On August 30th, we sat down with housing industry visionary, Tim Costello, for a conversation on the state of the current U.S. housing market and the posture of builders within that market. We learned that recent market shifts are setting the scene for better collaboration between builders and their vendors and trade partners, enabling both parties to seize more opportunities. Read on to learn how.
How have the societal changes in the US since COVID rippled through the 2020’s housing market, and how has it disrupted the traditional pecking order of new vs. existing home sales?
TC: During this period, we had quarters where we had build rates as low as 500,000 units and quarters where we had build rates over a million units. So we had 100%, quarter-to-quarter changes. The market moved up and down dramatically. It was going up gradually, before COVID, then it crashed for about two months, it then spiked to incredible levels and then it began to cool down eventually at the end of 2022. That’s when rates and prices started to get out of control, and affordability started to suffer.
Now rates have continued to rise. Everybody was prepared for a doomsday scenario of affordability and rates rising that would cause new home sales to crash again, but what we are now seeing is the exact opposite — a very healthy and, in spots, even hot new home market (Figure 1). It’s being driven by two things: lack of resale home inventory, and the fact that some people simply need to move, and they need to move fast. Unit sales of existing homes are coming down sharply, but new home sales are rising.
Figure 1: 2019-2023 housing market snapshotIs there an offset in resale with home improvement?
TC: The problem is the price of home improvements is so high, it generally involves a home improvement loan or revolving credit and those rates have increased dramatically along with home mortgages. So that’s cooling as well (Figure 2). The renovation market is getting hit from two sides – people aren’t moving into homes that they want to fix up before they live in them long term, and they also can’t afford the credit to improve the homes that they’re stuck in. So, I think that market is going to be in a real slump over the course of at least the next four quarters.
Figure 2: Leading Indicator of Remodeling Activity – Second Quarter 2023. Data from Joint Center for Housing Studies of Harvard University. https://www.jchs.harvard.edu/press-releases/further-softening-expected-homeowner-remodelingCan builders use this victorious moment in the market share battle to claim more than sales? To amplify the “new is better than used” brand promise?
TC: That would be overstating the situation and probably giving us way more credit than we deserve as an industry. Builders believe new homes are better than used homes, there’s no question about that. But to effectively convey that we need to significantly change sales and marketing messages and attitudes. Builders are thrilled that new homes are 35% of all the homes available in many markets, and that means they’re going to have more customers and home shoppers in total looking at new homes than they have ever had. For them, it’s a once in a lifetime opportunity.
If we’re going to have three quarters of the buying market now looking at new homes, wouldn’t it be incredible to really convey this long-lasting message of new being better than used, to embed in the psychology of homebuyers for the next generation that new homes really are superior? And, that if you’re going to buy a home, you deserve a new home? That is a huge opportunity. Traditionally, we only get 25% to 35% of home shoppers looking for a new home. The rest of them are out there mired in the used home inventory. That’s not the case now. The majority of buyers are actually considering new for the first time ever. It is a chance for us to really drive home the importance, the advantage and the differentiation of new homes.
What’s your sense about builder appetite for selling more of a “finished home,” generating more dollars per unit by optimizing options sales instead of just running as fast as they can to get closings with a minimalist offer?
TC: I think builders are always looking at that as kind of a risk equation. In a challenging housing market, having a lot of standard inventory can be really risky, right? There’s the time value of money – as the finished houses sit out there, you may have to offer incentives at some point to get rid of them. But on the other hand, many buyers, for one reason or another, don’t want to go through the custom built process from the beginning – they don’t want to deal with the challenges of configuring a new home, picking all of the options, all the colors, that kind of stuff. Or, maybe they just need a home – they need to move next month, so they need something available right now. I think this opens a window for builders to build a higher percentage of inventory homes without the inherent risk of that business model.
What about build for rent? Is that part of the equation because interest rates are inhibiting buyers, at least at the affordable or starter level?
TC: As a business person, you know, the build to rent model is just a way for builders to print money. If you think about it, there’s zero risk that the home is not going to close, you have almost zero carrying cost of the home. In fact, if you negotiate appropriately, you could actually pay all of your suppliers and all of your costs on the same day you actually close the home. You can create a level production schedule so you have none of the variation in waste.
I believe homeownership is a really important part of our democracy. It’s a really important part of helping all Americans build wealth and be able to retire in comfort. And the idea of becoming a rental nation to me, where private equity firms own all of the housing stock, and we all just rent… I don’t look at that as a major positive, but I clearly understand the business model behind it. And it’s incredibly appealing to most builders.
Let’s talk about vendors and trade partners of builders. What new strategies might they deploy in the current market?
TC: We’ve got to look at what our builders are trying to accomplish right now. We’ve got this incredible opportunity where we’re kind of the only game in town, but at the same time, we are dealing with a high-interest rate environment. As a vendor or trade partner, I would look at all of my products, those that I have, and those that I’m in R&D with, and ask myself these questions. Do they end up helping builders build smaller homes that are more livable? Do they end up reducing the construction cost of homes? Do they end up speeding up the construction of homes? Do they end up allowing homes to be built with less labor? Do they solve the regulation issues? I would hammer on those issues.
What about looking backward as well as forward? Is there a way for a trade partner and even a manufacturer to go back a couple of years in the builder’s customer database and with the information assets that they have and try to get retrofit business through a builder?
TC: We’ve been talking about that for years that builders need to document what’s in the home and track how that home and the family in the home will age over time. And as they age, how their needs will change, and how some of the products in the homes will become either obsolete or outdated. And then we can target them directly to capture update and upgrade business very efficiently. I have not seen anybody do that well, but the opportunity is certainly sitting out there for manufacturers and their installer base. I think a lot of your electronics integrators probably have the best opportunity there, or at least the lowest-hanging opportunity. Because, you know, they know what they installed, they know where they installed it. And, with home automation and smart home systems, there’s so many new products that can be easily integrated. They probably have one of the easiest opportunities in that space.
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Wrapping up our conversation with Tim, we learned that there are many ways that vendors and trade partners can pivot to capitalize on the current state of the housing market. At the end of the day, it all comes down to understanding their builder targets and what they can do to help improve their processes.
Click here to watch our full interview with Tim.
About Tim Costello
Tim Costello has been a pioneer his entire career. As the Technology Planning Manager for Advanced Vehicle Engineering at General Motors, Tim oversaw the launch of the first modern electric vehicle, the EV1. As VP of Global Operations at Applied Materials (the world’s largest manufacturer of semiconductor equipment), he drove the transformation of the semiconductor industry’s manufacturing systems from a craft system to a lean, flow production system. Tim then founded the homebuilding industry’s technology consortium, BHI. For 22 years, Tim led BHI and the homebuilding industry’s digital transformation. BHI was the market leader in digital customer acquisition and experience, serving over 1,300 builders which built over 60% of the homes in the U.S. Tim retired from BHI in 2022, but stays connected sitting on the boards of several technology companies. Tim was inducted into the Shingo Prize Hall of Fame for his work in lean process transformation and is a sought-after speaker who challenges traditional thinking and the status quo.
