The new home construction cycle still has a long way to go.
Welcome to my new home! As many of you know, I spent 13 years as a Contributing Editor at The Concrete Producer, which was just combined with Concrete Construction, and this is our first issue of the newly joined publications. I hope you will follow me here for at least another 13 years.
Just this week, I ran across a great deal of interesting facts and metrics about the current state of the new homebuilding market that speaks volumes about the pent-up demand that bodes well for the foreseeable future. We all are aware of the multiple bottlenecks that have kept the reins pulled back on the homebuilding market recovery: a lack of developed lots for builders to buy, labor constraints at every level of construction, rising mortgage rates, and housing prices that are generally rising as comparable existing housing prices just keep moving up every month. Together, this set of collective bottlenecks has kept new housing starts from getting back to even average historical levels, much less the levels we witnessed in the mid-2000s that led to the housing bust and the subsequent Great Recession. There are doomsayers out there predicting housing will see a significant dip as a result of these bottlenecks, a view that is the polar opposite of my own. Here’s why.
The first indicator is builder confidence, which stayed firm in August. According to the National Association of Homebuilders (NAHB) which tracks this metric, builder confidence in the market for newly-built single-family homes edged down only one point to a solid 67 reading in August. Builders continue to report strong demand for new housing, fueled by steady job and income growth, along with rising household formations. And while they express concern about lots, labor, and affordability, the rock-solid economic expansion and firm job market should spur demand for new single-family homes for many months ahead. Meanwhile, builders continue to monitor how tariffs and the growing threat of a trade war are affecting key building material prices, including lumber. These cost increases, coupled with rising interest rates, are putting upward pressure on home prices and contributing to growing affordability challenges, but as I have predicted before, the tariff rift will come to a resolution very soon, as politicians look down the barrels of the midterm elections and need this issue resolved.
Another way shoppers are dealing with affordability is by lowering expectations, and looking at townhouse construction as a sensible alternative to single family detached homes. Townhouse construction posted significant gains during the second quarter of 2018, and is set for further expansion given the demographics of renters entering the for-sale market, as well as ongoing land constraints and the growth of demand for walkable neighborhoods.
Over the last four quarters, ending with the second quarter of 2018, townhouse starts totaled 116,000, 23% higher than the prior four quarters. Townhouses, or single-family attached housing, accounted for 36,000 starts during the second quarter of 2018 compared to 25,000 in the second quarter of 2017. Using a one-year moving average, the market share of new townhouses stands at 13.1% of all single-family starts, a post-recession high. And this isn’t the first time townhouse construction has surged against the backdrop of rising mortgage rates and high prices; in the late ‘70s and through much of the ‘80s, double-digit mortgage rates drove townhouse growth, and it became the housing style of choice for many years in most markets across America.
But the last metric that really surprised me was NAHB’s recent poll that tracks prospective home buyers’ perceptions about the availability and affordability of homes for sale in their markets. Fourteen percent of adults responding to the poll in the second quarter of 2018 are planning to purchase a home in the next 12 months. A follow-up question asked that group if they were already actively trying to find a house or still just in the planning stage: 49% said they were already actively engaged in the search process, a share that was somewhat higher than in the first quarter of 2018 (42%), but still lower than in the last quarter of 2017 (67%). More granular second quarter 2018 results show that nearly half of all prospective buyers planning a home purchase within the next year are already actively looking for a home, regardless of what generation they belong to: 51% of Millennials, 49% or Gen X’ers, and 46% of Boomers.
The poll also revealed that prospective buyers who are already actively looking for a home are spending considerable amounts of time house hunting. In fact, more than half have been trying to find the right home for three months or longer in each of the three quarters data are available for. Most surprising was the number one reason home buyers gave in the second quarter of 2018 was that they can’t find a home with the features they want (45%), followed by not being able to find a home at a price they can afford (43%). It is apparent affordability isn’t as important as finding the “right” house.
And finally, a critical question for all involved in the housing industry: what are these veteran house hunters, who have already actively looked for at least three months, going to do if their dream house remains elusive in the months ahead? Fifty-five percent will continue looking for the “right” home in the same preferred location, 34% might expand the search area, 24% might accept a smaller/older home, and 19% might buy a more expensive home.
But what surprised me most of all was the final metric the poll revealed, and which speaks volumes for the strength of the market: is the one option that is not in the cards for most of them is giving up. Only 16% say that is likely their next step, suggesting that despite the difficulties and delays, most prospective buyers will press ahead undeterred in their homeownership goal.
The combination of builders with a firm sense about new home construction in the near-term future, ways shoppers are tackling affordability, and the sheer tenacity of home shoppers to find what they want tells me this current new home construction cycle has a long way to go.
About the Author
Pierre G. Villere has been a contributing editor for The Concrete Producer for over a decade, and serves as the President and Senior Managing Partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry. He has a career spanning more than four decades, and volunteers his time to educating the industry through his regular articles and presentations. Contact Pierre via email.