What do all you home builders feel about recessions?

Question

Hello Friends, I just wanted to open up a discussion in regards to our economy going into a recession and how it relates to your home building projects current and future

Do you think homes will begin to become a lot harder to sell?

What category of homes do you think will be best off (Luxury 1.5-5mil homes vs Smaller 500-700k homes)?

Given the current lack of supply what do you think about when you hear it will have less impact the usual due to low supply of homes on the market? That said do you think we will start to have less buyers and begin our way into equilibrium?

If demand slows and we get close to equilibrium do you think home prices will stay the same, drop a little, drop significantly, go up?

Would you still build in a recession and if so, what would you stick to and why?

Do you think we are even heading into a recession and if so when and why?

Overall friends, lets hear your thoughts on building homes during a recession, Id love to hear what everyone has to say?

Bruce Woodruff · Answer

I recently retired from a lifetime of building and have been through more than a few 'recessions'....

I would build a house anytime as long as the client can pay me what I need to make a good profit.

What happens in a recession is that the trickle down process kicks in....the people at the top tighten up their $$ and the whole market sort of freezes. All of a sudden it's not about supply and demand so much, it's about the almighty dollar.

This will/should bring down that $PF number, so maybe a better for an owner wanting to build (as long as they have the money and are willing to spend it right now)

Fortunately it only lasts for 4 or 5 years and then we're back to normal.

Jay Hinrichs · Answer

we are continuing in our little berg in the Portland OR MSA.. there is no inventory to speak of  24 homes on the market as of 30 minutes ago when i check MLS in a town of 25k  thats detached SFR..  we just stay conservative we are fine with 2 to 3 sales per month.. our product is the highest price in town but we also are semi custom compared to production building we add a lot of little things that creates our buyers. But that all said my bank only allows 12 specs  right now we have 5 of those presold with solid deposits and pre paid upgrades . and 3 are all cash.. the 7 are at dig out /  framing and starting on finishes  So will see how it all goes.  WE have VERY low LTV on finished lots less than 20% So our returns of course statistically are not the max leverage max returns I went for max safety and healthy returns.  Also if for some reason we have to hold we can do that . and if we get stuck with 5 or 6 homes we cant sell we will rent and wait it out.

Mike Dymski · Answer

Curious on others thoughts.  I am building properties that I feel will do fine regardless of market conditions and could actually use a little slow down in 2023 to bring labor and materials costs down a bit.

Douglas Gratz · Answer

@Mike Smith You post gives me some more confidence in that I am building to large luxury homes. As its my first new construction , I was not sure how it would hit my target sale price, but you said " The ultra expensive luxury homes won't be hurt as much."  I expect in a recession it might take longer to sell a house of these price, but with demand still high for these luxury homes in the heart of Philadelphia, Condos are selling for 2 million. So my 5800 sqft 2 car garage (which you dont see in the city) should fetch at min 1.9 and on the higher end 2.2-2.3mil....I put up this forum to feel out if  I should sell the lots (my exit plan) for a 300k profit or if I should push on and build and profit close to 1.2 million...I am just waiting on the building permits now so I can get started. I got a construction loan for 2.1 million to build two of these 5800 sqft homes, but will only be building one at a time.  My agent is confident he can presell them given the demand, at which point I will begin building the second home.

But being new the new construction, I wanted to see what people thought about the impact of a recession on home sales but more specifically luxury home sales.  I really appreciated your response. Cash is king and even though I will be using a loan, I have an account with 400k in it, incase I run into any problems

Jay Hinrichs · Answer

as long as you have a decent plan B I would go for it.. by that I mean if they dont sell what will your construction lender do for U.. My bank for example will term me out 5 years so I am not forced to sell in a down market..  Or if you have cash to pay the lender back  that works or other equity that can be pledged or liquidated to pay these off.

the risk is when you have no plan B if a sale does not work or you cant get enough to clear your debt.

Mike Smith · Answer

@Douglas Gratz It's a great question and the timing is almost perfect.

Here is my opinion:

1. Will houses become harder to sell?  Absolutely.

2. What category of homes will be best off?  Lower priced homes will continue to sell.  The worst off will be the upper-middle priced homes.  The ultra expensive luxury homes won't be hurt as much.

3. The lack of home supply will help the recession from being like 2008, but yes, we will start to have less buyers and move our way to a more normal, healthy market.

4.  My forecast is for home prices to drop a little, and then remain relatively flat, or slightly upward for the next few years.  Obviously every housing market is hyper-local, so there will be exceptions to this.  With the more affordable markets doing better.

5. Yes, we plan to continue building in the coming recession.  We will watch sales and try not to build too many spec homes.  Again, with focus on more affordable homes.

6. Yes, we are heading into a recession.  The Fed has to correct the ridiculous monetary policy they've had over the past 4-5 years in order to slow down inflation.  Rising interest rates combined with home prices that are up 30-100% in the past 3 years create unaffordability for many that want a home.

My guess is we are already in the start of recession, with it deepening by Q3 2022.

Lastly, when building or developing in a recession, cash is king.  Highly leveraged builders and developers that made it during the boom will go bankrupt when sales don't match pro-formas any more.  As Warren Buffet likes to say "When the tide goes out, we get to find out who was skinny dipping!!"

Sybil Rollins · Answer

I'm in the process of our purchasing land to build small SFH on 16 lots. We would like to build affordable homes. I kind of laugh to myself when I say that because that just changed in a blink of an eye where I live in Texas. It is a little bit nerve wrecking listening and reading about the market but pushing past that mentally. With anything good planning (for the good and bad) is the key although you can't truly prepare for every little thing that can go one way or another but hopefully you should be resourceful enough to respond.

Douglas Gratz · Answer

@Jay Hinrichs As I said above I am new to new construction. I have alot of experience in rehabs and rentals, but this is going to be my first new construction. So watching the news and hearing all this talk about recession really had me close to using my exit plan however I really want to build these homes. So I started this forum to see what people who do new construction think, but as far as building these homes and not selling the lots, is not only because of the profit, but more so because I want to leave my mark, you know! Also I want to learn and get into the new Construction side of real estate investing as it will open so many more doors for me to expand my business.  One day I hope to build a large apartment complex.

What I am building is two 5800 sqft homes in one of the best neighborhoods in the city of Philadelphia. Minutes away from downtown. Northern Liberties is the area https://www.rentcafe.com/blog/.... Comps in the area, actually a 4500 sqft home just sold for 1.9 million in 1 day a few houses down from where I am building.  They are beautiful luxury homes with the coveted garages, which in this area are usually rejected by the community.  I found a loop hole since I am building on such large lots . Most homes here are row and are 18-20 feet wide. My lots are 40 feet wide each so by taking 5 feet of each side (making side yards) they are considered detached homes and are allowed garages by right. Two car garages raise home prices by around 150-200k . City skyline view with roof decks raises the price by around 50k and the 5 year tax abatement raises the price another 50k.

My agent says the demand for homes like this are in high demand because there are almost if not zero of them. I am building a unicorn , as their are no homes more than 20 feet wide down here, so its like a suburban home in the city.  I am hoping being in that niche really helps me get them pre-sold shortly after having the frame up. I bought the land for 720k and have offers for 1 million right now, but thats my exit plan. I see this project as low risk in that, lets say I build them and cant sell them for the 2.2 million I am looking for. The cost to build one home costs around 185/sqft or #1,050,000, so I say its low risk because if I have trouble I could unload and sell the homes for 1.5 mil in a heart beat (which is enough to cover all my costs) But what I have heard so far on this forum and my real estate agent, it seems like a recession might not hurt me as much as I thought. Thanks for your input

Douglas Gratz · Answer

@Jay Hinrichs isnt he! Bruce has been nothing but scaring me in all of my posts , even before this mess of Ukraine, inflation, and recession fears.  I mean some of it is hard truth but he is overall discouraging. No offense Bruce, but I think a lot of what you say is wrong in that I believe that it might be true where you live and invest but is not a one size fits all for what you say. When I was giving you my cost to build at 185/sqft and you would counter and say there is no way it will cost less than 250-300/sqft (just guessing because I do not remember the post) but its along those lines and that just was not true at all. After 3 builders come back with budgets all close to 185/sqft, well then thats how much the cost probably is give or take.

Jay, what do you mean 4 or 5 years they will die on the vine?

What do all you home builders feel about recessions?

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