Builders Surprisingly Optimistic About Current Housing Market
Originally Published by: Builders Online — February 29, 2024
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Each year in the post-COVID housing market has presented unique challenges and market dynamics for home builders, with the developments in 2023 no exception.
While resale inventory was limited with homeowners unwilling to give up their below-market mortgage rates, the new-home market captured market share as builders found success offering rate buydowns to incentivize buyers. The previous calendar year also saw mortgage rates climb above 8% in the second half of the year, before steadily falling in November and December.
“2023 in general for our industry was an adjustment year. When you look at 2023 and the way that not just the consumer had to adjust, but builders and [the] housing [market] in general had to adjust with interest rates going from 3% to almost 8%. It was so dramatic and drastic that there was a shock factor that took place,” says Amy Rino, chief customer officer at Taylor Morrison. “I feel like 2023 was a year that prepared us in all positive ways for 2024. Whether it’s a seller’s market or a buyer’s market, it’s how [builders] respond to the customer.
Drees Homes
Several builders, including Taylor Morrison, Drees Homes, Tri Pointe Homes, Fischer Homes, CBH Homes, Meritage Homes, and Lennar, shared positive outlooks for the upcoming spring selling season, noting underlying demographic trends, overall economic conditions, and a normalization of market factors at the end of 2023. In addition to a normalization of interest rates, production schedules and supply chain conditions continue to improve.
“We are cautiously optimistic [for 2024],” says Tim McMahon, CEO of Fischer Homes. “We saw a ramp-up in activity in December that was beyond our expectations and well above the prior year, and we believe that momentum will carry forward into the spring selling season.”
McMahon says 2024’s spring selling season could mark the return of the “typical seasonality” experienced in pre-COVID years. He adds the probability of Federal Reserve rate cuts occurring in the back half of 2024 could provide a longer runway for a favorable selling environment into the summer and fall.
Kevin Oakley, managing partner at Do You Convert, an online sales and marketing partner for builders, says he anticipates a “violently good” spring selling season in regards to clearing out inventory that is complete or nearly complete and a “better than expected” season for presale activity.
“We expect spring sales to be strong; however, not as robust as the boom we experienced during the pandemic years,” says Dan Jones, executive vice president of home building operations at Drees Homes. “Rather, we expect new-home sales more in line with last spring, which were surprisingly good. Additionally, we envision the market stabilizing with less volatility across mortgage rates and home pricing.”
Demographic trends are driving builder optimism independent of potential movement in mortgage rates. Marla Telfair, corporate director of sales for Drees Homes, says the house- hold formation from millennial and Gen Z individuals in family-building years will likely drive demand in 2024; with resale supply still limited due to the lock-in effect, new homes remain an attractive option for this cohort of prospective buyers.
“The majority of millennials have transitioned from renters to homeowners, [Tri Pointe data indicates] a 64% increase in millennials buying homes in the past five years,” says Tri Pointe Homes CEO Doug Bauer. “Millennials represent 62% of our home buyers. Right behind them is the Gen Z buyer. They are buying homes at a younger age; when you look at Tri Pointe, two-thirds of our profile is Gen Z and millennials. [Due to these trends], we’re pretty optimistic going into 2024.”
Rino says the increase in individuals entering the 55-plus age bracket is a positive trend for builders who offer active-adult product. These buyers are typically less rate sensitive and are still encountering life events that influence moving decisions.
“Millennials and baby boomers are still collectively having life events that create need-based housing demand,” says Phillippe Lord, CEO of Meritage Homes. “We have seen interest and mortgage rates moderate over the last two months already, and the general market expectation is for rates to either hold steady or move down as the economy stabilizes, which will continue to give people confidence to buy a home in 2024.”
Preparing for the 2024 Spring Selling Season
With expectations of a busy spring selling season—and one that could see the rapid turnover of completed inventory—builders share that aligning starts and inventory was of paramount importance in the fourth quarter of 2023.
“CBH has hit the gas pedal, pushing for more starts and more spec inventory,” says Corey Barton, president and owner of CBH Homes. “Plus, [the company is] looking to hire 25 people in the new year for positions across all areas of the company to help us hit those inventory goals. CBH is excited to be able to release 10 new-home communities in the first half [of 2024]. We’ll be pumping the inventory into these new communities with new up- dated products designed by our professional designers.”
Jones says Drees Homes focuses on even-flow starts to the field, and, with slower sales in the fourth quarter, the builder was been able to replenish its market home inventory, “which has been carefully curated by our design consultants to deliver style and the best value for our customers.”
McMahon says Fischer Homes continues to prioritize contract-to- build homes over spec homes, focusing on expanding its portfolio to include more affordable product offerings while also reinvesting in new plans at the higher end of the market.
“At the same time, we are putting some additional quick move-in inventory homes in place for 2024,” McMahon says. “One of our most critical success factors in 2023 that carries forward into 2024 is opening new communities with success and ensuring that we are focused on achieving this goal between developers, our home building operations, and municipalities.”
For Tri Pointe Homes, Bauer says the company has remained focused on having a 65–35 split of spec homes to to-be-built homes while also doubling down on sales training.
“I think training and the fundamentals of training are important to your success. We [also] make sure that our teams have all the tools to sell successfully, from digital tools that customers shop for on our website to design tools to mortgage financing tools,” he adds.
Reasons for Optimism, Concern
Builder optimism for the new-home market in 2024 is mirrored by positive outlooks for the sector from industry economists. The new-home market is expected to continue to benefit from limited resale inventory due to mortgage rates throughout the year.
NAHB chief economist Rob Dietz says the organization projects housing starts to increase between 3% and 4% in 2024 and anticipates new-home sales will also experience positive growth in 2024.
At Zonda, chief economist Ali Wolf projects starts will increase by 2% compared with the previous year and believes that the “tale of two housing markets” for new and existing homes will continue throughout the calendar year. With affordability still top of mind for a majority of buyers, she notes that rate buydowns and other financial incentives will remain a competitive advantage for builders.
“Home buyer demand is met with limited inventory in the market due to the chronic shortage of existing-home listings, as current homeowners are wary of leaving their below-market mortgages,” Lord says. “Given the tight resale conditions, while the quality and location of the home are always critical to a home buying decision, today the quick move-in timelines and affordability of a home from a monthly payment perspective are equally as important.”
Consumers are responding to lower rates with a more positive outlook for home buying conditions, but they still have largely pessimistic views toward the housing market. According to Fannie Mae’s most recent December Home Purchase Sentiment Index, the share of consumers who say it is a good time to buy a home increased to 17%, while the percentage who say it is a bad time to buy a home stood at 83%. However, a combined 67% of respondents share expectations that mortgage rates would either decrease or remain the same over the next 12 months, a more optimistic outlook than shared with Fannie Mae in recent months.
“Home buying sentiment continues to hover at historic lows. Buyers are receiving negative input from friends, from co-workers, from Uncle Ernie who purchased in 2007 and sold in 2011 at a huge loss, even from Realtors,” says Jeff Shore, founder and president of Shore Consulting.
Rates, high prices, and general affordability concerns continue to drive consumer hesitation toward the housing market. Bauer says that while mortgage rates don’t “establish demand,” they impact pricing, payment, and psyche.
“Buying a house is such a psychological event. You’ve got to have the right psyche, and interest rates can play with that psyche,” says Bauer.
Tri Pointe Homes
Shore says the onus is on sales professionals to re-instill confidence in buyers, communicating why purchasing in the current market is a good idea. While mortgage rates may come down further in 2024, the lack of supply and expected increase in demand could push prices higher, negatively contributing to affordability, already a chief concern for a majority of buyers.
Land and access to capital is also a concern for builders heading into the spring selling season. Dietz says the NAHB still is seeing lingering issues related to land developer loans and lot availability, while Bauer says difficulties in the capital markets benefit public builders at the expense of smaller private builders. Barton notes land prices are a concern for CBH Homes, having increased recently in the builder’s home markets in Idaho due to the rise of national builders in the state.
Bauer and McMahon also note headlines from geopolitical events as well as the 2024 national election could impact buyer psyche throughout the year.
“Geopolitical events remain a major concern. Financial markets and—to some extent—customers like certainty, and there is uncertainty in the upcoming election cycle,” says McMahon.
Incentives, Rate Buydowns, and the Resale Market
Photo by Greg Grupenhof
Builders have experienced a significant increase in market share in part due to the significantly constrained supply in the resale market. Estimates from NAHB and Zonda indicate that the new-home market increased share to nearly 30% from historical levels between 10% and 15%. However, with mortgage rates projected to decrease, there is a possibility that the resale market could capture back share from home builders.
During Lennar’s most recent earnings call, executive chairman and co-CEO Stuart Miller said the tick down in rates could benefit both the resale and new-home market in 2024.
“What has been missing from the market is the traditional resale buyer looking for that move-up home, and, decidedly, the first-time market has been very thirsty for new-home product because the traditional resale product simply hasn’t been available," Miller said to investors. "So, I suspect if the existing-home market is activated as interest rates do trend down, that it will result in both additional supply for the first-time buyer and additional demand for the move-up buyer.”
Builder responses to changing preferences, including small- er home sizes, increased design flexibility, and more quick move-in homes, have positioned the new-home market to meet buyer demand through the spring selling season.
“The one thing I would say is consistently the same [among buy- er preferences] is flexibility. It doesn’t matter if it’s a first-time home buyer or an active lifestyle buyer,” Rino says. “Having the ability to work from home is important; I would say making every bit of space in the home usable matters to the customer, and using it in a way that is best for their lifestyle is definitely something that [is important] for customers.”
Bauer says home builders’ ability to offer financial tools not available in the resale market remains a competitive advantage that is driving optimism, even with the possibility of a reactivation of the resale market.
“We’re going into the spring selling season having the financing tools that aren’t readily available in the resale market, which provides an enormous opportunity for builders to gain market share,” Bauer says. “I don’t think [incentives and rate buydowns] are going to differ much [compared with 2023]. We use forward commitments, a range of pricing incentives including closing cost credits, and [rate buydowns]. I believe those tools will be the same tools used in 2024.”
CBH Homes and Taylor Morrison say interest rates will dictate the role buydown incentives play in 2024, though using financing as a sales tool will remain a priority.
At Meritage, Lord says as mortgage rates have retreated, customers are selecting the incentive—either rate buydowns, lot premiums, closing costs, option upgrades, or price concessions— that best fits their need.
“Due to affordability concerns, incentives and rate buydowns will still be warranted in 2024, much like 2023,” Telfair says of Drees Homes’ strategy. “These options have motivated prospective buyers to move forward in turbulent times and have allowed us to drive traffic as well as maintain sales momentum. Further, we feel pricing correctly from the beginning is crucial and will negate having to do price cuts later down the road. The plan is to price to market and sell homes without having to recreate the wheel halfway through communities.”
Builders Expand Their Digital Efforts
Technology and digital tools are more important to prospective buyers than ever in the post-COVID years. Taylor Morrison has leaned into online sales, and Rino stresses the importance of offering options for all types of buyers—those who want limited face-to-face communication in the buying process and those who want limited digital communication.
“Many times, when our customers start with our online tools, they end up speaking with an online sales manager and that online sales manager relays the customer to a model home in a specific community,” Rino says. “I find that the process is more seamless. We are able to deliver a better experience to the customer because they have been educated so much from all of our tools prior to speaking with a live person that we are able to get them into a home of their choice quicker and with a lot less disruption than we saw in previous years.”
Fischer Homes and Drees Homes are working on initiatives to enhance the digital home buying experience.
Drees Homes is launching a new website with content created with the digital sales experience in mind and is working to integrate 3D touring into its customer portal in each of its markets.
Fischer Homes is focused on differentiating itself from both resale and new-home competitors with creative marketing content, including photos, videos, blogs, 3D tours, and interactive floor plans.
“We realize that a customer’s first interaction with us almost always begins digitally,” McMahon says. “We continue expanding our digital presence to reach our buyers in all our markets and the ones we see relocation buyers coming from.”
Above all else, though, Rino stresses that despite focus on incentives, design flexibility, and marketing tools, the home buying process ultimately boils down to a transaction between people.
“I am focused on our people taking the time with every single customer, listening, providing them with solutions to their needs,” Rino says. “Making sure they are trained and able to use finance as a sales tool [and also] technology tools. Being educated so they can help educate the consumer to make the best decision for them. It is about people.”