Thank you to the John Burns Research & Consulting team for hosting a great event in New York City last week. There was plenty of optimism in the room, as an audience poll by John Burns showed that 70%+ of attendees had a favorable outlook for the next 12 months, driven by comfortability in elevated rates and perception of greater market certainty.

• Higher Rates Are Here to Stay: We should not expect rates to come down in the near term as economic growth continues to be resilient. Rates at 5% are historically low, but public perception is skewed due to recency bias of the last decade. Elevated rates have impacted sales volume but not prices and have driven a surge in cash buyers, which is consistent with historical precedents.

• Public Builders Have Clear Competitive Advantages: The cost of debt for a public homebuilder is near 6% while private builders are experiencing rates closer to 10%; the publics also realize more favorable terms. They have strong balance sheets with minimal debt, operate with land-light models, and continue to focus on ROIC as it’s more favorably received in the equity markets. Mortgage rate buy-downs continue to propel sales and address affordability challenges – an incentive the smaller, private builders struggle to match. Credit facilities are still available, but the smaller regional banks have retracted, affecting private builders the most.

• The Future of Artificial Intelligence is Now: @Allie Miller provided an excellent tutorial on AI and how companies should incorporate it into their businesses. Those that are slow to adopt this new technology will fall behind their competition in the years to come. Leaders should first look at implementing AI into their internal processes and employee efficiency, followed by products.

• Residential Insurance Poses a Challenge: Insurance requirements, driven by lenders, are unrealistic and archaic. Builders can expect to either absorb more risk or be forced to adjust where they invest because of the cost burden experienced in high-risk markets, such as Florida. There needs to be greater stability in the market (i.e., slowing claims and losses) before this improves. 

• Despite Challenges, Optimism Abounds: Attendees seem to have grown used to the ‘higher for longer’ mantra and are adopting it accordingly. While underwriting is more stringent, and debt less favorable, deals are still closing. Land banking remains attractive, and M&A is filling gaps in lot pipelines across geographic markets and price points.

Please contact us for a confidential conversation to discuss your company’s growth plans and capital needs.