Survival of the Fittest, Part Two
How Economic Cycles Clear the Playing Field of the Weakest Companies
Last week I wrote about economic recessions being cyclical and good opportunities for strong companies that are built on long-lasting principles of quality service and products and high levels of customer service delivered by trained professional staff. This is similar to the US Real Estate Market. I keep up with the housing market since it is a good way to track how the landscape industry is expected to perform. According to IBIS* the value of residential construction and the value of private non-residential construction are two of the key external drivers to predict future industry performance.
Every six months I look for the update on the recent past and future housing market provided by the Chief Economist for the National Association of Realtors, Dr. Lawrence Yun. Dr Lawrence Yun bio Here are some of the most interesting comments from his First Half of 2022 report.
The U. S. still has a record low housing inventory.
- Before the pandemic, it was low (March of 2020)
- During the pandemic we noted that people were moving to larger homes, different suburbs, and inventory plunged further
- Still at near record lows
We have been experiencing unyielding inflation. Wage growth has been rising but increases have been wiped away by consumer price inflation. Rents are rising and so are mortgage rates. The cost of a monthly payment on a mortgage has escalated. The impact of housing prices continuing at high levels (due to limited inventory) added to higher interest rates has caused some decline from the crazy activity in the housing markets we have seen in the past year. Even with these facts, the pace of closing is very swift. From offer to closing is taking 2-3 weeks.
Dr. Yun predicts:
- Home sales may be slightly down until interest rates stabilize.
- Mortgage lenders have already priced the inflation and factors into the current rates. He believes that rates are at their peak in the current cycle. (Note this was end of July.)
- Positives: job market still good, if rates start to stabilize and the economy ends up with a soft landing it won’t be much of a dip in demand.
Those that wanted to buy when there were five qualified offers and four did not get it still want to buy a new house when they find one. Rates have increased, but they are still not as high as we’ve experienced in previous decades and the buyer can refinance a mortgage when rates come down. The key for buyers is inventory.
He added that to some extent, this period of cooling off is probably good for the real estate market. The level of demand has been crazy for the past few years. As demand is slightly reduced, it becomes harder for late entrants to successfully sell houses. The best in the business will survive.
This is the same with the landscape market. When demand is at crazy levels, it is easy to get people to sign and buy if you show up for an appointment at all. Unfortunately, that may not be the best company if they came in just during the peak demand period and don’t have any depth of service or expertise to offer in the long run. As with other periods of demand with some slack, the weak players will end up out of the market. Ideally, you will be in a stronger position if you continue to keep a long-term focus on your decision making.
If you’d like to discuss how to optimize your company’s positioning and strengths through an economic downturn considering your goals for a graceful exit, feel free to give us a call. There are buyers in the market now and there will be buyers in the years to come as we live through these repetitive cycles.
You can reach me via email: [email protected] or on my cell phone a: 224-688-8838.
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*IBIS World Research Report on Landscaping Services Industry in the U.S.