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How Are Dealers Feeling Today? Positively Nervous

By Craig Webb

President, Webb Analytics

Collect dozens of anecdotes from travels, panels, e-mails, and social media interactions, as I have recently, and three trends emerge to summarize the state of construction supply today:

  1. Dealers say demand remains strong, with only marginal easing of supply chain pressures.

  2. In contrast, gloom-and-doom statements abound among housing commentators, who equate recent speed bumps with going over a cliff.

  3. Dealers hear those fears and all the general talk about a potential recession and thus have become cautious about conditions late this year and into 2023.

Expect this confused state of feeling both positive and nervous to last well into the fall.

When LinkedIn contacts wished me a happy birthday recently, I took the opportunity to ask them about conditions for their markets and products. Here are some of the things my well-wishers said:

  • No real slowdown, but lumber prices are a worry.

  • No slowdown where I am, but I hear it's down in metro areas.

  • Volume off a little, margins down.

  • Payments have slowed some.

  • Fantastic business now, but we'll see how things are in Q4.

  • Not really seeing any slowdown yet.

These assessments are far from apocalyptic, and they make sense. Given the clogged supply pipeline, experts like Evercore ISI estimate builders have enough work just completing the homes they've started to keep overall construction activity growing to spring 2023.

Now, contrast these comments with what John Burns Real Estate Consulting says it is hearing from new-home builders:

  • “Scary times. Hoard cash and hang on for the ride!” (Nashville, TN)

  • “Someone turned out the lights on our sales in June!” (Atlanta)

  • “Sales have fallen off a cliff. We’re selling 1/3 of what we sold in March and April.” (Austin)

  • Builders are slashing new home prices by 15% to 20%. (Boise, ID)

MarketWatch summarized the JBREC report thusly: ‘Scary Times’: Builders Are Slashing Home Prices and Slowing Construction as Buyers Pull Back, Survey Shows. (John McManus of The Builder's Daily gave it his newsletter's "Overhyped media clickbait award of the day.")

Why such different tunes? Perspective could be one reason why. The dealer community focuses on current demand. Builders, meanwhile, always seem to be focusing on the next sale--and odds are that sale won't feel as quick or as easy as recent ones have been, even if all that's really happening is a return to the sales norm.

Dealers also may seem to be more optimistic than builders because most get their revenues from four sources: builders, remodelers, commercial contractors, and retail customers. There's a correlation between single-family housing starts and dealer revenues, but it's not one-to-one, and the drop in starts is likely to have less of an impact on custom builders, which are the bread and butter of most independent dealers. Meanwhile, remodelers generally have more work than they can handle and are booked up for months to come. And in business, The Dodge Momentum Index, which measures planning under way on nonresidential building projects, hit a 14-year high in June.

As for consumers, the economy's seemingly contradictory attributes are making it hard to judge. Most recessions put people out of work and leave them short of cash, causing businesses to pull back as well. But the unemployment rate hasn't gone up (yet), and consumer spending is still rising (albeit more modestly). Also, thanks to stimulus money and lifestyle changes, Americans in general have 40% more money in their bank accounts as of March 31 than they did two years earlier.

But if there is one thing this recession has in common with others, it's pessimism, and the trouble with pessimism is that it can become a self-fulfilling prophecy: If you expect certain things to happen, your attitude can play a big role in them coming true. That's why the Federal Reserve pays so much attention to the New York Fed's survey of inflation expectations. For June, that poll found consumers were predicting double the rise in food and rent prices than they were pre-pandemic and were 50% higher in their estimates of how much more gasoline would cost 12 months from now.

Another mood ring--the University of Michigan's Consumer Sentiment Index--found Americans in July were 32% gloomier about economic conditions than they were in July 2021 but 6.1% more optimistic than they were in June of this year. The month-to-month change could stem in good part from the decline in gasoline prices as well as anecdotal reports that retailers had over-ordered some consumer goods and thus were putting stuff on sale.

So, what we appear to have are three different groups in three different states of feeling: Dealers are optimistic but nervous, builders range between worried and frantic, and consumers are still buying but feeling glum about it. Some dealers might feel they are whistling past the graveyard, but I tend to think their cautious optimism shows they've got a better grasp of what's going on than do many of their customers. They're positively nervous.

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