The Light: High Risk, High Reward

The Light: High Risk, High Reward

In our February client webinar, we noted the housing market has reached the “High Risk / High Reward” part of the cycle. As the market becomes more complicated we point out a few of today’s higher-risk elements, and offer some insights for opportunities that can lead to those rewards.

Risk: Inventories are at all-time lows resulting in massive home price appreciation that is threatening affordability. Public builders have 10% fewer communities to sell from than during this time last year, and the number of inventory homes for sale in actively selling neighborhoods is dwindling. Resale home inventories are down 45%. The result is historic home price appreciation.

Reward: Many buyers are prepared to spend more money. Consumers made $1.0 trillion more than usual in 2020 due to government stimulus, while spending dropped by more than $500 billion. Combined with surging stocks and a rising home equity, potential new and move-up purchasers have more wealth to utilize. A projected strong economic recovery, demographic tailwinds and an accelerated pivot to remote work allows buyers and renters to live in locations where they can get more home for their money.

Take action now. Think about how effective home design can help mitigate affordability challenges. Land, labor, and materials prices aren’t likely to come down soon. Ensure that you are considering elements that drive value the most like smart maintenance, energy efficiency, and appropriate room dimensions. Our New Home Trends Institute monitors this every day.

Risk: Metering of home sales means homebuilders do not have a home for every buyer that wants one. Across the country builders are restricting sales and increasing prices to ensure they can keep up with rising material and labor costs, as well as maintain production schedules. The risk to builders is that these limited releases could mean lost customers.

Reward: Builders can keep consumers engaged in their product. We know builders across the country who are maintaining interest lists and are reaching out to prospects for each new release. That constant contact conveys the message each buyer is important and assures them the builders are paying attention. We have seen great examples of builders empathizing with the challenges of purchasing in today’s environment and assuring buyers that the builder is a partner in the journey. And builders are telling us they are delivering a constant message— they want each buyer experience to be one of quality and longevity and that building within construction capacity maximizes the opportunity to do so.

If you are not engaging with prospects, start to do so immediately. Times are good, but the market will moderate and builders who demonstrate a long-term commitment to buyers will prevail.

Risk: Land supplies are limited and competition for lots is intense. In JBREC’s newest land survey (1Q2021) 99% of brokers we surveyed rated their markets as “Hot” or “On Fire” and 96% of brokers reported rising lot prices quarter over quarter.

Reward: New solutions for product, density, and location can help mitigate rising land prices and housing affordability.  In our recent Building Products Seminar Todd Tomalak mentioned Berkley Homes’ neighborhood at The Canyons outside of Denver, Colorado.. This +/-7.0 du/acre product creates a great transition from rental to homeownership with a balance of space, outdoor living, and low maintenance. The trend is indicative of the balance between density and affordability, with the need for “more space” in products that are commonly 7.0 to 12.0 du/acre.

The coming months and years are likely to be robust for the housing market and will not be without risk. By understanding the pending risks and by taking action now to mitigate them, builders and buyers will be rewarded in the long run.

Contact Ken Perlman, or Lesley Deutch for other inquiries and great ideas on how to succeed.

Ken Perlman If you have any questions, please contact Ken Perlman, Managing Principal, at (858) 281-7214 or by email.
Lesley Deutch If you have any questions, please contact Lesley Deutch, Managing Principal, at (561) 998-5814 or by email.