For anyone in the residential real estate business, it is clear the tides have shifted over the past 6 months. Gone are the days of properties lasting mere minutes on the open market only to be snatched up at well over asking price on the first day. The traction has slowed and as a result we are seeing a gradual decline in home prices, compared to the overvalued prices of 2021 and 2022. On the back side of this slowing, most housing experts concur there will indeed be a short and shallow recession. This is not all bad news for those in the residential real estate industry, however there is a need to prepare in a way that can set developers up for success regardless of how long this housing dip continues. There are actions and decisions we can make in the next 6-12 months to help position ourselves for a strong recovery/rebound on the other side of the recession.
How Did the Real Estate Market Get Here?
Let’s look at how we got here and what the landscape looks like today. Key contributors to this shift include everything from supply chain shortages to low new home inventory to lifestyle choices by potential first-time home buyers, and of course, rapidly rising interest rates. With the Federal Reserve raising rates another .25% on February 1, 2023, bringing current average home mortgage interest rates to a 20-year high of 7.5%, housing is simply becoming unaffordable to many first-time home buyers. Combine that with continued low inventory and lingering overvalued home prices and it’s clear how we have arrived at this dip in the housing market. As a result, we are seeing record home purchase/build cancellations and slowed first-time home purchases. In some markets, as much as 60% cancellations were recorded in Q4 of 2022. On the other hand, many markets are perfectly poised for a housing market boom but will need to be monitored carefully. For example, Dallas/Fort Worth, Austin, Orlando, Houston, Phoenix, Charlotte, and Atlanta are among the markets with the strongest opportunities for new development, not to mention the positive progression among the entire sun belt markets. However, recent inventory increases (for example, in January 2023, Realtor.com reported an inventory gain in Austin of +260.4% and Raleigh, N.C. at +254.8%) have the potential to lead to decreased pricing growth and potential oversupply.
The Build-to-Rent Shift
In addition to the current situation in traditional single-family residential development, we now see an uptick in new approaches to residential housing gaining momentum. Build-to-rent communities, as well as corporate home purchases, are just two areas to keep an eye on in the coming months and years. As these types of products make their way to the market, home buyers will have more choices – especially as it relates to fulfilling the emotional connection with-first time home buyers relative to their desire for a sense of community. In lieu of buying, these options offer potential alternatives and avenues to experience neighborhood living without taking on a mortgage. In fact, these new entrees to the housing market have us pondering the question: Will we see Build-to-Rent replace the “starter home” mentality we’ve all come to recognize as the initial step for first-time home buyers?
This recent activity led us to the realization that while housing market speculation has never been clear-cut, it appears to be more convoluted now than ever.
So, what are residential real estate developers to do as we await this looming recession and rebound?
Beat the Trends
In times like these, it’s important to recognize this is cyclical and to remind ourselves this looming recession is not an end game, it’s a long game. This brings us to our recommended course of action for the coming months as we weather this recession storm, whatever form that takes in your market. Beginning with the advice to reject the notion that now is the time back away from investing in your project and reserve dollars. Here’s why – the average home buying timeframe is 6-12 months. Now is actually the ideal time to get in front of new home buyers with your message and the story of your community to begin to build that relationship. While buyers are in the initial phases to mid-way through their process, they are seeking that emotional connection to a community in a way that will drive them to action when the time is right. Waiting for the tides to turn to begin this work will have you in catch-up mode. Look at this looming recession period as a gift to allow you to prepare for the day that sentiment turns, and buyers are ready to take action again.
Some specifics to consider over the next 6-12 months include:
- Direct marketing through digital engagement and nurturing campaigns will keep communities and homes top of mind, even if not directly promotional. Share communications about the community, and residents, and showcase the experience
- This can prove particularly effective given that people are seeking a sense of community and experiences even over the type of home they may want to live in.
- Be prepared: If the inventory is not available, or the community is in its early stages, use that time to be fully prepared for a go-to-market launch, without stress.
Work with your agency to:
- Develop your brand story
- Identify your key selling points
- Design and develop your website
- Pepper your community with engaging signage so people become intrigued as they drive through
- Execute early activation marketing and activities
- On-premise events
- Directional signage/billboards
- Content for Social and Web
- Create and share educational content. Many of the home buyers today who are struggling are first-time homebuyers who do not have the experience or savvy to navigate the difficult home-buying process. Be a resource, not just a sales organization. Content can be a neutral tool to provide potential homebuyers with tips, information, and resources to make them more comfortable with home buying. This can create an added sense of security in deciding to buy in your community.
In the end, whether this looming recession talk manifests into a reality or simply remains the conversation that keeps home buying at bay, now is the time to prepare and connect with those home buyers. At Schaefer, our focus on the real estate development market keeps us up to the minute on not only the realities of the market, but importantly the mindset of the home buyer. We understand how to best develop your brand, tell your story, and, most importantly, how, and where to intersect with them to drive action.