pricing out more potential homebuyers due to increases in their monthly payments.
Wolfe Research director of housing equity research Truman Patterson captures the double-edged sword nature of the employment news in a note this morning to investor clients.
Considering employment and mortgage rates are two of the most important drivers of housing demand today, we view the release as a modest negative for the Housing equities today as the labor force participation declined -10 bps sequentially and wage inflation remains elevated. Unfortunately, housing demand today in part depends on the Fed, with continued gains in the labor market and record-low unemployment rates likely supporting stronger Fed action. While we are not rooting against increased employment, more hawkish Fed action clearly creates headwinds for our sector."
Which means that business leaders and homebuilding team members counting on a break from the Federal Reserve sooner than later had better not hold their breath. Those angling to "fight the Fed," well, we'll see how well that works out.
Consensus is building that – despite the continued verve the economy is showing in its ability to expand livelihood and earnings power opportunities – the Fed's work to reel in intolerable levels of inflation may well already have done the job.
New York Times columnist and Nobel Prize winning economist Paul Krugman writes:
Policy always involves a trade-off between risks. And the risk that the Fed is doing too little seems to be rapidly receding, while the risk that it’s doing too much is rising.
So where does that leave builders?
With customers, that's where. Tough customers. They're everywhere. It's just that they're not always the ones you tend to want to treat the best because they can act, well, you know, like customers.
- Would-be owner-occupiers. Remember, a global and domestic "cost-of-living" crisis makes this time, its priorities, challenges, and opportunities, more about them, even though you may think that Jay Powell, and the Fed, and interest rate trends make it more about you. They're the ones who're really going through a ringer right now.
- Investor buyers and single-family build-to-rent developers. Think of them as a fall-back Plan B, and they'll think of you that way too. The idea is to invest in and be willing to commit to relationship value as well as a transactional deal. The asset class, and the enduring place of BTR in consumer household preference types is proven. Be strategic about your BTR partners as customers, even if they drive a hard bargain.
- Team-members. The Great Resignation, quiet quitting, work-from-anywhere, etc., this "future of work" thing is working out to be tough on a just about everybody, and the verdict's not yet in on who's got the upper hand. Face it though, while the cultural core of many organizations in homebuilding is sound and strong, there's a lot of work to do to make homebuilding, real estate, and construction's workplaces environments a next generation of talented individuals gravitate to. They're customers, after all. This isn't easy, and it shouldn't be.
- Lenders/finance sources. Equity period has taken a hit, and it means that terms and conditions, rampways, earn-outs, and rigors around capital have done a pendulum swing from "too easy" to "too hard." This too shall pass, but, as Morgan Housel writes in a Collaborative Fund post about Expectations, "Change eventually comes, but agonizingly slower than you might assume."
- Municipalities and jurisdictions. The sooner homebuilders and their partners begin to reckon with the fact that localities are "tough customers" just like owner-occupiers, employee associates, lenders, and BTR buyers, the sooner triggers, incentives, and commitments will start to reflect relationship responses, vs. transactional ones.
- Vendor and supplier partners. Being a "preferred homebuilder partner" has become table stakes to secure quality skilled frontline trade crews and timely access to materials, products and installations.
When it comes to customers – as homebuilders and their partners discovered through newfound initiatives that mined technology's capacity to remove friction and add convenience – there's more room for opportunity to improve things with each of these "customer buckets" through subtraction of aspects they don't like.
Joseph Michelli spotlights six pillar opportunity-areas to improve customers' perception of “experiential convenience” and “reinvention.”
They are:
Reduce friction – Friction is the drag, extra steps, confusion, and customer effort required to receive products or services. Friction creates customer pain that increases the probability that customers will churn.
Increase self-service – Give customers the option to meet their needs without involving human interaction. The key word is “option,” – meaning human service should be available for those who opt not to take the self-service path.
Leverage technology – Not all technology reduces customer effort. Look for manual, repetitive, or simple processes that will be streamlined by technology. Increasingly these technology tools mobilize the guest experience and facilitate brand interactions from the customer’s mobile device.
Offer Subscriptions – This involves creating scheduled and automated content, products, and services for your regular customers. Rather than having your customers’ track reordering, you are essentially providing products at a cadence convenient to them.
Provide Delivery – Wherever possible, provide your products/service where the customer is, instead of requiring the customer to come to you.
Increase Access – Remove barriers to access by increasing your hours of availability and the ease by which they can engage you.
Customers are not easy, but they're rewarding. And a remaining challenge for many homebuilders – especially as they navigate an indefinite stretch ahead of volatility, stress, and shock – is in recognizing customers in all of their colors and dimensions.