The Expert Podcast

So, are we headed for another big Builder industry meltdown because of the crash of the real estate market? Not likely this time. Many of the builders and contractors have been around long enough to remember what happened in the real estate crash in the late 2000s (2007-2008). According to the Wall Street Journal, Builders say they're ready for this slowdown because they've learned their lesson. Most Builders have been through this before; they're not taking on as much risk or as much debt. They're just building smart. They're building a lot of prepaid things like additions, remodels, and even if you're building an entire home, it may be on contract for a property owner that wants to build a house. There are some spec homes still being built, but even that is much less risky or speculative than building a whole subdivision and hoping hordes of people come to buy it.

There is still going to be quite a bit of demand for new homes, and even at the higher prices, people are going to realize, "Look, I need to buy a house, and if I have to pay a little more money, even if the interest rates are higher, hopefully they'll see rates come down where they can refinance in a few years." But I think once the dust settles and people realize, "Look, the market's not going to crash, it's not going to get cut in half. I still need a house, I have to pull the trigger," so there will still be some spec homes being built.

When they interviewed some of the builders, there were some interesting quotes. Touchstone Living, a builder, had a list of 639 qualified buyers who wanted homes. Now that list is about 30, so it's about five percent. Many would-be buyers are unable to qualify because the rates are higher—rates are at seven percent. So, if you can qualify for a loan based on your income, but all of a sudden the rates jump up, that payment now is going to be higher, where you may not qualify for that loan. But here's the thing, there's still 30 people who need to buy a house. So, instead of building 200 homes, build 20 homes. You still have plenty to do as a builder.

Many of the contractors are taking completed single-family homes and turning them into rentals. You can bring in revenue that way, and you can sell that rental revenue to capitalize your business. Even the big builders like Lennar said that new sales orders fell 12 percent. But here's the thing—it fell 12 percent, that means they still have 80 to 88 percent of their market. So, the buyers are still out there; they're just being more selective, and maybe they can't qualify for as much house. So, the builders are in a little bit better shape.

Existing home prices are still up from a year ago. They're still a shortage of existing homes below historical levels, and millions of Millennials are moving into their prime home buying years. That could limit price declines, according to economists. Certainly, prices got a little frothy; they got a little out of whack. But people still need homes, and as soon as the price rate and demand hit equilibrium, there's still going to be a market for homes because people need a roof over their head.