The news gets better, but the job of making a go of it in home building doesn't get much easier looking toward the back-half of 2015, a year that may well become known as an inflection point year in product and pricing "mix shift."
Mix shift means that more buyers from the middle and lower part of the wherewithal spectrum are showing up in the market for new homes. This is a classic "be careful what you wish for" moment, but a necessary one in the stingy progression of recovery.
Higher end homes--move-up, second-time move up, luxury, and, to some extent, active adult community homes--sell to people who have means and have time. The selling and construction cycle allow for care, attention, quality assurance, a civil and sane experience leading to the settlement.
Everyone knew that that high-end market couldn't and wouldn't last forever as the sole bright spot in housing's recovery, so builders and developers have been trying to pry open the housing finance spigot to get money flowing, both to builders who need project finance to land deals and start going vertical again, and to home buyers, who normally need to finance at least 80% and as much as 97% of a home purchase to make it to settlement.
Once that spigot opens and demand for homes in the middle and lower price tiers starts to activate--and it shows ever stronger signs of having done so--life, as we knew it, changes.
Suddenly, it's on people's minds: it's the right time to buy. We have a sense that the reason it's occurring to a lot of people that it's the right time to buy is that they're afraid the time to buy will have come and gone--potentially for a long time--if they don't act now or soon.
So, it's a "risk-on" moment, in both commercial lending and investment in home builders, a great deal of whom have been rattling their cages to get at capital for a couple of years now; and among individual home buyer borrowers, who are finally awakening to the fact that banks want to lend them money to buy homes again, provided borrowers are willing to do the dance it takes to prove ability to repay in the Dodd-Frank era.
So, among the challenges to builders include the effect of a capital and investment "risk-on" mentality.
Let's look at land and lots, for a moment. Finished lots are rare, and spoken for, and are mostly in the A positions aimed at higher end buyers.
As market demand swells in the middle- tiers, developers and builders are teeming to get to the middle-level B and C lots, not so far away from the job centers, but where density opportunity and other factors might make the homes more affordable. So, many of those potential land positions have not been entitled nor developed.
So, lenders and private equity players who may be interested in backing builders who want to seize those opportunities to build where the demand would be huge, now must add "entitlement risk" and "duration risk" to their list of "unknowns" as they assess whether to invest or lend. Local politics, environmental matters, soil issues, weather events, ... a host of unpredictables now figure into the lending or investment return dates of maturity or payout to a degree that has not been material for some time. This is not new, but it certainly hasn't been much of a big factor in investment decisions when there were a lot of distressed, big-tract deals to be had.
At the same time, the minute lending starts to open up to lower-price tier buyers, builders suddenly experience deja vu on their cancellation rates. Earnest money deposits notwithstanding, can rates go up when buyers don't feel their initial order and deposit is more than an option to buy the home, so get ready for a spike in accidental spec homes, especially as lenders navigate Dodd-Frank regulatory waters as they take on borrowers they haven't welcomed for some time.
Net, net, now is when disciplines, processes, integrity, and quality assurance get a stress-test the likes of which they haven't seen for nearly a decade. That's what tipping points are all about.