TRENDS. GREAT TO CATCH THEM BEFORE they happen. Still, how devastating they can be if we find ourselves merely reacting to them, swept along in their force field. It's occasionally critical to look at the uber trendlines that track both back in time and forward into the years ahead in order to peer around the next corner. A braid-work of macroeconomic, demographic, geographic, home buyer preference, operational, and product development trends tells us that while fundamental drivers for growth remain strong, uncertainty and pockets of weakness are cropping up as rising interest rates collide with the profound urge to own or own more home. Clearly, whether they're born optimists, realists, or pessimists by nature, company leaders, economists, and industry experts alike predict that the next 12 months will begin to filter out the strong players from the less strong, saying that the era of the “rising tide” that lifts all boats has ended.
At the BIG BUILDER '05 show in Las Vegas in November, we invited two industry veterans to share observations on where the nearer and longer-term challenges are and what the opportunistic moves might be for big builders. They are: Eric Belsky, executive director of the Joint Center for Housing Studies for Harvard University and Boyce Thompson, editorial director of BUILDER, MULTIFAMILY EXECUTIVE, and BIG BUILDER magazines. Belsky focuses on macro population and economic drivers. Thompson addresses a series of best practices topics specific to large home builders.
LONG TERM MOJO The one sound-bite a big builder would most hope to hear from an economist with a reliable track record, Belsky predicts a “rock solid long-term outlook.”
First, household growth is strong. Belsky's contention is that the Census is undercounting for immigration, erring on the low side. “For 40 years in a row, the Census Bureau has been misestimating immigration,” Belsky asserts. Correcting for the undercount would add 14.5 to 15 million households over the next 10 years, a number unlike anything seen since the 1970s, when baby boomers came storming into housing markets.
BA-DA BOOM The second reason for Belsky's conviction that the market momentum will continue over the next 10 or 15 years is that baby boomers, and the World War II generation before them, are reaching each age level with more wealth and more home equity than any of their predecessors. People are going to use that wealth to do a variety of things, Belsky observes. They will tap into it, as they have been doing, to finance consumption and numerous other activities. “But they are also going to be using it to help their kids buy homes and other things,” he says. What's more, boomers' kids have the advantage of more wealth and more income than any generation before them.
A third reason for long-view exuberance is second home demand. In 1989, only 3 percent of 45- to 54-year-olds had second homes. In 2001 it was 7 percent for that age group, more than double. Among people ages 55 to 64, it jumped 4 to 9 percent. “Again, this is in 2001, before a clear and obvious ramp up in second home buying that we can tell from other sources. But we won't have a household-based estimate until probably next year for the year 2004.
“So you can see that you're doubling the rates at which people are owning second homes, plus you've got that huge baby boom bulge moving right into the age ranges where that doubling is occurring, and now moving past them, with record levels of second home-ownership. In fact, third homeownership is becoming increasingly common.”
INFILL ‘ER UP Infill housing and redevelopment will also drive production higher, according to Belsky. There are a number of reasons, the most important being demographic. Older people—perhaps as they reach an empty-nest stage—want a second home in the city. As their children reach adulthood, they're apt to migrate to infill homes in cities, because the things that you really worry about being in a city that you can't really live without are quality schools.
“The disincentive to live in cities is much less,” says Belsky. Reinvestment in a few cities is already significant. In large metropolitan areas, the cost of commuting and getting downtown (for example in the Washington, D.C. area, from a place like Tyson's Corner, Va.), has become so unmanageable that people are going to want to opt out of that kind of commute. That phenomenon will spur an increase in demand, “and that demand isn't going to be met through vacant lots,” asserts Belsky.
YOU CAN QUOTE ME Here are Belsky's convictions for the coming year … Clip this page and hang it on your bulletin board, and let us know how it pans out a year from now: