Sheryl Palmer, the CEO of the sixth-largest home builder in the country, joined our podcast host Dean Wehrli for one of the most insightful interviews I have heard in a while. Sheryl shared her:
- Unique and very thoughtful view of the housing cycle
- Consumer research that is contrary to much of what you read, including a new opportunity to grow the home building business
Featured guest
Sheryl Palmer, Chairman and CEO, Taylor Morrison
Where are we in the cycle?
Sheryl broke the industry cycle into components that have been behaving very differently. Her answers:
- Early. Demand has barely recovered. Our host Dean Wehrli noted that we need to “feed the beast.” Sheryl added, “It is a hungry beast.”
- Late. Land prices are far along in the cycle. They can’t go up much more.
- Big affordability differences by market. Home prices and affordability vary a lot by MSA. To provide a quick example, Denver’s home prices are 78% higher than in 2007, while Orlando’s home prices are just 2% higher.
Sheryl described her crystal ball as foggy in the short-term and crystal clear in the long-term.
- Foggy short-term. With today’s headline uncertainties around trade and other issues, it is tough to predict the market month to month.
- Clear long-term. Sheryl is very optimistic over the long term due to the massively undersupplied housing market.
Watch consumer confidence
Sheryl points out that about half of her company’s geographies have experienced a period of slowdown during the recovery, with the biggest slowdown occurring in Q4 2018. That Q4 slowdown—which was a triple whammy of rising mortgage rates, plunging stock prices, and the slow part of the housing season—convinced Sheryl that consumer confidence is the most important metric to track. While most of Taylor Morrison’s buyers could still qualify to buy at a 5% rate, they were reticent to buy.
"If the fourth quarter taught us anything, (it is)...how quickly the consumer can be impacted emotionally.'"
Consumer research surprises
In my opinion, Taylor Morrison does more consumer research than most builders.
"Research that we did two years ago, we can’t go to market today with that. We have to keep it fresh and updated. That’s why we talk to our consumers. We talk to our buyers. We talk to our shoppers. We talk to them before they buy. We talk to them a year after they buy."
According to Sheryl, great consumer research can increase margins by 300–400 basis points. When they build the right homes in the right locations, the margins are much higher than when they miss the target market.
In my opinion, Taylor Morrison tends to focus on a more affluent, design-oriented home buyer. Perhaps that will help you understand some contrarian views Sheryl’s research has supported. Taylor Morrison’s buyers tend to be:
- Financially secure boomers who know what they want and are willing to pay for it. What they want varies significantly by location, including age-restricted resorts, age-targeted homes in family communities, beautifully designed small “jewel box” homes, and even McMansions on golf courses.
- Affluent millennials, many of whom could qualify for a much more expensive home or the same home if mortgage rates rose all the way to 7%. She noted that 56% of Taylor Morrison’s older millennial buyers (the group born in the 1980s we call The Sharers) are already buying their second home. Even 28% of their younger millennial buyers are already buying their second home. Since they are planning on families, school quality matters the most.
- Traditional move-up Gen X buyers
- Landlords, as described below
Sheryl shares additional consumer research nuggets
- Dining rooms. Taylor Morrison’s millennial buyers still want the dining room. They want to host Thanksgiving.
- Culture in retirement. As a leader of Pulte’s Del Webb division in the early 2000s, Taylor Morrison’s Esplanade, and other retirement communities today, Sheryl has seen the retired evolve. Today’s retirees are not like their parents. While reasonable proximity to medical care still matters, and many still play golf, culture is the hot amenity in retirement.
- Renters want new homes. Taylor Morrison recently announced a joint venture with Christopher Todd Properties (CT) to build the homes and turn them over to CT for leasing and management. While the outlook for homeownership is strong, there is still a big percentage of buyers who will rent.
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