Tri Pointe CEO Doug Bauer: 'No Soft Landing For Housing In '23'

It's official. American economics' worst-kept secret – that the Federal Reserve would raise its policy benchmark rate by 50 basis points, and elevate its "terminal rate" above 5% for the full-year in 2023 – is now fully revealed.

While the December hike, to a benchmark interest rate in a range from 4.25% to 4.5%, takes Fed funds rates to their highest level since 2007, it's the terminal rate and its expected duration that have big homebuilders battening down the hatches for a year of slim pickings in 2023.

I don't believe in a soft landing for the housing economy," Doug Bauer, ceo of Tri Pointe Homes tells The Builder's Daily. "You don't bet against the Fed, and unfortunately what the Federal Reserve typically does is to overcorrect. The way we're looking at it is for a sustained, higher interest rate through 2023, with a hold at the higher terminal rate from around the end of Q2 next year through the end of 2023. Right now, the consumer is in a state of 'pause,' waiting to see both where rates settle out, and equally, where prices go. Until there's signs of stabilizing, it's going to be rough."

Bauer, whose Tri Pointe team, like every other national, regional, and local homebuilder, has been dealing with a significant "pull-back in demand," sees flickers of it remaining in what he characterizes as "mostly needs based relocations" from one market to another for job and life-stage changes.

By late Spring or the middle of 2023, we'll start seeing material amounts of job displacement, which unfortunately is part of what the Fed is looking for and wants to hear about in its efforts to crush inflation," says Bauer. "So, it's going to be some months of bumpy, lean teams. The fundamental driver of housing demand is people who are confident in their job situation, so we'll have to work through to the other side of that. I think 2024 is going to be the big snap-back year that's going to be where we'll be in a great position to grow."

Bauer notes that a best-case scenario for a modest Spring 2023 ties to expected continued weakness in existing home supply, for reasons that include up to 70% of homeowners with loans anchored to below-4% mortgages.

The resale market doesn't have a lot to offer, and can't offer financing options that buyers these days are more responsive to," says Bauer. "The new home builders will be selling at more aggressive pricing, and will have all of those mortgage financing options that can make it a really good time to buy for some households."

One thing Bauer does expect to accelerate in 2023 is M&A.

Warren Buffet has that great line, 'be careful when everybody's greedy, and be greedy when everybody's careful,'" Bauer says. "The credit markets out there for medium and small sized builders is frozen, and a number of the small builders are screaming for capital. You can bet that the higher volume builders will be increasing their market shares, and we'll be looking opportunistically when the moment becomes right."