Housing's Prediction Spin Wars Sway You From What Really Matters

John McManus -

As we've seen, more transactions take on a life of their own and cause more transactions. As we're also learning, we need to consider to what extent the opposite proves to be true.

Getting involuntarily tugged into some grand cosmic experiment of the "recency/availability bias effect" in one of the economy's crucial industry components is no fun.

As housing's red flags become part of the daily media news cycle, color analysis of residential real estate – like it's done before at the threshold limbo of a cyclical rotation – has devolved into "us/them" camps.

If you don't vocally ascribe to the beliefs of one camp, you're assigned to the other. Middle ground – it would appear, given a dizzying cross-current of explicit and less transparent self-interests – is a big challenge to find.

There's too much work and too much opportunity out there – no matter where the housing market is barrelling – to let that kind of polarization weigh on response to the challenges.  

In such a context, those who view a housing market "calming" from white-hot to, say, circa-2018-19 normal, are regarded as "what-are-they-smoking?" optimists.

Those, including me, who expect a deeper, more destructive fall – in prices, in company/business financial viability, and in economic resiliency that powers a healthy residential investment contribution to the macro economy – are written off derisively as limbically-overstimulated hysterics, seeing doom where there is really none to see.

Enough of the Bulls vs. Bears talk. Some of us by nature are over-reactors and some of us under-appreciators. What's undeniable is that what was the case driving transactions and valuations is no longer.

As we're starting to hear in the form of restated volume, revenue, and business performance guidance of homebuilding enterprises that account for more than 45% of new-home construction activity, the change is happening fast. Velocity – when a real estate cycle enters an inflection – is a crucial value to try to understand. It can help strategists pierce through their own recency bias and recognize better what is going on so that they can prepare their teams better for what's coming next. Here's a couple of trusted perspectives on the speed of change to key indicators that impact planning, preparation, financial risk, and confidence.

Fairly characterizing that change from what was just a few months ago to what is now in play, as we've seen, calls for a delicate leadership balance between recognition of the changing nature and severity of challenges and bottom-line resolve and confidence to weather them. One-camp-or-the-other side-taking – rose-colored-glasses-wearing optimists vs. freak-out gloom-and-doomers – won't solve for the following:

Our first, foremost focus here – and our self-interest as a platform whose sustainable viability is a healthy, robust, housing-as-a-solution private sector – is the ongoing capability of small, medium-sized, and large firms to discover ways to meet that abundantly evident need for more homes, and to do it profitably.

It's not for us to predict – we're so well aware of ours and everybody else's shortcomings in that department. Barry Ritholtz, investment advisor and host of The Big Picture blog writes about "the uncertainty monster:"

Economic and market forecasts tell us little about the economy or the market, but everything the forecaster. The silver lining: When people are people are secure, unworried, well-fed, they don’t concern themselves with uncertainty. When they are uncomfortable with the present, nervous about the future, and genuinely frightened about their economic security, the uncertainty monster suddenly comes to visit.
The future is unknown and unknowable; everything is inherently uncertain, and always has been. The only thing that changes from moment-to-moment is how your psyche processes this. 2022 has been an excellent reminder of this.

It is for us, we believe, to challenge business leaders committed to continuing to learn what it takes to make their organizations and businesses truly resilient, to challenge assumptions and reflexes. Why? Simply for the reason that we saw the pain so many endured in the late "aughts," – 2006-2011 – where personal and professional losses stemmed then from overconfidence in those assumptions and reflexes.

Let's set aside, for a moment, that a silver bullet factor – say, Millennial household and family formation models, or deeply undersupplied new-construction to population and job formation ratios in this market or that – yield to some players a sturdy way to predict with certainty that those forces will establish a floor that will shield businesses from near- and medium-term risk.

Instead, focus on the fact that what was is no longer, and what is next is occuring at an accelerated pace. One source of influence as to the speed of change is flip-flop that has occurred, and continues at a sharply pitched slope, in the cost of debt versus sticky prices.

The trade for one-by-one single-family-rent aggregators – including both institutional investment-back single family rent enterprises and some of the iBuyer groups – has gone "upside down," according to residential real estate executive sources we talk with.

Existing home resellers have been slow or unwilling to drop their prices yet as they're trying to hang on for their on-paper gains on the properties," one of our trusted senior level executives in the field tells us. "At the same time, the debt markets have moved up aggressively, and the cost of debt now exceeds your ability to pro forma a profit on adding the property to your portfolio, so that trade is now dead in the water."

That's a big deal, but not just in the single-family rental space. Since nine out of 10 of those aggregated properties were MLS listings, an important buyer/bidder group – in some markets as much as 25% of the resale markets were investor buyers for the SFR market – has now gone radio silent.

So, soon, what has been looking like very low months' supply of available inventory in many markets starts to release and pronounce itself. Added together with all the homes started and under construction, as well as the hundreds if not thousands of new communities builders plan to grand-open during the balance of 2022, months' supply could be one of those metrics that changes sharply over the next few measurement cycles.

So rather than engage in "us/them" distractions, focus wholly on "we/us" opportunities to take smart decisions sooner.

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