Published on: Mar 5, 2015 @ 09:51 am
A proliferation of data and new data analysis methods
are changing the way builders buy, sell and develop
vacant land, according to experts, and builders are
cautiously optimistic that easier credit and more
flexibility will help the new homes market rebound in
2015. Several groups of real estate experts,
executives of large residential builders and land
advisors spoke this week at a building and building
products symposium held at Barclay’s New York City
headquarters. The state of the land market – a key
factor in determining what kinds of housing gets built,
where and at what price – was a common theme throughout
the various discussions. “The real opportunity of land
goes beyond the land itself,” said Steve Benson, CEO of
Phoenix-based land-banking and advisory firm Community
Development Capital Group. “Builders are looking at
land as much more than a piece of dirt now.”
Landowners and buyers alike are using multiple data
sources to examine what is being built in other areas,
which designs work best for certain parcels and which
builders are best suited to maximize certain features
of a given piece of land, Benson said. Rather than
plowing ahead and building a certain set of homes on a
given piece of land, developers today may be more apt
to sell their land to a different type of developer
rather than undergo a project themselves, or choose to
build a different type of home than they normally
would, based on data. “Real estate has always been
about location, location, location,” Benson said. “But
with land especially, it’s future location, future
location, future location. Today, data helps inform
that equation for builders much more than in the past.”
High land costs, and perhaps unrealistic value
assessments by landowners, are a big reason why
developers are having difficulty developing more
entry-level, lower-cost communities and homes, said
Greg Vogel, CEO and founder of Land Advisors
Organization, a Scottsdale, Ariz.-based land brokerage.
Developable tracts of land appreciated very quickly in
value during 2012 and 2013 in anticipation of a
building boom in 2014 that largely has yet to
materialize, Vogel said, calling 2014 “a dud” compared
to expectations for new development. But strong recent
years have convinced today’s landowners – tomorrow’s
land sellers – that their land may be worth more than
it is. “[Land] sellers are very sticky on the up,”
Vogel said, in reference to land price appreciation.
“We’ll offer a price, and they’ll tell us, ‘See you
next year.’” As a result, builders are increasingly
forced to put higher-priced homes on the developable
lots they do control, in order to recoup their higher
land-acquisition costs. This will create challenges for
larger builders looking to cater to lower-end and
first-time buyers, who are expected to enter the market
in higher numbers in coming years as younger buyers, in
particular, get married and start families. Most
observers agreed that it’s just a question of time
until we see millennial demand pick up. “If the
entry-level buyer does come back, I’m not sure there
will be a lot of opportunities to develop those kinds
of communities right away,” Vogel said.
Price Vs. Pace Vs. Margin
Beyond the kinds of large, multi-acre tracts on the
edge of cities and towns favored by big, publicly
traded homebuilding companies, smaller in-fill lots
located in downtowns and established communities also
represent opportunities for builders, particularly
smaller, private developers. Private developers can
build higher-density projects with a smaller overall
number of units on infill sites, Vogel said, though
these homes cannot compete on price with those built by
larger firms. But what they lack in price strength,
these developments can make up for in design
flexibility. “Private firms excel at being able to
simply hire an architect and ask, ‘What can you do with
this site?’” Vogel said. “And with those kinds of
projects, they don’t have to worry about competing with
the bigger builder down the street or on the other side
of town.” In recent years, data indicate that builders
seem content to trade high sales volumes in exchange
for lower volumes, but higher sales prices. Vogel said
the way to get higher sales volume is simply to have
more speculatively built homes completed and available
for sale in the first place. “If you have a house
ready to go, you’ll get a higher pace of sales,” Vogel
said. But the key question builders ask is not monthly
sales pace versus final sales prices, Benson said, but
instead is sales price versus profit margin at a given
pace. If a builder is selling three homes per month,
then that builder knows that overhead costs will total
a certain amount at that pace. If they wanted to adjust
the pace of sales to six homes per month, they need to
adjust their overhead costs and maximize their
efficiencies accordingly, which many may be unwilling
to do if they’re comfortable at a given margin.
“Plenty of Runway”
In order to begin building more homes, the one thing
builders would like to see more than anything else –
more than lower land costs and higher wages among
buyers – is simply more economic confidence among
potential buyers, said John Burns, CEO of John Burns
Real Estate Consulting. According to a recent Burns
survey, roughly one-third of builders said more
confidence topped their 2015 wish list. That bodes
well for 2015 and beyond, as recent Zillow research
indicates housing confidence, in particular, is on its
way up, especially among younger renters who may be
looking to buy in the next few years. But not all
demand for new homes is expected to come from younger,
entry-level and first-time homebuyers in coming months
and years. Douglas Yearley, CEO of Pennsylvania-based
residential construction firm Toll Brothers, said there
are plenty of existing homeowners looking to move up
into a larger or nicer home. The typical home built by
Toll Brothers sells for roughly $700,000, Yearley said,
certainly on the higher end of the price spectrum but
not outrageously so. “There’s plenty of runway left in
what we do,” Yearley said. Builders were also hopeful
that slowly easing access to mortgage credit would
convince more would-be buyers to enter the market.
Steve Hilton, CEO of Scottsdale-based homebuilder
Meritage Homes Corp., said there is currently more
demand for new homes than his company is able to
qualify, an indication that if credit conditions were
looser more homes could be sold. Hilton also indicated
there could be a kind of chicken or egg problem
preventing the credit market from easing further, as
borrowers with lower credit sometimes don’t apply in
the first place. “There’s a kind of perception gap
we’re seeing,” Hilton said. “We see a lot of people
with a 680 credit score, which is historically pretty
good, thinking that they can’t get a loan. So they
don’t apply in the first place. There’s a lot of good
loans out there that aren’t getting made.”
US consumer spending falls, inflation pressures muted
US consumer spending fell for a second straight month
in January, likely as lower gasoline prices continued
to weigh on receipts at service stations. The Commerce
Department said on Monday consumer spending slipped
0.2% after falling 0.3% in December. Economists polled
by Reuters had forecast consumer spending, which
accounts for more than two-thirds of US economic
activity, dipping 0.1% in January. When adjusted for
inflation, consumer spending increased 0.3% after
December’s 0.1% dip. Income increased 0.3% after a
similar rise in December. Income at the disposal of
households after accounting for inflation advanced
0.9%, the largest increase since December 2012. The
saving rate increased to 5.5%, the highest since
December 2012. Lower gasoline prices continued to put
downward pressure on inflation, with key consumer price
gauges slipping further below the Federal Reserve’s 2%
target. A price index for consumer spending braked to
show a 0.2% rise in the 12 months through January, the
weakest reading since October 2009. The personal
consumption expenditures (PCE) price index had
increased 0.8% in December. Excluding food and energy,
the so-called core PCE price index increased 1.3% in
the 12 months through January.
Urban Institute: the renter next door
An unexpected side effect of the mortgage crisis has
been the replacement in many neighborhoods of
single-family homeowners with renters. An article from
the Urban Institute, took a closer look at the 14.2
million single-family rental units in the US and found
that renters are living in smaller, older and slightly
less suburban homes than homeowners, and are poorer,
more racially and ethnically diverse and younger than
homeowners. From 2007 on in the aftermath of the
mortgage crisis, investors (mostly small) bought many
of the 7.5 million owner-occupied homes that were in
foreclosure or had experienced a short sale, and
converted them to rental properties. The result was a
huge increase in the number of occupied single-family
rental properties in the aftermath of the crisis, from
10.5 million units in 2005 to 14.2 million in 2013, a
35% increase, according to the American Housing Survey.
Rental units comprised 61% of the 6.1 million unit net
increase in single-family housing stock from 2005 to
2013, with the remainder split between vacant
single-family units (21%) and owner-occupied
single-family units (17%).
US 4Q economic growth rate revised lower
US economic growth braked more sharply than initially
thought in the fourth quarter amid a slow pace of stock
accumulation by businesses and a wider trade deficit,
but the underlying fundamentals remained solid. Gross
domestic product expanded at a 2.2% annual pace,
revised down from the 2.6% pace estimated last month,
the Commerce Department said on Friday. The economy
grew at a 5% rate in the third quarter. The
fourth-quarter revision was generally in line with
expectations. With both business and consumer spending
expanding in the fourth quarter, growth in final sales
to domestic purchasers was revised to a 3.2% pace from
the previous 2.8% rate. Businesses accumulated $88.4
billion worth of inventory in the fourth quarter, far
less than the $113.1 billion the government had
estimated last month. That resulted in the GDP growth
contribution from inventories being revised down to
one-tenth of a percentage point from 0.8 percentage
point previously. Residential construction spending
was revised down, while government spending was not as
weak in the fourth quarter as previously reported.