Tracking the Pulse of Residential Homebuilders

Insight on the current market based on BTIG survey show that building more affordable homes helps

By GLENN RENNER

If you’re like me – and the 2,700 local production builders using HomeSphere’s platform — this year’s housing market has you puzzled. Are we recovering from the late 2018 slump? Or is another slump on the horizon? Is the economy full speed ahead, or facing a recessionary brick wall? Will cost pressures or political potholes make us stumble?

Reports may be mixed, but the data from our My HomeSphere platform and our free monthly survey of our member builders has me reasonably optimistic.

HomeSphere builders represent a unique segment of the industry: They are nimble and innovative local companies whose voices are often left out of the conversation. Yet, together, they built 20 percent of all homes constructed last year. As a point of comparison, that is a larger construction output than the top 15 national homebuilders combined.

It is the mission of our platform to have the most up-to-date information, so we can accurately advocate for builders and provide data to building product manufacturers who use it to plan and grow. To that end, we survey our builder members monthly, in partnership with investment bank BTIG. The resulting data creates a value-added service for our members and contributes to the residential new construction landscape. We have found the surveys to be an early indicator of the true state of the market, and the industry agrees — the BTIG/HomeSphere Builder Survey has become among the leading reports outlining the health of the residential construction industry.

And lately, that health is good.

After bottoming out in late 2018, the industry is coming back. In fact, our builders have reported steady increases throughout the year. In January, 29 percent reported sales increases (after a low point of just 23 percent in November 2018). Sales have continued their upward trend, and in our most recent survey, a majority of builders (51 percent) were back in positive territory. Traffic followed a similar pattern, with overall growth. In January, 33 percent reported traffic increases. That number steadily increased to 49 percent in July, and even saw a big jump to 53 percent in April.

Are we officially out of the woods? BTIG veteran analyst Carl Reichardt believes we could be, for a few reasons.

First off, builders are responding to customer demand for lower-priced homes. Last year, builders had “the wrong product and the wrong price,” according to Reichardt. He alerted attendees of our annual Partner Summit 2018 to the problem more than a year ago, telling the crowd of HomeSphere clients that he was seeing an excess supply of move-up product and, specifically, too much move-up product on entry- level land.

The industry heeded his warning. Our builders have incrementally lowered their exposure in the move-up/luxury segment, while retooling to add new entry-level products to the mix. Nearly 40 percent now offer an entry-level product, up from just 25 percent of builders reporting entry- level offerings in December 2018. They have also adjusted their exposure in the luxury/move-up segment, with 70 percent offering that product today, down from 80 percent in December 2018. While our builders are often a bellwether, the overall market is changing. National Association of Home Builders has reported consistent declines in single-family home sizes, based on U.S. Census data and its own analysis.

The change in mix, coupled with lower interest rates and more inventory, are reasons for optimism. “Nine months ago,” Reichardt said, “we were bracing for a downturn. Luckily, the steep declines in late 2018 scared builders, and they made mix changes that met market demand. The Fed had very good timing, too, lowering rates during our darkest hour. If consumer confidence remains strong, builders have a brighter future ahead.”

Our builders’ ability to change set them on a positive course. That refocusing is an example of why our team is so passionate about data gathering. The HomeSphere survey allows us to track changes in the business/sales cycle on a monthly basis and provides a more realistic view of the market than relying solely on public builder reports. As a result, the industry can identify change points sooner and get a leg up on the market.

To that end, we are acutely aware of a potential headwind for the industry — labor and materials costs. In July 2018, 62 percent of our builders reported increases in both labor and materials. That number has eased in 2019 to about 41 percent, but additional cost pressures continue to weaken pricing power, according to Reichardt. “Margin enhancements are still limited,” he said, “but builders with entry-level product in markets that remain affordable may see opportunity to take price increases.”

We believe one way out of this margin game is to change the way the industry procures products. We continue to open the flow of information between builders and building product manufacturers.

By expanding how and whom we connect across the industry and providing datacentric insights in many forms, we help builders gain insight into the housing market for the betterment of all.

Survey Disclaimer: www.btig.com/disclaimer

Glenn Renner is chief executive officer of HomeSphere, the country’s largest digital marketplace connecting major building product manufacturers and local builders. He can be reached at grenner@homesphere.com.