This marks our sixth week of sharing vital insights for leaders in the homebuilding industry from a sampling of important webinars and podcasts helping us pivot and thrive during COVID-19.
As always, each summary offers key highlights. The full value of each webinar can be had by listening to the recording and by signing up for upcoming webinars.
This week, we again sought to mix new voices with ongoing sources of insight from industry experts for the week ending Friday, May 15, 2020.
John McManus, longtime editorial leader for Builder Magazine, opened his one-on-one conversation with Tim Costello, founder and CEO of BDX.
McManus underscored two pillars that defined the design, intention and substance of this series of #BuildersAreEssential webinars: “Protecting lives. Supporting livelihoods. Safeguarding our lives and our ability to prosper,” McManus said.
McManus noted that Builder Magazine is part of a larger network of Hanley Wood offerings that include other top media brands, two of housing’s leading research firms, and an extensive team of analysts, researchers, advisers and journalists. Collectively, he defined the team’s goal as providing vital information to key stakeholders across homebuilding in real-time, providing an important network effect for decision-making.
“Our entire human resource has a single, impassioned purpose – never more focused than it is now – on your ability to learn what you need to, anticipate what you need to prepare for, and act in a way that assures you your best shot at success,” McManus said.
Prior to introducing Costello, McManus provided a six-part overview to frame their discussion. On the day after Mother’s Day, he cited the principles below. Many, McManus noted, were lessons his mother had first shared with him and his six siblings. Over the course of the webinar, McManus and Costello unpacked each of the themes below – and made clear their relevance to builders today:
- The rainy day
- Living with the unexpected
- Necessity and change
- Suspending disbelief
- Design systems entirely for CX
- All about share
“Right now, facing the specter of unemployment rates that American society has no experience with for upwards of nine decades, homebuilders…face a moment like no other,” McManus said. He noted many observers feel that the pandemic was amplified by occurring at a time of what he referred to as “an awkward pivot to the future of work – in an exponentially enabled technological, data and automated world.”
“This is our rainy day, McManus said. “How creative, inventive, imaginative can we be? We’re seeing a glimpse of…what people have been talking about for years – but now are doing, out of necessity.”
As he joined the conversation, Costello opened with market information, “to help us get focused on the opportunity in front of us,” he said. He also noted that teasing out meaning from vital – but often conflicting – indicators was not always easy. What’s going on in the housing market today, he said, was the result of complex interactions among these forces and signals:
- Consumer Confidence
- Housing Prices
- Interest Rates
- Credit Availability
- Housing Supply
- Economic Background
“The opportunity here is to take back our traditional market share (for new homes vs. used homes),” Costello said. “Because of the shortage of used home inventory on the market, there is an opportunity to re-gain market share – and actually sell more new homes this year than we sold last year.”
Costello was quick to admit that might send like an audacious – or unrealistic – goal in the midst of a pandemic, but he built his case, point-by-point:
- Owners of existing homes are removing them from the MLS or not listing them.
- Used home inventory is down 30% to 60% across many MLS’s.
- Prior to the Great Recession, new homes averaged a 17% to 20% share of market.
- Market share for new fell to a low of 7% in 2012 – and has moved up by roughly 1% a year since, to nearly 13% in 2019.
Costello noted that even if the market melted down to 4 million total home sales in 2020 – which he does not expect – builders should take advantage of the historically low level of existing homes for sale. He pointed out that the typical market share for new homes of 17% to 20% would translate to 680,000 to 800,000 new homes – more than 2019 – even if total home sales fell 40% in 2020.
To bolster his case, Costello cited the 15-year old BDX Google Online Real Estate Traffic Index. Explaining the Index, Costello noted that it consisted of three components – each of which served to cross-check and corroborate the other two components, making it uniquely reliable:
- BDX tracks the volume for thousands of consumer real estate search terms online – in hundreds of housing markets and sub-markets across the nation.
- The BDX analytics team compares the Google search trends above to activity on NewHomeSource.com, the firm’s website for consumers with 36 million visits per year. Costello noted that NewHomeSource achieved the highest traffic, leads and other conversion actions last week – especially phone calls to builders – shattering 20-year records.
- Last, the BDX data team compares the datasets above with aggregated and anonymized search volume and consumer behavior on builder websites that BDX builds and/or manages.
As shown in the BDX Index chart below, consumers first awoke to the impact of the pandemic in the third week of February, Costello said.
“For four weeks, we descended into the valley of despair,” Costello said. The BDX Index – which began 2020 near 100 – fell to a low of 60 in mid-March. Since then, he noted, the decline has been completely reversed by six straight weeks of gains in the BDX Index.
“In the last three weeks, the volume of consumer searches for new homes online is actually higher now – despite the pandemic – than it was in 2019, a record year for online search,” Costello said.
As large as this opportunity is, Costello was quick to point out that the chart above reflects the national average – and online search varies by market and product type.
Costello noted that 55+ buyers, luxury buyers, and move-up buyers face additional challenges that first-time buyers with stable jobs and good credit do not.
“If I were CEO of a homebuilder that addressed the first-time buyer – especially in markets less impacted by the virus and job loss – I’d be telling my team to plan for the same or even better home sales in 2020 than in 2019,” Costello said.
He noted that the impact of tailwinds that favor new homes, on average, outweigh the headwinds that can hold new home sales down.
In addition to levels of competition from used homes and mortgage interest rates – both historically low, Costello noted that new homes are comfortable and easy for consumers to tour, design and buy — and builders are enabling buyers to do so virtually and online in record numbers.
The BDXtra podcast opens each week with a look at the latest online search trends for new homes. BDX founders Tim Costello and Melissa Morman share the latest insights and offer practical, actionable, facts-on-the-ground analysis of home shopper behavior.
“For the seventh week in a row, the BDX Online Real Estate Search Index has risen,” said Costello, the CEO of BDX. “It’s boring, boring, boring!”
On a more serious note, Costello noted that it was unusual to see the 15-year old BDX Index rise for seven weeks in a row. “”Typically, there are ups and downs in the Index each month,” he said.
Costello also observed that the rate of increase has started to taper a bit – up 2% week-over-week. Even with the rate of growth lessening, “We are now 20% above the interest and traffic levels (for new homes) that we were at a year ago,” he stated.
NewHomeSource.com Achieved the Highest Traffic and Conversion in Its 20-Year History
“NewHomeSource.com not only had record traffic, but also record conversion last week – resulting in a 34% increase in connections (between buyers and builders) compared to last year at the same time,” Costello said.
Costello noted he was on a webinar with Builder VP/Editorial Director John McManus earlier in the week (covered above) and some builders were not seeing the same trends in the national BDX Index.
“We always have to be cognizant that there are 400 individual building markets. I am sure some have not recovered at this national rate. That’s why we also track the Index at the individual market level,” Costello said.
While local results vary, Costello summarized the national trend this way: “The consumer is out there. They’re interested. They’re motivated. They’re looking for single-family detached living. Renters want out of apartments, into more space with backyards. Urban people want (to move to) the suburbs. We’ve got people looking at rural land,” Costello said.
“You’ve got people wanting to lock-in historic low interest rates. They feel like this is going to transform their lives over the next 30 years,” Costello added. “There are tremendous opportunities for builders. The question is how long will this last? And can you pivot to satisfy, connect and actually close (with buyers) in this market right now?”
Upon joining the podcast, Tim Sullivan, Senior Managing Principal of Meyers Research, shared a few kind words with his hosts and long-time friends.
“We appreciate our relationship with BDX,” Sullivan said. “You’re so important to the work we do in our Zonda database…and I’m delighted that today we have a panel of two Tim’s,” he added with a laugh.
Melissa Morman, Client Experience Officer of BDX, asked Sullivan if the data Costello had just shared on online home searches was consistent with what the Meyers Research team was seeing across their client base of hundreds of builders.
Sullivan noted the BDX Index was largely consistent with what Meyers Research was seeing. He also said he wanted to take a step back and look at “Four things at play…with consumer behavior, builder behavior, and the whole economic situation. I can summarize them with three F’s and an H,” he said
“The first F is Facts,” Sullivan said. “The BDX Index definitely shows (homebuyer) intent. The second F is Fear – the feat of the unknown and job loss. The third F is Future. I’m very positive on the future. The question is, how many months down the road is it?”
Sullivan said the H stood for Hope. “While not a strategy, it’s important for our industry, where optimism runs high based on what we do,” he said, referring to delivering homes and dreams to buyers.
“Putting those four factors together, very clearly the demand is there. The thing I worry about is the time until we start to recover a month or two – or three or four?” Sullivan said. “Thank goodness we had such a powerful first two-and-a half months of this year, but the key is – can we replace that backlog?”
Costello asked Sullivan what the key reasons are that the industry is not seeing the backlog of sold homes rise. “It’s fear,” said Sullivan. “The 55+ buyer is incredibly discretionary. They’re on the sidelines for the most part.” He noted that jumbo buyers were also on the sidelines.
“The bright spot has been entry level,” Sullivan said. “All the markets are seeing pretty robust entry-level activity because of (low) interest rates.”
Costello brought up the need to look at different geographic markets and product types. “What we’re seeing is an urban flight going on,” Costello said. “There’s just less interest in dense urban areas and more interest in backyards and single-family detached homes.”
Sullivan agreed the interest was clear for urban to suburban moves, but he added, “It’s too early to see the massive flight that would align with the intent. Right now, we have an affordability challenge and an availability challenge,” he said. Sullivan feels this will drive interest in new homes for rent – both attached and single-family detached.
Costello agreed and said, “We’re also seeing the re-engineering of work. Just today, Twitter announced that all jobs in the U.S. would be work at home – permanently. (Jim) Cramer of Mad Money believes the majority of jobs will be location-less and you can live anywhere.”
“The future is finally here,” Sullivan said. “We’ve proven that working from home works. That means secondary and tertiary markets like a Boise, a Greenville, a San Antonio that are highly affordable…will become acceptable, attainable and attractive.”
Costello noted that with a combined household income of $200,000 to $300,000, buyers in more affordable markets could be shopping near-luxury homes. “That’s a pretty powerful push for demand in such markets,” Sullivan said.
Looking further at geographic trends, Sullivan noted that cities with high urban density and international connections have been among the hardest hit by COVID-19 – with clear impact on urban real estate. Costello agreed but also noted BDX is seeing an explosion in demand in commuter markets. “We’re seeing 200% to 300% increases in demand in suburban areas of New York City,” Costello said.
“I think our high-rises…and cities will be re-invented. This may mean fewer restaurants, more outdoor restaurants. It may mean a lower population density,” Sullivan said. However, he believes cities will remain a magnet for many people who will not move away from urban areas.
Sullivan shared his thoughts on the luxury market. He views it as two groups: public builders like Toll Brothers, Drees Homes and Taylor Morrison that address high-end buyers – and local custom builders. He noted 55+ buyers comprise a large segment of luxury buyers and many active adult buyers are pausing now. Sullivan also expects real estate agents to continue to play a disproportionate role in the high-end market. He noted that builders must also master direct digital outreach to luxury buyers.
All parties on the podcast applauded builders for the speed of their pivot to virtual and online sales. Sullivan noted that the percentage of buyers who are keeping virtual appointments is now around 80%. In comparison, he said builders were seeing 50% of in-person appointments kept before the pandemic.
Morman asked Sullivan what silver linings he was seeing amid COVID-19. Sullivan responded with three:
- Much greater investment in technology overall – and in the buyer’s journey: “Holy cow! Builders have made two years of technology improvements in two months,” Sullivan said. He noted that many steps builders are making now to move the homebuyer journey further online were changes BDX has advocated for several years.
- New homes will be even healthier and better designed: While he does not expect to see immediate product changes, Sullivan believes builders will pivot to meet surging demand for healthy homes (especially in areas like indoor air quality and anti-microbial surfaces) and offer design changes that stress flex spaces, working from home, lighting and more.
- Builders see the value of their people: “Every builder is realizing who their key players are…the people stepping up as leaders,” Sullivan said. “People who are willing to be open-minded, shift, pivot and adjust are the ones who are going to come out of this fastest and strongest.”
As Tim Sullivan, Senior Managing Principal of Meyers Research, introduced his co-host, Ali Wolf, he cited a quote from one of her favorite economists, John Kenneth Galbraith: “The conventional view serves to protect us from the painful job of thinking.”
Sullivan noted it was that perspective – as well as an arsenal of data, key indicators and pain-staking thought– that Wolf brings to builders each week.
Ali Wolf kicked off this vital weekly webinar with a quick re-cap of what has changed since last week’s update. Wolf, the Chief Economist for Meyers Research was fresh off a national interview with Bloomberg TV, so her library of data was especially well stocked. Indicators she shared included:
- Los Angeles County has extended stay-at-home orders until July.
- Spending date is slowly moving in the right direction.
- 7.9% of mortgages are now in forbearance – a slowing rate of increase, but far higher than the 0.25% level pre-pandemic.
- The majority of renters are meeting their obligations – but some are charging rent to a credit card. Wolf is watching credit card usage for essentials closely.
- The government continues to invest in consumers and the economy swiftly and with unprecedented tools and scale.
- Wolf noted it was six years after the stock market crash of 1929 before unemployment insurance took effect. In contrast, the Fed and political leaders have injected trillions overnight into the economy – and are prepared to do more, with a possible additional $3 trillion stimulus.
- Look behind the headlines: Wolf was heartened to read that Disneyland was selling out upon re-opening. It wasn’t until she got past the headline – and into the body of the story –
that it became clear Disneyland was “selling out” at a cap of 30% of capacity.
In a major theme of her discussion, Wolf noted that seldom – if ever – in American history have Wall Street and Main Street held such different views. In large part, this reflects the difficulty – and uncertainty – in interpreting current unemployment levels and the difference between temporary and permanent job losses. Depending upon the data source, she could cite an unemployment rate anywhere between 14.7% or 22.7% or higher.
Wolf noted that initial job losses were concentrated in lower-paying leisure and hospitality positions that will likely snap-back when a market re-opens. However, Wolf is starting to see increasing job losses in higher-wage and even technology jobs – and those positions may not return as quickly.
Wolf handed the reins to Tim Sullivan. His Heard on the Street segment highlighted trends that included:
- Some builders reported a strong start to May – others slow
- Backlog is still helping keep base prices firm – for now
- A shift to virtual community amenities – some communities looking to soft open amenities
- Cautious optimism is the prevailing mood – but backlog for 2021 still a concern
The weekly Meyers survey found that 78% of builders kept base prices flat week-over-week. Sullivan noted this data point had been in the high 90’s a few weeks ago. In an example of seemingly contradictory trends, nearly one in five builders reported they actually raised base prices. Twenty-one percent increased incentives week-over-week – and 14% reported an increase in cancellations.
Netting out new sales and cancellations, 39% of builders surveyed said their net contract volume slightly increased vs. the prior week – while 34% cited no change and 14% reported a slight decrease in net contracts week-over-week.
In an interesting look at the debt and equity markets, Sullivan said capital providers are showing clear preference for the single-family land development and single-family built to rent market segments – and for entry-level products and first move-up homes.
Sullivan offered fascinating – and built examples – of two distinct product offerings for the growing built-to-rent market: Single family platted lot subdivisions and an emerging sector that he dubbed Horizontal Apartments. See the webinar recording for examples of both.
Sullivan also made the case that healthy homes are a key lever for builders. He noted that a desire for space will drive people to move – and smart builders will design and market fresh product that appeals to newly sensitized consumers seeking healthy homes and life change. The formula, he said, looked like this: New = Clean = Safe.
Chad Bria, Director for the Envision Online Design Center, kicked off this webinar by noting that Envision delivered on BDX’s mission: Reduce the cost of customer acquisition and improve builder margins.
As important as those two central goals are, Bria said builders using Envision also report higher customer satisfaction scores since buyers get the home and upgrades they want more easily and can shop at their convenience. This translates into higher ratings and reviews and more referrals.
According to Bria, builders using Envision say Online Design Center provides these additional benefits:
- Increased leads and closing ratios – by 22% to 41%. Consumers build emotional engagement by designing their home, their way, and this creates high-quality leads when Envision is deployed as a pre-sales tool on a builder’s website. That same emotional connection reduces cancellations.
- Increased operational efficiency – fewer hours spent per home in the physical Design Center, with happier customers making more confident purchase decisions from the comfort of home. Bria noted this also reduces the “divorce court” feel of some Design Center visits.
- Increases of 30% or more in option revenue per home – which improves builder margins on each sale, and provides an additional revenue stream and cushion in a market downturn.
With nearly 200 builder Design Centers across the nation using Envision, the product is proven, and well thought out, Bria pointed out.
“We’re on release 199,” Bria said. “That’s almost 200 releases with refinements to Envision based on feedback from builders of all sizes and product types – over the course of more than a decade.”
Bria also noted about half of Envision users are smaller or custom builders – proving the platform works equally well for the largest national builder and also the builder of 8-10 homes per year.
The strength of Envision, Bria noted, was the breadth, depth and accuracy of the product data it contains. “Envision has robust and complete data on more than 375,000 building products from more than 350 manufacturers,” Bria said.
“That sounds like a lot of data – and it is – but the power and simplicity of Envision is how we partner with each builder so their buyers only see a far smaller number of products that each builder offers as a standard feature – or a good-better-best option, “Bria said. “We’re not showing shoppers options they can’t have.”
As exciting and timely as the Envision Online Design Center is, Bria noted that builders who deployed the platform before the pandemic are very glad they did. While demand is high for new Envision implementations – and builders with interest should reach out right away to secure a launch date – Bria said BDX has taken steps to meet the soaring demand for Envision.
“First, we added new launch dates by doubling down on the resources and size of the Envision launch team. Second, we’ve streamlined an already-efficient launch process even further,” Bria said.
“In addition, we’ve created a new Envision Express offering. It allows builders who seek to stand up the core functionalities of Envision more quickly to do so. All of these are ways we’re working to help builders take advantage of Envision,” Bria said, “but we definitely encourage builders with interest to contact us right away.”
As proof points of the value that builders are realizing from Envision, Bria noted that 85% of homebuyers with access to Envision log in and use it. Buyers spend an average of four hours shopping for options and upgrades before their Design Center visit – and , in many cases, even longer.
“As consumers today, all of us prefer to shop online. And we prefer to buy vs. be sold,” Bria said. “Today, buyers across all types of products want to be in control of the process and the pace. They want on-demand access to all of the information they need to make informed purchase decisions.”
“That’s why Envision was designed to enable homebuyers to compare options side-by-side,” Bria said. “It’s also why we translate the cost of an option into a simple mortgage payment, to help that buyer understand she can have an upgraded refrigerator or professional-grade range for only $11.17 more in her monthly mortgage payment,” Bria added.
“Empowering today’s homebuyers to make informed decisions and to select the options and upgrades they desire in a comfortable and consumer-friendly way is why builders using Envision report an average increase in option sales of 30% or more,” Bria stated.
About the AuthorMore Content by Jay McKenzie