By Charles C. Shinn Jr.
Builder Partnerships Founder and CEO
2020 was shaping up to be the best year for housing in 15 years, with record-low unemployment and interest rates, rising wages, and very strong consumer confidence and spending. The first 2 1/2 months of traffic and sales for home builders were surpassing expectations and the millennials and the baby boomers were on the move.
On March 11, during our Executive Summit conference, the World Health Organization declared the coronavirus a pandemic. On March 12 and 13, our Benchmark builder group met and the whole discussion centered on how to respond to social distancing to protect staff, customers, and trade contractor crews and maintain company operations. Who could work from home? What to do with the sales offices and model home complexes? What do we need to do with the selection center appointments? What do we do with the back-office personnel? What needs to be done with the production staff and trade contractors? How do we handle customer meetings and what needs to be done with warranty appointments?
Over the following weekend, home builders continued to have very strong traffic and sales. However, at the same time the whole economic environment was changing as the U.S. economy begin to close down. Across the country, schools and universities were closed for the rest of the academic year. Bars, restaurants, retail stores, theaters, amusement parks and sporting events where closed to reduce social contact. By March 25, there would be 34 states, Puerto Rico, and the District of Columbia completely shut down with “shelter–in-place” regulations with the only exemptions being essential services.
By Monday, March 16, the whole U.S. business environment had changed 180 degrees, catching home builders totally off guard. They needed to move instantaneously from expansion mode to crisis and survival. Builders were elated with their sales over the weekend. By the end of the day, the stock market dropped over 3,000 points, followed by two days of over 1,300-point drops, with the Dow Jones index falling below 20,000. The economy was in a free fall.
At Builder Partnerships, we called emergency meetings for all of our builder groups to try to help builders understand and adjust quickly to what had just happened to them. Many of the builders were either totally unaware of the change, in a state of denial, or in shock. Some builders were frozen in panic and fear. Builders who experienced the housing recession in 2008 were already in the planning mode for what is to come.
This last week has still been dominated by many builders in fear and panic, where clear thinking is very difficult and actions are frantic. Builders need to quickly move through denial and panic stages to turn their fear of failure into focus and belief they can survive this crisis and the unknown. The faster you reach this point, the better your chances of survival.
Don’t believe this is going to be a short-term disruption in the economy. We are shutting down the U.S. economy and no one had time to prepare for the shock. Everyone was in an expansionary mindset with no thoughts of contraction.
I believe it will take at least 18 months before we even begin to get back to normal. The federal government and the Federal Reserve have passed emergency legislation and regulations, but these undoubtedly will come with a lot of red tape. Last Friday, congress passed the $2 trillion Coronavirus Aid, Relief, and Economic Security Act to help businesses and individuals survive this crisis.
One of the wins for home building so far is being designated as an essential industry in most states. At this time, Pennsylvania and Michigan appear to be the only states that have specifically restricted residential construction. The essential services designation will allow builders to keep building during the crisis and to complete the houses currently under construction. If you need to close down, document with pictures the status of the homes for insurance purposes.
I would anticipate that builders are going to have negative sales over the next several months with more cancellations than sales. During the meeting with one of my builder groups immediately after the crisis, a builder said a customer walked from a $50,000 nonrefundable deposit, and another builder had two customers walk from $35,000 nonrefundable deposits. Traffic and sales have plummeted during the last week with cancelations on the rise.
One builder said he had a number of all-cash deals and he felt comfortable. But where is the cash? If it is in the stock market, the customer just lost 30-50 percent of the available funds. Right now, every one of your buyers is scared about everything. If they still have jobs, they don’t know if they are going to be laid off. Their lives have been turned upside down and the last thing they need to deal with is the purchase of a new home. It is forecast that home sales could fall 35 percent during the spring home buying season. No sales and increased cancelations make for a bleak selling season and 2020. Plan for it and protect your cash.