Wallach Wisdom: Understanding Market Dynamics for Spec Home Investments

In the world of real estate, identifying the right markets for spec home investments can be a challenging endeavor. However, industry expert Dan Wallach, CEO of Shepherds Finance, has shared valuable insights into how to navigate this landscape successfully. His approach considers both geography and the type of homebuilder, emphasizing the importance of examining geographic housing markets individually. 

Wallach begins with the critical distinction between geographic markets. “First, when you think about your geographic market vs. another, your housing starts might be 10 times or 10% of that other market. This doesn’t matter. What matters is supply and demand in your market.” This statement underscores that focusing solely on the sheer volume of housing starts in a market can be misleading. Instead, analyzing the underlying dynamics of supply and demand is essential.

He elaborates on the implications of market conditions, stating, “In general, if the number of homes needed declines because there are declining jobs, bad policies, etc., you are in a market that is going to struggle, but most likely already is.” This insight highlights that an apparent decline in demand can directly correlate with local economic factors such as employment rates and governmental policies.

As Wallach explains, a market’s future stability and growth depend more on changes in supply than on demand. He notes, “How that market fairs in the next 6 months is more about changes in supply than changes in demand (generally, unless the government shuts down the navy yard, or Amazon closes its facility, etc.).” This statement emphasizes the significance of monitoring developments that could alter the supply landscape. 

Wallach further classifies most markets into three segments, emphasizing their unique characteristics and drivers. The starter home market heavily relies on the correlation between ownership costs and rental prices. “This market is interest rate sensitive, but also very dependent on rental rates,” he explains. For many first-time [home] buyers, the ability to transition from renting to owning is tied to prevailing interest rates, making this segment particularly vulnerable to economic fluctuations. 

In contrast, the mid-market, where buyers typically look to upgrade from their first homes, presents its challenges. Wallach asserts, “The move-up market (mid-market) is very dependent on interest rates and less on rental rates.” In this sector, rising rental prices can enhance the value of starter homes, indirectly benefiting mid-market buyers. However, their primary concern remains interest rates—a significant obstacle for many potential home buyers. 

Lastly, the high-end home market exhibits different influences. Wallach states, “This market is less interest rate driven and more confidence driven.” By that, he means that the purchasing decisions of affluent buyers are often contingent upon their overall perception of economic stability and personal financial prospects. When there’s confidence in the economy—indicated by strong job performance, robust business growth, and healthy stock market conditions—high-end buyers are likelier to engage in the market. 

Yet, Wallach identifies a troubling trend: “What I see today in most markets is that the starter and high-end markets are doing well, and that the mid-market is not doing as well.” He attributes this disparity to the focus on interest rates, which currently pose a challenge for mid-range buyers. This observation allows us to understand how macroeconomic factors create uneven dynamics across the housing spectrum. 

The second topic Wallach discusses concerns the methodology employed by lenders when assessing market risk. “Our risk is similar to your risk as a builder,” he notes, which sets the stage for a deeper analysis of how trends in housing can affect valuation and investment strategy. 

He elaborates, “When we think of risk, it is less about how many homes are being built, but mostly about the likelihood that the value will decline while it is being built.” This perspective emphasizes the importance of evaluating the stability of market trends over mere numbers. Wallach highlights the necessity of understanding market trajectories: “First, we look at the trend of housing over time.”  

Markets in Florida, for example, show a consistent growth pattern. On the other hand, “Many markets in the Northeast are growing, but the rate of growth is not growing.” Such differences can be pivotal in guiding how homebuilders and investors approach their strategies. He points out that analyzing a market’s distance from its historical trend line is a crucial aspect of evaluating its viability.  

“Then we look at the specific market to see where it is in a housing cycle (rising/falling) and how far the current housing starts are from the trend line,” Wallach explains. This method involves carefully studying market data to assess current housing starts about historical averages, acting as a barometer for potential growth or decline. “If you are in a market where the trend line is rising, and the current housing starts are moving up but still under the trend line, that is a great market,” he advises. 

Conversely, a market in which housing starts well above the trend line but begins to fall is viewed as concerning. “That is a bad market,” he warns. This analysis method relies heavily on historical data and trends, emphasizing the need for builders and investors to have a long-term perspective. 

For home builders and investors looking to investigate their specific market conditions, Wallach encourages proactive engagement. “Feel free to call us to talk about your specific market,” he invites. This openness highlights the importance of tailored advice based on unique market characteristics rather than relying on generalized data or trends alone. 

He concludes, “When we do this analysis, the data we look at is for all types of housing in that market, not broken down the way we think about the first topic.” This holistic approach to understanding market dynamics enables builders to position themselves better within the competitive landscape. 

In summary, grasping market dynamics for spec home investments requires a multifaceted approach. By paying close attention to the nuances of geographic factors, market type, and economic indicators, investors can make informed decisions that enhance their chances of success in varying conditions. Dan Wallach’s insights serve as invaluable guidance for those navigating this complex terrain. 

We invite you to consider how Shepherd’s Finance can help you empower your residential construction projects. With our tailored lending solutions and business growth services, we’re here to support you at every step. Thank you for being with us—let’s build something remarkable together! Find your regional sales manager today for more information or to get started. Happy building!