What I’m thinking about: Unprecedented (and shaky) macro conditions, and the elite decision-making and resilience needed to win in this environment.
Job postings have plummeted 30% according to Indeed, from their peak a few years ago. ADP reported the US lost 32,000 private sector jobs in September. Hiring rates hit 2008-2009 levels.
Yet the stock market keeps climbing, GDP growth looks solid, corporate earnings are at an all-time-high. (Most of this is driven by AI, which is almost impossible to reduce or eliminate investment exposure from, no matter which sector you focus on).
It’s worth mentioning that ~90% of the stock market is owned by the top 10% of US households, and ~50% by the top 1% of US households.
If you hadn’t heard that before, makes you double-take, right?
These numbers get thrown around often, but I try to remind myself of this routinely, given the implications for the population at large, and overall consumer spending.
So I put more weight on the macro factors that are impacting a much larger portion of the population (~300 million people).
Let’s start there…
(BTW, for a smooth reading experience, I’m not overloading you with links for the stats. Feel free to confirm on your own, of course.)
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The Distressed Seller Pipeline Is Opening Back Up
Over the past few months, I’ve noticed a clear shift in the ~2x margin deals making it to the closing table for acquisition. Financial distress is ruling the roost again (e.g. troublesome mortgages/liens/taxes, healthcare bills, family heirship situations usually accompanied with money trouble, etc.)
The “I had plans to build, but I’m not moving back to the area” sellers? Still exist, but they’re less common, or they have that rationale, but also have a finance issue.
Macro-wise, we’re seeing early indicators of increased distress:
FHA mortgage (first-time or lower-income home buyers) delinquencies are at 12%, as high as they were during the GFC. Google search volume for “help with mortgage” is nearly as high as during the GFC. One-third of US adults skipped needed healthcare due to cost over the last year. Cardboard box production down 9% in 8 months (double the GFC decline). Pet shelter intakes surging.
Economic cracks are widening. More sellers will need exits (and land is first to go compared to homes). Patient capital wins.
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But Here’s The Constraint: Buyers Are Thinning Out Too
While distressed sellers create opportunity, the buyer pool is shrinking simultaneously. This is the tightrope we’re walking.
For instance, job market bifurcation is extreme right now. Healthcare job postings up 38% from pre-pandemic (and job openings for therapists and physicians are up roughly 85% each! My wife, who’s a clinical therapist, loved this news.) Software development down 37%. Media and communications down 36%. Marketing down 23%.
And while layoffs have not caught up with decreased hiring yet…if you’re investing in deals in markets heavily exposed to tech and media (e.g. California), you’re playing with fire. Conversely, markets near major hospital systems and healthcare hubs (e.g. Boston, Cleveland, Houston) show more resilience.
Critically, jobs data alone doesn’t determine housing markets. (As always, real estate is hyper-local. Bottom-up data always trumps top-down.)
You need to pair employment trends with days-on-market, inventory levels, and pricing pressure (e.g. Illinois is net losing jobs, but homes move in 38 days on average, with the lowest available inventory in the US.)
Another key stat that should be imprinted in your mind: The top 10% of US earners now drive 50% of all consumer spending (up from 36% three decades ago, per WSJ).
Think about what that means for land…
We’re not selling to the average American. We’re selling a luxury product to roughly ~30-35 million people who can actually afford it. Everyone else is barely hanging on.
And make sure to reframe what “luxury” actually means. When the median US household can only cover a ~$500 unplanned expense, even an “inexpensive” $5-10K land parcel is out of reach for most buyers, outside of owner financing.
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Why High-Powered Sales Teams Won’t Save You
I’ve seen some land operators recently looking to hire a VP of Sales or build aggressive dispo teams. And I keep wondering…how cost-effective is that really?
We consider ourselves to be dispo experts (with millions in sales to back that up), and you can exhaust most reliable buyer channels pretty quickly:
- MLS (~80-90%+ of real estate transactions)
- Land.com, FB, and similar platforms
- Targeted cold call/text/mail to area residents and recent acreage buyers
- Signs and local marketing
- Builder/developer outreach
- Auctions (break in case of emergency)
We’ve tried all of those, with varying results. Once you’ve hit those channels, what’s left? Mailing every household in the township? Calling/texting every person in the county? Door to door sales?
The cost explodes, when net margin is already tight from an acquisition cost perspective. The targeting deteriorates. You’re reaching for increasingly unqualified buyers.
As the above section notes, land is a luxury good. Think about Burberry or Louis Vuitton. They don’t send door-to-door salespeople. Their killer brands do a lot of the heavy lifting for them, but even they don’t have infinite margin to push sales.
In a buyers’ market with a constrained 10% affluent buyer pool, you can’t force sales through sheer sales horsepower. You need the right product, right price, right location, right buyer channels…and then patience.
Fortunately, land generally has low holding costs. So if you need to wait out a market (and price cuts aren’t effective), then wait it out.
(If I’m missing something here, I’m genuinely open to feedback. But I’ve talked to some of the best operators in the space, and no one’s cracked the code on cost-effective hyper-aggressive dispo in this environment that can inevitably get any piece of inventory to move in the face of a tough market.)
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How We’re Navigating This
We’re continue to approach this market with extreme caution paired with opportunistic action.
Still funding deals, but only the obvious 2X gross margin plays with bulletproof downside protection. Putting our money where our mouth is, we’re closing a $350K purchase (infill lot of all things…) shortly because the fundamentals checked every box.
But we (continue) to tighten up:
Bottom 25% of characteristics? Won’t touch them, regardless of price.
We’re hunting distressed sellers in markets where the top 10% buyer pool remains stable. Following job growth/loss data. Watching days-on-market like a hawk.
The opportunities exist. They’re just harder to find, and require more discipline to underwrite correctly.
(And we do so well because no one on our team is “above” the work required to win. Everyone gets their hands dirty. There are no shortcuts.)
It’s hard to make macro-level economic predictions, but I expect an overall more difficult dispo market for at least the next 2-3 years (I would LOVE to be wrong, obviously, and that a bull market comes back around sooner.)
(As an aside, a lot of folks are still grasping for the expectation that lowering interest rates will enable another real estate boom. I’m far more cautious about that. It will certainly be helpful, but I think the effect will be minimal to modest at best, especially when we saw significant rate cuts a year ago and real estate demand continued to decline.)
Many operators will struggle or crash out of the industry.
The ones who adjust? Who pair distressed seller sourcing with maniacal buyer pool analysis? Who maintain strict underwriting even when capital is burning a hole in their pocket?
They’ll feast.
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Looking for funding from a team that understands both sides of this buyer-seller equation? Serious Land Capital is actively seeking deals with genuine 2X margins and downside protection. We’re not sitting on the sidelines (~$500K in purchases lined up over the next month), but we’re also not pretending the macro doesn’t matter.
