Building Market Intelligence Q2 2015
Successful New Home Design Trends BY MOLLIE CARMICHAEL, Principal & ISABELL KERINS, Director
Here are 4 of the 10 trends our DesignLens team published this month, to give you a taste of what buyers are looking for in new homes that they cannot find in the resale market: 1. More light in high-density housing to help achieve 5%+/premium 2. Exteriors that look more expensive than they are 3. Clever kitchen and bath designs for a 35’ wide home 4. Creatively mixing conventional and alley-loaded homes to improve sales by targeting more lifestyles Each month, we publish 50+ photos and narratives on 8–10 design trends that we believe will drive improved sales and profitability at communities across the country over the next several years.
1
Light on every side for these exceptional townhomes.
All townhomes at the Courts at Orchard Park boast an end unit-style design and thus enjoy more light on more sides, along with a 5%+/- premium over comparable homes in the market. The special courtyard configuration achieves 18 units/acre and offers generous living areas of 1,690 to 2,243 square feet.
Orchard Park, Courts
Builder: New Home Company Architect: Robert Hidey Architects
San Jose, CA
2
Beacon Hill Collection
Denver, CO
Less expensive than it looks..
Reminiscent of the historical neighborhood of Beacon Hill, Parkwood Homes carefully designed these 10 unit/ acre townhomes with generous spacing of 1,900 to 2,600 square feet. Beacon Hill’s historical architecture combines simple forms and authentic detailing with modern traditional finishes on the inside. Cost-effective construction has allowed Aitken-Sadlik Architects to design a product that looks expensive but does not break the budget. Priced from the low $400Ks, this community is a must-see with value in all the right places. Builder: Parkwood Homes Architect: Aitken-Sadlik Architects
3
Clever kitchen and bath designs in 35-foot-wide homes.
These 35-foot-wide homes not only maximize the view but have modern designs creating eye-catching outdoor and indoor spaces. Collins Creek offers two distinctly different plans: a single-level home with 1,473 square feet and a two-level home with 3,317 square feet. Together, Collins Creek achieves 4–5 units per acre. Most of all, however, the innovative kitchens and baths are exceptional examples of great interior design specifications.
Collins Creek
Phoenix, AZ
Builder: Ashton Woods Architect: Woodley Architectural Group
4
Briarcliff at Magnolia
Seattle, WA
Mixing conventional and alley-loaded homes to maximize sales.
Briarcliff’s harmonious blend of alley-loaded and conventional homes makes for a better street scene and can attract a wider market segment as well. Our research has shown that alley-loaded homes attract more non-family consumers looking for a lowermaintenance lifestyle, while a conventionally designed home with the garage on the front appeals more to families looking for private outdoor yards. At Briarcliff, you can have both, with homes ranging from 2,544 to 3,173 square feet (excluding basements). Builder: Toll Brothers Architect: In-house, Seattle, WA
Special Feature: Kitchen and Baths Join Mollie Carmichael in an informative webinar on great kitchen and baths, with trends sure to surprise even the most knowledgeable in our industry. We know you will come away full of ideas to incorporate into your next product.
Our team of industry experts have identified these communities as the latest and greatest examples of design leadership in their market segments. We carefully select projects from around the nation to inspire new ideas and increase your knowledge of trends and opportunities. Learn where they are built, what makes them extraordinary, and who helped bring them to market.
From Ordinary Using Outdoor Spaces BY ISABELL KERINS, Director
One of the most profitable new design trends we are seeing this year is some very creative use of outdoor space to bring light into the house and to expand the feel of the home’s size. This has resulted in higher home prices per square foot than would have been achieved otherwise. I am going to highlight a few examples that we have featured in our DesignLens subscription this year.
Outdoor spaces have long been recognized as an additional opportunity to maximize profit potential. Consumers consistently rank outdoor spaces as one of their most desired benefits, both in the home and the community. Well executed outdoor spaces can turn the ordinary into the extraordinary, as seen in the wraparound outdoor room above, which opens up the family space to the environment and expands the usable space for day-to-day living or entertainment. Multi-track doors open the corner of the home to the outdoors and are beautiful in both function and aesthetics.
Buyers’ top preference in regard to outdoor spaces is the privacy they provide, and the top features of these outdoor areas are the outdoor room, outdoor fireplace, and water features. Creative use of outdoor spaces provides an opportunity to add to the bottom line and make product more appealing to the end user. These spaces translate well from high density all the way to a luxury product. For example, roof top decks have become a popular amenity in high-density homes, as shown above.
Fireplaces can also be added to high-density products and courtyard homes, addressing the national number one backyard preference among consumers. Even narrow side yards, with careful attention to details, can be beautifully designed and merchandised as usable space.
to
Extraordinary
Privacy—the national number one preference consumers want from an outdoor space—can be provided in a multitude of ways. This deck (above) off the master bedroom becomes an outdoor room that not only enlarges the function of the master suite but also provides the privacy desired.
Details in outdoor spaces can be extravagant or simple in execution. The beauty of well-designed outdoor spaces and details is the added benefit that is achieved in drawing the eye outward, expanding the line of sight. Outdoor areas can be executed using materials that can be very inexpensive. These spaces can be small in footprint, but they must be large enough to be functional in order to be effective. It is vital that outdoor areas are large enough to contain furnishings and still be able to navigate. The most important feature of a well-designed outdoor space is the ability to design it in such a way as to enhance the home and activate it.
The outdoor spaces in masterplans contribute to the desirability of the community, drawing residents out to enjoy their neighborhood. It is in the details where ordinary outdoor spaces become extraordinary, both on the masterplan level and for individual homes. These details can be added anywhere you build, bringing magic to your visitor’s and homeowner’s environment.
New Home Construction Is Gearing Up for a 15-Year Boom. Who’s Ready?
BY JOHN BURNS, CEO
If you want an industry with a great long-term outlook, consider construction. I have run the math. Even with the most conservative of assumptions, household formations will boom over the next 15 years, and we will need well in excess of 1.5 million homes built per year to meet the demand. That is 50 percent more than we built last year. All of my builder clients tell me there is a huge shortage of talent—both blue collar and white collar. I could go on and on summarizing why the housing market has been slow to recover and why we will not hit 1.5 million homes this year or next, but that is not the point of this article. Look at the US population today, shown by decade born to the right. Those born between 1989 and 1994, who are currently 21–26 years old, are the largest 5-year cohort out there.
Yes, this cohort’s struggles to gain full-time employment at a fair wage and to pay off student debt have been well documented. What has not been sufficiently documented is that the majority of them will still leave the nest, marry, have children, and need a place to live. There are some very exciting industry developments too. We like to group the many, many factors that impact housing demand into four categories: 1. Government involvement. From immigration policies to mortgage policies to investment in urban areas or infrastructure, government will continue to play a major role in housing demand. There is a tremendous need to help government with their policy decisions.
2. Technology. Whether it is improved health care extending life, IVF technology allowing babies later in life, Internet access enabling knowledge workers to live wherever they want, or construction technologies making new homes more energy efficient, technology continues to evolve. These changes will affect where people live, how long they live, and in what type of home they will live. 3. Economy. You need a good-paying job to form a household, and the Great Recession was so damaging that there are still fewer full-time employed people than 6 years ago. However, regional economies like Seattle, Silicon Valley, Denver, and Dallas are booming right now, and signs point to continued strong growth in Texas, Arizona, Nevada, Florida, Georgia, and throughout the Southeast, where jobs are plentiful and housing is affordable. 4. Social shifts. Television has done a great job depicting household life over the decades, from Leave it to Beaver in the 1950s and 1960s to Modern Family. Family structures are changing, and thus the type of home people desire has shifted as well. One great example is the surge in immigration in the last 25 years (more green cards issued than the prior 70 years), which is helping drive an increase in homes designed for multiple generations.
In summary, my home builder clients have been complaining for 3 years about a shortage of qualified labor, both blue collar and white collar. Our research shows that the industry will grow 50 percent over the next few years, and demographic housing demand will maintain that level for a very long time. If you want a great career, consider the many ways you can become involved in the construction industry.
Creative High-Density Detached Urban Infill BY PETE REEB, Principal
Our urban infill feasibility business is booming, thanks to a confluence of trends that are creating heightened interest in high-density single-family detached urban infill housing deals: • Gas expense. Uncertainty over gas prices and a growing desire for shorter commutes • Time savings. Reprioritizing life’s necessities (owning a “huge” house not necessarily a priority) • Environmental consciousness. Increasing awareness of the impact of housing on the environment (urban infill in existing neighborhoods vs. “green field” suburban, carbon footprints, water usage, energy usage) • The best of urban now in the suburbs. The reemergence/revitalization of many suburban “Main Streets” has created walkable retail/restaurant/entertainment cores that appeal to younger and older households alike. • Major infrastructure in place. Shortens the development cycle and decreases upfront development costs • Small builder opportunity. Ability for smaller builders to compete with larger builders on deals (although some larger builders are doing high-density urban infill, too) Infill deals typically push housing densities well beyond the densities of older existing homes in the same neighborhoods, and we are seeing more detached residential densities in the 12-to 14-unit-per-acre range and even higher. However, one of the biggest challenges in pushing density in single-family detached projects is accommodating resident and guest parking requirements while still creating livable floor plans and desirable site plans.
Some of the biggest buyer objections to high-density single-family detached urban product, which are also factors that can lower home values and slow sales rates, are: • Lack of driveways • Lack of private enclosed backyards (Many projects have zero lot line plotted homes, with only a side yard and no backyard.) • No sidewalks • Narrower alleys, not full-width streets
Source: SummA Architecture
One of our home builder clients recently purchased a site with creative floor plans and site planning that allowed the density to be pushed to 16.5 units per acre (38 units on 2.3 acres), with none of the buyer objections listed above! And all while still meeting city parking requirements. The property includes two floor plans (1,550 and 1,695 sq. ft.), the smaller plan with three stories and the larger with two stories. Both plans have unique designs where livable second-floor space (and second- and third-floor space in the three-level plan) partially cantilevers out over a full-length driveway. One of the big accommodations that the city made was allowing the full-length driveways to be counted as guest parking spaces. Typically, infill projects have alleys (not streets), and do not have full-length driveways, requiring other solutions for guest parking that reduce achievable densities. This project has the best of all possible worlds for a high-density detached infill concept: • • • • • •
Full-width streets Full-length driveways Private enclosed backyards Traditional plotting (not zero lot line) Sidewalks Mix of two- and three-story plans (Many urban infill projects have only three-story floor plans.)
The increase in density means more units and more revenue. As a result of the increased unit count, unit sizes did not need to be pushed to be too large, helping keep home prices attainable. This also opened up the project to a larger number of prospective home buyers, since highdensity three-story homes are often too large relative to their respective markets and buyer profile and are not able to fully capture the value of the extra square footage. Construction costs are projected at $70 per sq. ft. for the two-story plan and $85 for the three-story plan, with projected home prices in the low to mid-$500,000s.
Source: SummA Architecture
PART-TIME LABOR A FULL-TIME CHALLENGE? If you follow the US unemployment headlines (currently at 5.5%), you likely think that jobs have fully recovered. What if I told you that we are still 7 months away from peak full-time employment and that the unemployment rate is actually 10.8%? Don’t get me wrong—we agree that the labor market is healthy. But we want to make sure you are tracking the indicators correctly. BY ALI WOLF, Senior Research Analyst
The graph to the right tracks full-time and part-time employment. The blue line shows we have not recovered all of the full-time jobs from the peak in April 2008—largely because of the heightened levels of part-time employment. Full-time employment has been increasing since 2011, but we still remain 7 months away from reaching peak employment (assuming a conservative 200K jobs are added each month). We also track U6 unemployment rates across the country. The difference between the headline unemployment rate, the U3, and this more comprehensive unemployment rate, the U6, is explained in detail below the map. As of 2014, here are some of our key findings: • The US average underemployment was 12%. • 15% of Californians who should be working are not. The U6 includes agriculture jobs, which contribute to the high rate. • Only 10% of those in Texas are underemployed, and the rate is even lower across the plains. Oil is a big contributor to employment health in Texas, Colorado, and the Dakotas. • The coasts have more underemployment. • The Southeast, Midwest, Southwest, and West are all still recovering. • The heartland has recovered. The map below illustrates US underemployment well. The redder a state is, the greater the underemployment; the greener the state, the less underemployment there is.
The 10.8% unemployment rate I mentioned earlier is the U6, and we believe it serves as a better proxy for real unemployment levels. It includes individuals who have stopped looking for jobs over the past four weeks and those who are underemployed.1 The headline unemployment rate excludes both of these groups. The post-2009 trend of elevated part-time employment (which includes new companies like Uber and Lyft) and underemployment makes the U6 particularly important to monitor. We have heard countless examples of graduates with college degrees who are working in positions they are overqualified for. The higher the U6 rate, the more people are not contributing to the economy at their full potential, let alone buying homes. Conversely, a lower U6 suggests a strong economy and healthy housing market. The good news is that U6 unemployment has been trending down, which will have a spillover effect in the economy. Because a paycheck is the primary source of personal income for most Americans, its amount directly impacts consumer spending and can make or break an individual’s ability to get a mortgage. In summary, the economy continues to mend from the Great Recession. At current rates, we will return to peak full-time employment at year-end. [1] Underemployment includes highly skilled employees working in low-paying jobs, highly skilled employees working in low-skilled jobs, and those who are employed part-time but would prefer to be full-time.
Denver Housing Is Mile High
BY KEN PERLMAN, Principal
Denver ranks near the top of the 70 housing markets we rate each quarter. Prices have risen 12% in the last year, finally reaching historical averages. We are including some highlights from our monthly subscription reports as well as some anecdotes we have picked up on some recent feasibility studies.
Highlights • Demand fueled by strong job growth. Despite Newland Communities, one of the country’s concerns over oil industry dependence, Denver largest land developers will be the development employers created 56,000 jobs in the last manager of these two masterplans. year, and employment now stands 10% higher • Waning affordability. Housing has become than the 2008 pre-recession peak. Higherpricey, as payments as a % of incomes have paying office jobs have increased from one reached historical norms despite historically year ago in every submarket except one. Also, low rates. Millennials are taking advantage of the market value of the 85 publicly traded the many government programs, and more companies in Denver has risen 8% in the last than 40% of the homes sold have mortgages year. of 90% or more of the home price. The search • A year’s wait for delivery. By the end of for more affordable housing alternatives is April, many Denver builders had already sold pushing buyers into the northern Colorado 70–90% of their 2015 sales goals, compared Springs submarkets of Monument and Black to a 43% national average in our independent Forest from southern Denver and Castle Rock. survey. Some builders are quoting up to a • Rising urban demand. It is not just suburban one-year wait for home deliveries and are product that is selling well. Townhome product intentionally slowing sales now. targeting young singles and couples in and • Tight home supply. The supply of resale around downtown Denver is selling rapidly in homes has plunged to 5,100 listings, only newly evolving neighborhoods like Jefferson a 1.1 month supply, and bidding wars are Park, where prices are rising and some everywhere. New home sales have increased developments are selling out before the units 9%, but we expect sales to decline, as permits are even constructed. have recently been trending down as builders run out of supply. Some of the large masterplanned communities are winding down, which is adding to the lot price pressure. • Denver attracts investment. As evidence of Denver’s appeal, consider that North America Sekisui House, LLC (NASH), just entered Denver with the acquisition of two masterplanned communities: Anthem Colorado in Broomfield and Inspiration Colorado in northern Douglas County. Life is not that easy for Denver home builders, however. Finished lot prices have hit an all-time high, construction labor remains very difficult to find, and construction defect litigation risk has deterred condominium development.
Rental Growth Where You Least Expect It
BY DAVID GUARINO, Senior Research Analyst
Take a drive through the urban portion of any major city and you will likely see cranes and construction crews dotting the landscape, building what appears to be an endless supply of apartment units. Your eyes are not deceiving you. Construction in 24 of the top 27 apartment markets in the country has eclipsed 24-year historical averages. Given the declining national homeownership rate and numerous headwinds preventing entry-level buyers from owning a home, one could quickly assume that apartments are now the primary as well as preferred rental choice. This assumption would be incorrect, however, as single-family rental homes are growing faster than apartments.
Consider the following... 3% of all housing units are
single-family rental homes (roughly 1 out of every 9 homes).
The number of single-family rental homes has increased 35% since 2006.
15.1 million
11.2 million
While we expect the rate of single-family rental growth to slow as foreclosures slow, we believe the professional operators have a huge opportunity to build an investment-quality income stream out of what used to primarily be a mom and pop business.
Since 2006,
3.9 million single-family homes have become rental properties, compared to
2.9 million newly created apartment units.
Western Drought to Hurt or Help Housing?
BY JOHN BURNS, CEO
While the drought throughout the Western US has created a lot of concern, it turns out that a number of companies and water districts were prepared, having invested in all sorts of technologies and water recycling programs. In fact, new homes and new home communities are far more water efficient than existing communities. Here are some facts about the severity of the drought situation in California: 1. Reservoirs. The 22 largest are 34% below norm due to lack of rain the last 4 years. 2. Snowpack. The snowpack is 95% below norm this year, which means the reservoirs will fall further. 3. Expectations. There is a 70% chance that the drought will persist according to the Climate Prediction Center used by government officials. Water consumption is about to be cut dramatically. Farmers planted 400,000 fewer acres last year and just proposed to cut back even further. Also, residential water bills are set to skyrocket unless people cut back, so they will. I live in Irvine, California, where our water bill rose 40% last month and came with a letter telling us to expect our bill to triple by October unless we cut back drastically. We already have.
There are likely to be several impacts on the housing market: • Less demand. I expect increased water bills to be another reason some people will delay purchasing a detached home, and job losses in the agricultural markets will hurt demand as well. Food prices will also rise for everyone. • Higher prices. I expect new home approvals to become even more difficult, likely putting even further upward pressure on home prices unless demand slows dramatically. In the last year, median home prices have risen 8% to $418K, and median apartment rents have risen 7% to $1,364 per month. • Increased new home market share. I expect new homes to start taking more market share. Builders will use water efficiency as a sales tool, similar to the way builders use energy efficiency in the South as an effective tool. Cost-conscious and environment-conscious buyers will respond. Also, many California homes have no yard at all, with attached housing comprising 54% of all building permits in the state and most detached homes coming on very small lots. The short-term drought impacts clearly hurt most state residents, while the long-term benefits of improved water efficiency clearly help.
Cost Advantages Allow You to Pay More For Land BY JOHN BURNS, CEO
I learn the most when others tell me I am wrong. At a recent roundtable I moderated for 20 Washington, DC regional home building and development executives, we were discussing the challenges private builders face competing with public builders for land. The following chart shows the difficulty of buying land at a price that supports profitable home building, as lot prices (in green) began rising before new home prices in 2010 and 2011 and shot up dramatically in 2013. I attributed the difference to a better cost of capital for publicly traded builders. The largest land owner in the room chimed in:
“
I disagree. The biggest advantage is having lower construction costs. There are two builders in this room who continually pay me more for land, and it is because they have lower construction costs.
”
Everyone agreed and knew which two builders he was referring to—one was publicly traded, and one was privately held. While the public builders in the room agreed they had lower costs of capital, they pointed out that corporate charged them “private capital” rates for their land holdings, effectively holding them to the same land acquisition standards as private builders. While I had heard this many times before, I never really believed it because public builders often tend to be the highest bidders. That may be because public builders tend to have lower costs, but there are plenty of private builders who are large in their local market that have the same competitive advantages: • Low costs through local volume. Volume in the local market drives costs down. Builders with predictable volumes negotiate better rates with the trades (and often demand their best crews) and lower materials costs. Most agreed that national volume made little difference when it came to costs, especially considering the additional overhead associated with being national or publicly traded. • Low costs through repetition. While the luxury builders, architects, market research consultants (including us), and others continually harp on builders who leave money on the table by building the same floor plans over and over again, those who do build the same homes over and over again should be able to build them faster, cheaper, and with fewer mistakes (clearly not the case for those who are perhaps building them too fast or driving costs down too far).
I thank the builders and developers for setting me straight. While public builders have a cost of capital advantage, large builders in their local market (regardless of their source of capital) can compete effectively. P.S. For the many in the industry who hate the low-cost, high-volume, repetitive business model, I did not say that your model cannot work either. It can. You just have to do your homework to know that the incremental revenue from your beautiful, unique homes will far exceed the additional costs.
Independent Living Apartments: A Growing Lifestyle Choice for 75+ Seniors BY ADAM ARTUNIAN, Manager
The 75+ age group should grow rapidly over the next 20 years due to the aging baby boomer generation and longer life expectancy. What options are there for seniors who are relatively healthy but no longer want to maintain a home, cook meals, do laundry, pay utility bills, etc.? Independent living apartment communities are increasingly becoming a desirable option for this growing segment of seniors. 75+ Population to Expand Rapidly The U.S. Census Bureau projects the 75+ age cohort will reach 23.4 million by 2020, up from 19.8 million currently. The most significant period of growth for the 75+ population is expected to occur between 2021 and 2035, when the baby boomer generation enters this demographic group. The U.S. Census Bureau expects the 75+ population to reach 28.8 million by 2025 and over 41 million by 2035. Homeownership peaks around 71 years old, according to analysis of Census data by Chris Porter, our firm’s Chief Demographer. Beyond that age, households begin to show a greater tendency toward renting, and apartments can meet that need.
The Independent Living Lifestyle Choice Independent living communities typically serve the healthiest residents among senior housing and care properties, offering a lifestyle choice that provides freedom from daily chores such as cleaning, cooking, and home maintenance. The most common reasons residents move to independent living are to “get away from the upkeep of their home” and “be closer to family and/or friends”. Although independent living caters to senior men and women of any age, the typical resident is an 82-year-old widowed woman who is relatively healthy and generally does not require assistance with activities of daily living. Prior to moving, she lived in a private home located within 15 miles of the independent living community.
The Opportunity The recent sharp increase in home values in many metros is helping boost demand for independent living, as home equity is often the primary financial asset that allows seniors to afford this lifestyle choice. Below are some of the current national trends for independent living communities: • Occupancy rates have risen to 92% nationally, up from 86% in 2010. • Occupancy rates are generally above 95% among newer communities, with waiting lists not uncommon in many desirable locations.
• The average age of a community is 23 years. • The current capture rate among households age 75+ is 5.7%. • Recent research shows that 13% of households age 75+ cite independent living properties as “very desirable”. Source: National Investment Center for Seniors Housing & Care (NIC)
More than ever, senior housing for the expanding 75+ age group should be viewed as both a lifestyle choice as well as “needs based.” Independent living apartment communities offer the best of both worlds for an increasing number of seniors.
Affluent Apartment Renters Slow to Buy a Home
BY DAVID GUARINO, Senior Research Analyst
On an almost-daily basis, we hear the question: When will the millennial / first-time buyer emerge? While predicting the behavior of a cohort still recovering from high levels of unemployment and a record amount of student loan debt can be tricky, the response of some of the largest apartment REIT operators is an unhesitating no time soon. When your apartment lease expires, you have two choices: to renew or move out. Each quarter we track the percentage of residents who move out of an apartment to purchase a home. (Other reasons for moving out can include a job change, eviction, or rent rising too high). By studying publicly traded apartment REITs who manage a combined 520,000 units, we have learned the following: • During the housing boom of the early to mid-2000s, roughly 1 in 5 renters leaving their apartment opted to purchase a home. In fact, the national homeownership rate peaked in 2004—at the same time that the percentage of those moving out to purchase a home was peaking. • Since 2008, the percentage of renters moving out to purchase a home has remained below its historical average of 17%, while Sources: Apartment REIT public filings; U.S. Census Bureau; John Burns Real Estate Consulting, LLC the homeownership rate has continued to decline. • As of the fourth quarter of 2014, just 14.7% of all tenants moving out purchased a home. The homeownership rate declined to 64%, the lowest since the mid-90s. The public apartment REITs we track primarily operate communities that target more financially stable millennial tenants (i.e., the most qualified to purchase a home). During the fourth quarter of 2014, the weighted average rental rate of these REITS was $1,652, roughly 31% higher than the national average asking rent. One would think that enduring years of sizeable annual rent increases would push tenants toward owning a home. However, even with an improving economy and a more stable employment outlook, this trend has simply not occurred. While newly revised FHA loan requirements have the potential to pull more first-time buyers out of apartments, the data does not indicate a significant uptick in FHA buyers.
Powerhouse Job Markets:
California Dominating BY PETE REEB, Principal
Three powerhouse metropolitan areas—New York, Los Angeles, and Houston—together accounted for one of every seven new jobs created in the country over the last three years. These top three markets added 300,000+ new jobs from 2012 through 2014. A total of 17 metro areas added at least 100,000 new jobs during that three-year period.
Note that 6 of the top 17 job growth markets over the last three years were in California: Los Angeles, San Francisco, Riverside/San Bernardino, San Jose, Orange County, and San Diego. Combined, the California markets quietly added 926,600 jobs from 2012 through 2014, or one out of every eight new jobs in the country. Looking forward, four markets are expected to add over 250,000 new jobs over the next three years: New York, Los Angeles, Chicago, and Atlanta. Job growth in all three of the biggest Texas metros—Houston, Dallas, and Austin—is expected to slow due to the drop in oil prices. If the job growth projections hold, New York and Los Angeles will have added a combined total of over 1.3 million jobs during the current economic expansion but built far fewer housing units to accommodate that demand. Job growth is the number one driver of new home demand, as adults with incomes are the largest proportion of home buyers. Household formation data is not reliable for projecting housing demand. Call me or email me or any of our local consultants if you are interested in seeing the 50+ pages of data that we analyze on the top 66 markets in the country every month, or if you desire a more in-depth analysis on your specific investment decisions. Source: John Burns Real Estate Consulting, LLC
Shift in Land Sellers Tells the Story of Land Values BY JODY KAHN, Senior Vice President
Bank sales down significantly. When 60% of the land was being sold by banks, as was the case in early 2011, we advised our clients to buy aggressively in the better locations. Today banks represent only 6% of the residential land sales (as of 4th quarter 2014), and most of the bank activity is occurring in the Midwest and Southeast, or exurban locations. Developers selling again. Since housing market conditions began improving in late 2012 and early 2013, we have been watching the resurrection of developers who are selling lots and land to builders in the normal course of business. The lack of aquisition and development (A&D) financing has held back a stronger volume of developer sales. The developers’ share of sales will rise, as many of the nation’s top developers are backed by private equity now, and access to A&D financing has gradually improved in the last year. Investors and long-term owners capitalize on current high land prices. As expected, the investors who bought land during the market correction are selling those assets to builders and developers. Long-term owners who are often not in the development business, such as farmers and family trusts, recognize that lot and land prices are back to or exceeding the prior peak in many metros and are anxious to sell. As shown in the “Burns FInished Lot Value Index™” Chart, finished lot prices have appreciated far faster from the trough in 2009 than most thought they would. In summary, fortunes are usually made (or lost) by timing your land purchases right (or wrongly). Congratulations to our research subscribers and others who bought a lot of land in 2009 through 2012.
Strong Demand and Few Public Builders Means More M&A Activity BY JOHN BURNS, CEO
Our Chief Demographer Chris Porter shared the following amazing chart with me, showing the explosive construction growth in the Southeast. Any builder or building products company that has invested more heavily in the Southeast has certainly reaped the rewards.
Chris, our Southeastern consulting leader David Kalosis, and I believe this growth trajectory will continue. Affordable housing, pro-growth economies, and great regional airports will continue to attract people to the Southeast. David also notes that the Southeast recovered later than many other areas, so recent momentum is strong, and builders are currently selling many high-end homes to relocating executives.
So I wonder why the big, publicly traded home builders dominate the Southeast less than other areas. While publicly traded home builders own more than 65% of new home subdivisions in Orlando, Las Vegas, Riverside, San Jose and Denver, the public builders own the minority of subdivisions in the Southeast, particularly Raleigh (33%), Atlanta (36%), and Charlotte (42%). This leads me to conclude we will see more M&A activity in the Southeast. We have already seen quite a bit in the last two years.
12% Price Appreciation per Mortgage Point BY JOHN BURNS, CEO
In the last 15 years, home prices have grown 29% faster than incomes, primarily due to falling mortgage rates. Since the monthly payment determines what most buyers can afford to pay for a house, we thought we would show you the powerful stimulus that lower interest rates have on home price appreciation.
Source: John Burns Real Estate Consulting, LLC
8%
4%
A typical family earning $60,000 per year can afford a mortgage payment of $1,800 per month, which qualified them for a $245,000 mortgage in the year 2000 when mortgage rates were 8%—and qualifies them for $377,000 when rates are 4.0%. In other words, each 1.0% drop in interest rates in the last 15 years has allowed home sellers to raise price 12%+/-.
Since last March, rates have fallen 0.7%, a 9% stimulus to home prices. For all but the most affluent home buyers, payment trumps price, and sellers now have the ability to raise prices again. Price drives profit, which is why the industry always talks about price. However, payment drives price. In addition to talking about price, please always calculate the payment. It will help you stay in touch with the consumer.
Beware
the Household Formation Headlines BY CHRIS PORTER, Vice President & ALI WOLF, Senior Research Analyst
be new, and the Census Bureau has not been able to explain it to us. First quarter data is available April 28.
Beware the household formation headlines! The current data—1.3 million households formed in 4Q14—likely overstates actual household growth. Since 2007, 6 out of 8 of the gains in the fourth quarter were given back in the subsequent first quarter by negative household formation (see graph below). Also, no other data point we found in Q4 supported household growth that strongly.
We advise using caution regarding all data, especially the housing vacancy numbers, exactly as the Census Bureau reports. For housing vacancy, we use a rolling four-quarter average, as it smooths out the end-of-year jumps that likely occur due to secondhome double-counting of snowbirds. Do not criticize the Census Bureau, however, as estimating housing vacancy is quite difficult, especially on a constrained budget. Also, the goal of the Housing Vacancy Survey is to estimate rental and homeowner vacancy rates, as well as homeownership rate, and not to estimate household formation. In the following rolling four-quarter average chart, you see more steady growth (and also adjustments we made to be more in alignment with the Decennial Census). Households have been forming at a lower than usual pace since the Great Recession began.
On average since 2007, roughly 76% of the Q4 gains were reversed in the following quarter. If you believe the trend will continue, the real 1Q15 number may be more like -1.0 million. While this would be extreme (as was the Q4 number), we do believe some of the overstating in 4Q14’s data will be reversed in 1Q15. In the 41-year period from 1965 through 2006, household formations only went negative in the first quarter five times, so this seasonal shift appears to
4
Shifts Needed to Sell More Homes
BY JOHN BURNS, CEO
As noted during our consulting team’s visits to thousands of communities all over the country last year, and also shown by the slower 2014 sales in our master-planned communities survey, the land development and home building industries need to shift their mix of communities to target a different mix of buyers than the traditional mix. New home community segmentation needs to change in four ways:
1
Less Move-Up Housing Move-up buyers are traditionally 36–45 years old. Today, that means they were born in the 1970s. Here are a few facts about this group: • 18% fewer of them. 18% fewer people were born in the 1970s in the US than in the 1950s, which
has been somewhat offset by a surge in immigration. This means that the US resale housing stock has more than enough homes designed for move-up buyers. • Insufficient equity. Many of those born in the 1970s bought their first home 10+/- years ago and thus are far less likely to have sufficient equity to move. They are also more likely to have gone through foreclosure, which has a marginally positive housing demand element to it, as some will return to homeownership soon. Not only are there fewer traditional move-up households, but a high percentage of them are unable to move.
Move-up housing success can be achieved in the right locations and with the right execution, but the total demand is much lower than usual. It just is not as easy. Our consultants have witnessed plenty of success, such as Line K in Virginia and La Vita in Irvine (both highlighted at www.DesignLens.com).
2 3 4
More Luxury Housing
Luxury homes, whether in urban or suburban environments, continue to outperform, and for very good reason: • Rise in affluence. The economic recovery has been
fueled by low interest rates, which have increased the value of most assets—– stocks, bonds, homes, etc. This has heavily benefitted the rich, who are the primary owners of these assets. • More of them. Luxury home buying typically occurs when buyers reach their years of peak earning and net worth. The US currently has more people in this group, aged 46—60, than ever before, and they have more income (two careers) and less expenses (fewer kids) than any generation before them. Compared to prior generations, this group is loaded.
• • • •
More Active Adult Housing
Eight million more people will turn 65 over the next 10 years than the last 10 years, and more of them than ever before plan to move, according to our Consumer Insights survey. This creates opportunities in all regions and at all price points, as the demand drivers are no longer solely golf courses in sunny states. Proximity to kids and grandkids, as well as entertainment, and health and wellness are just a few of the main success drivers we see over and over.
More Entry-Level Buyer Housing in Future Phases
The headlines about low entry-level buying activity mask the fact that entry-level buying is indeed already on the rise (we purchased this data for 166 MSAs) and will almost certainly increase steadily in the years the economy grows. Those born in the 1980s (currently 26– 35) have delayed the need to buy a home by 3–5 years, creating pent-up demand. Consider that they are:
10% higher in number than those born in the 1970s Marrying 5 years later than their parents did Having children 3 years later than their parents did Struggling financially, since they entered the workforce in the worst economic downturn since the Great Depression and have more student loans than any generation before them
While entry-level buyers are financially challenged, the number of people is so large and the desire to own so high that many entry-level buyers will emerge over the next decade, especially if mortgage rates and down payment requirements stay low. While most will buy resale homes for affordability reasons, a small percentage of a large number will still translate to strong new home demand.
Conclusion
In summary, builders and developers should study their local market with an eye to building communities and homes for the following: • • • •
Less move-up housing More luxury housing More active adult housing More entry-level buyer housing, but in future phases
The fastest growing economies, which tend to be in the south, will be where most of the opportunities abound.
New Homes Too Expensive For Most Buyers BY ERIK FRANKS, Manager
New homes failed to gain much market share last year, which can be partially explained by looking at two factors in more depth: 1. A shift in the preferences and demographics of current first-time home buyers 2. The pricing spread between new and resale homes
Most people cannot afford a home that is more expensive than the median-priced home in a market (the price where 50% of the homes sold are more expensive, and 50% are less expensive). That is one reason why 92% of all the homes sold in 2014 will be resale homes. The following chart is one we produce each month that compares the price of the median resale home to the average sales price reported by the larger publicly traded builders. Every single home builder’s average sale price exceeds the median resale home price by at least $68,000. While comparing medians and averages is a bit apples and oranges, rest assured that the vast majority of new homes are priced well above the median resale home.
Demographics Many of today’s first-time home buyers value living closer to their jobs and retail, partially because fewer of them have a stay-at-home parent. Since the affordable new home developments tend to be built in outlying areas, they are less appealing to today’s young buyers. and although millennials prefer new— especially with the latest technology, this same group is also strapped with unprecedented amounts of student debt, which diminishes their buying power.
Pricing Spread While a number of home builders are traditionally known for building entry-level homes, those builders have really always focused on the more affluent first-time buyers. These buyers have traditionally been willing to trade some commute time to get a brand new home, which is almost always more expensive than most of the resale homes sold in the market. A the price difference between new and resale homes has increased to an all-time high, more first-time buyers are being priced out of the new home market.
*The average median price is weighted by community count. **The average selling price is from the most recent quarter.
In the future, as millennials get older, make higher incomes, and pay off their student debt, the demand for new housing will increase, and more will buy on the outskirts—particularly if they can capitalize on the growing trend to work from home. Over time, we expect the new home/resale home price gap to narrow.
How Much is Too Much? BY PETE REEB, Principal
The headline screams, “Southern California New Home Inventory Has Almost Doubled since the Beginning of 2013.” Terrible news, right? Not necessarily. Even with the increase, new home inventory levels* are still near all-time record lows and are highly unlikely to reach back up to prior highs.
As of the end of the second quarter 2014, there were only 2,806 units of unsold new housing inventory in all of Southern California. While it is true that the current inventory represents a 92% increase from the beginning of 2013 (1,458 units), the fact is that the beginning of 2013 represented an all-time record low over the last 43 years.
• While single-family inventory is up, it is currently only back to 2012 levels. • The condo market is still at historically low levels of supply. • Fewer large sites for masterplans, fewer active projects, smaller unit counts per project, smaller phase release sizes, and tighter construction financing releases all have a limiting effect on inventory levels.
From 1971 to 2014, there were an average of 13,100 units of available inventory on the market, and even looking at just the last 30 years (1984 to 2014), there were an average of 9,900 units of inventory. As such, the current inventory is 72% below the average of the last 30 years and is 79% below the average since 1971.
There are a number of reasons why inventory levels are so low today compared to the past and why the supply going forward is highly unlikely to reach the highs hit in the past (or even historical averages): • Running out of land. The three primary coastal counties (Los Angeles, Orange, and San Diego) have far less “greenfield” land left for large-scale new home developments than even just five years ago. Fewer master-planned communities equates to less supply. • Fewer projects. Actively selling community counts are far lower today than 10 or 20 years ago. Fewer projects means fewer units coming to market. • Lower unit counts. The average total number of units in a project has shrunk considerably over the last 30 years. In San Diego County, project sizes have decreased from a median size of around 125 units per project in the 1980s, to 90 in the 1990s, to 78 in the 2000s, to just 59 units today. With fewer units per project, there are less total units to bring to market. • Smaller phase releases. Phase release sizes have decreased over the decades from 10 to 20 units per phase in the 1970s and 1980s, to 4 to 6 units per phase today. This is a very important factor, as builders now control their inventory levels much more than in previous years. • Tighter construction financing. Construction financing is much more closely tied to actual sales performance than in the past. It used to be possible to release 10 to 20 homes at a time, take some reservations, and then move on to the next phase. Today, phase releases are more typically only 4 to 6 units, and lenders often require builders to have 50% to 100% of units under contract (not just reserved) before releasing funds for the next phase, greatly reducing the potential for overbuilding. Interestingly, all of the increase in inventory levels has come in the single-family market, while condo inventory levels remain at historic lows. In many markets in Southern California condominium projects are achieving faster sales rates than single-family projects (primarily due to lower price points and/or strong infill locations near jobs), which is keeping a lid on condo inventory levels. Also, there is very little new high-rise development taking place today compared to the mid2000s, and there is still virtually no condo conversion activity today (compared to high levels of condo conversions in the mid-2000s). A careful understanding of market supply and demand conditions can make the difference between a successful project and an unsuccessful one. Pete Reeb has been providing advice on the new home market to builders, developers, and investors for over 30 years.
*New home inventory is defined as new homes that have been released for sale but not yet sold. Includes both completed homes and homes under construction. Does not include homes that have not yet been released for sale.