Contact: Brad Hunter,
"Housing: Anatomy of the Rebound”
Metrostudy's new study of housing in markets across the country puts hard numbers to the housing recovery, and provides a detailed look at differences in the trajectory among regions. The data (collected at the end of calendar year 2012, and newly analyzed) indicate extreme variance among markets and submarkets, with some markets’ single-family production up 90% or more versus a year ago.
Starts of detached homes rose by an impressive 46.9% from year-end 2011 to year-end 2012, and the rebound is starting a virtuous cycle, providing a much-needed boost to personal incomes, which in turn translate into still-higher demand for homes.
It is important to understand the forces that are driving construction activity higher as well as those that are restraining gains in some areas. In some markets, there are land constraints that work to the advantage of the builders who have lot positions and ongoing projects in those submarkets, keeping the number of head-on competitors low. Additionally, the builders that have lot positions in lot-constrained submarkets are able to push prices up much more easily, and they have a strong incentive to do so, because: (1) they can make more profit by selling the homes at higher prices, and, (2) they don't want to run out of lots too quickly.
Builders are currently enjoying markedly stronger traffic and orders at their projects. This reflects:
* A much faster rate of household formations (pent-up demand is finally asserting itself)
* A modest increase in consumer confidence (people are less fearful)
* Rising home prices, which now bring a sense of urgency to buyers (two years ago, buyers were sidelined, fearful that falling home prices would destroy their equity)
* Affordability (this reflects the tempting combination of low home prices and low mortgage rates)
The largest percentage gains are occurring in the hardest-hit bubble markets such as Las Vegas, Naples/Ft. Myers, Atlanta, and the Treasure Coast of Florida. The largest gains in detached housing starts in 2012 were:
Market Percent Change in Starts of Single-Family Detached
(Year-end 2011 through year-end 2012)_____
Las Vegas +96.1%
Naples/Ft. Myers +91.6%
Twin Cities +75.0%
Northern California +64.9%
By contrast, Houston had one of the smallest percentage gains, at 26.8%. That said, Houston single-handedly is a major driver of the housing recovery nationally, having started 5,303 detached homes in the fourth quarter, compared with the 1,426 homes started in Las Vegas or the 550 started in Naples/Ft. Myers.
It is important to emphasize that the increases in starts shown above are a reflection of bona fide demand. Effectively all of the homes being started are either sold or are needed to replace a recently-sold inventory unit.
Although the entire year was up, there was a pullback in the fourth quarter in most markets. This stemmed from a combination of factors, including pre-election jitters and normal seasonal fluctuations, but also reflected higher prices of new homes. Facing lot scarcities in the best locations, builders are deliberately slowing down sales by raising prices. Even with higher prices, buyers are showing up at builders’ sales centers in growing numbers.
Despite the high cost of “A” and “B” lots, builders are not going into the C locations yet, although it is likely that they will do so in larger numbers fairly soon. Starts in Pinal County (a “C” submarket of Phoenix) doubled during the last four quarters, but that county still builds fewer than 500 homes a year. When the builders do go “below C level” in a big way, they will have to be prepared to compete once again with distressed-price homes. Even in those areas, builders will be able to sell; recent surveys of home buyers indicate that a large number of buyers prefer new homes to used homes, chiefly because they see a used home as being full of someone else's problems. Also, a study by NAHB shows that a buyer can pay 23% more for a new home than a used home, just based on the lower cost of ownership (repairs, energy efficiency, etc.). That said, there will be less pricing power in the more remote suburbs, and buyers will have more difficulty getting mortgages (for one thing, because a builder's homes often fail to appraise in those areas).
Builders will face some challenges in the C areas. To understand why, it is necessary to think separately about first-time homebuyer demand and move-up demand. So far during this housing recovery, the entry-level buyers have represented a very small portion of demand, and the move-up buyers (i.e., the people with established jobs, and savings) have been the largest component of demand. Once mortgage rates start to move higher, the people who are buying homes or refinancing right now will find it somewhat difficult, or at least disadvantageous, to move. If mortgage rates rise by two or three percentage points over the next three or four years, the people who still have 3.5% mortgages will look at a move as an expensive proposition (5% rates, say), because their monthly payment will jump dramatically, even if the home itself is not a lot more expensive. This will limit the growth of move-up demand over time.
In addition to this factor, some builders will find it difficult in 2013/2014 to find lots that are priced competitively against the lots that their competitors already own, at a lower cost basis.
Metrostudy, a Hanley Wood company, is the leading provider of primary and secondary market information to the housing and related industries nationwide. Established in 1975 in Houston, Metrostudy provides research, data, analytics and consulting services that help builders, developers, lenders, suppliers, retailers, utilities and others make investment and business decisions every day. http://www.metrostudy.com
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