This time of year, everyone wants to know what 2020 will be like and in keeping with our tradition, I am going to lay out our 2020 market expectations below. However, before I do that it makes sense to turn the clock back 12 months and assess the accuracy of our predictions for 2019 (broken down below):
Prediction: We would probably not see a recession in 2019, and if we did it would come in the back half of the year.
Analysis: Correct - We did not see a recession in 2019, though there were plenty of warning signs and fears in the second half of the year.
Prediction: All signs point to 2019 being a year of economic volatility. However, volatility does not necessarily mean a recession. It just means uncertainty and variable swings in the big indicators.
Analysis: Mostly Correct - 2019 was a volatile year on a lot of fronts, and we definitely saw big swings in major predictors, including an inverted yield curve. However, overall the stock market continued to climb.
Prediction: It is highly likely that this year’s selling season will underperform compared to last year. Housing, specifically new housing, is not as affordable as it needs to be to capture the demand that exists at the levels most builders will want.
Analysis: Correct - According to the National Association of Realtors, existing-home sales were down year over year in the first half of 2019 but then picked up in the second half.
So what does 2020 hold for us? I believe 2020 will likely be more of the same outcomes; it should be volatile in different ways and mostly steady overall. This likely means, short-term fluctuations, and swings in the overall market will mask a mostly unchanged trajectory. This is both good and bad. It is good in that we think a recession is unlikely in 2020.
2020 does not come without plenty of risks that could tip us into a recession. Household debt is high, as is corporate debt. Money has been excessively cheap (near zero FED rates) for an extended period of time, which may be creating a general asset bubble. Tensions have been steadily rising globally, and in a deeply interconnected global economy one shock to the system could shake things up quickly. Additionally, there are still plenty of troubling signs in the overall economy, though it appears resilient.
The downside in “more of the same” is that many of the same problems currently challenging homebuilders will remain in place. For most of the last few years in my Star Report features, I have pointed out the structural flaws in the housing market impacting the supply side in particular. Those realities have driven prices and will continue to do so (especially new construction housing prices) beyond their perceived or actual value. The increases in price will necessarily shrink the overall pool of demand due to the demand side factors we have explored previously.
We are even seeing some weakness in the first-time buyer market, largely due to those structural flaws mentioned above. The pool of buyers who can afford to purchase is shrinking. The main problem here is that housing tends to be a trickle-up industry, meaning move-up buyers need to sell to first-time buyers in order to make the next purchase. If the first step slows down, the next step does as well.
Given that our prediction for 2020 is mostly the same as our prediction for 2019, or rather a continuation of the predicted trends we saw in 2019, it makes sense that our suggestions are also similar. In our predictions for 2019, we concluded with the following advice, which remains unchanged:
“If you don’t have a strategy to drive affordability, meeting your volume goals will be difficult in 2020 and beyond. You need to aggressively question every inclusion in your homes, especially those behind the walls, and ask whether or not your customers actually value this. Meaning if you priced it as an option, would they take it at least half the time? If not, you need to consider removing the unvalued cost that is pushing your price up beyond what the market will bear. Second, you need to double down on your investment into your sales team.
The front-line staff that works the closest with your customers needs to be developed, trained, supported and listened to more. Dismiss their feedback at your own risk and forget to prioritize training at your own risk. Ignore top-line revenue strategies at your own risk; the market is about to turn. Maybe not in the next six months and maybe not in 2020, but soon.
When it does, we will find out two hard truths. First, your product may not be aligned with your consumers and what they value. Second, your sales team may or may not be capable of driving incremental performance above and beyond the market, which could result in you overpaying for average results. If you are not confident about what these truths could reveal now, it is time to reach out to New Home Star.”
