We report here a fascinating data point that surfaces from our annual Builder 100/Next 100 research: 45 of those top 200 companies did half or more of their 2015 business in entry-level housing offerings.
That's up from a low-point in 2014, when only 36 of the 200 highest volume builders did 50% of their homes in the starter, first-time buyer, lower-price tier segment of the business. It's also way short of the 70 builders--35% of the lot--who dwelled in that arena in 2010. Anybody remember the first-time home buyer tax credit?
Now, here we are. A cocktail of a better jobs economy, and light-at-the-end-of-the-tunnel student debt obligations for people just reaching their mid-30s is finally catching up with dirt cheap interest rates. That's made home buying a viable, smart household management decision for more young adults--minor details like down payments and mortgage qualification aside.
Home builders can almost taste that classic recovery that "takes on a life of its own," when Animal Spirits psychology kicks in, and people wake up in the morning and subconsciously say to their spouse or themselves, it's a good time to look for a home to own. They're worried, as they're wont to do, about, well, things.
Mainly, the cost and the time it takes to bring a lot on line. Assumption one is that there are too few finished lots. So, first, there's the price of the raw lot, which is high because there are multiple bidders in almost every market that matters. Then, you have to get engineers to do the land engineering. Where are the engineers? Many of them split during downturn time to find a livelihood else-wise, so while everybody's talking about labor shortages in the building trades, that becomes a high-class problem to have when compared with not having a pipeline of lots available to work with because of the time and money it takes to do the engineering and development before breaking ground on vertical construction.
So, lots are a worry. Labor's a risk. Lending--at least from the acquisition and development side of things--is not fun, but it's at least out there, as institutions are thirsty for yield.
Worries intensify when you kick over to demand. Demand is there on an absolute, pent-up, sheer quantitative level, but everybody's well aware that that means a whole lot less than it should when wonky economic events start to mess with typical life-stage behavior.
The big, slightly off-stage worry right now, now that Spring has genuinely materialized as a 15% to 20% better than last year sales market for many home builders to date, is interest rates. Interest rates, we know, can catalyze sales or snuff them.
An interest rate has instantaneous and potentially show-stopping impact on monthly payment analysis for a good number of would-be buyers who may--because of jobs mojo and shedding their college debt--be on the verge of waking up and thinking, "we should look for a home."
There are two ways home builder operators need to think about the inevitable moment that interest rates rise--and not wait for that instant.
One is velocity--which Fletcher Groves and Clark Ellis will address in two weeks at our Housing Leadership Summit Bootcamp session--which gives builders an opportunity to increase operational speed profitably, with benefits and added value to both the company and the customer.
The other would be a collective movement among home builders and the residential development and construction ecosystem, rallying against this phenomenon: closing the gate. Closing the gate takes many forms.
In this case, it's making lots and land and community development so torturous and expensive and frustrating that it chokes it off. It's choking off opportunity for new people to come into the "club" of the American Dream of homeownership. Seth Godin writes:
The choice to not fight this inertia is still a choice. And while closing the gate can ensure stability and the status quo (for now), it rarely leads to growth, and ultimately leads to decline.
Closing the gate is housing's public relations problem. No single company can tackle that. Collectively, the community can solve the challenge. Let's take that on. Housing Leadership Summit is a good place to start. HIVE will be another great time to continue this, for it's a chronic issue. Enough said.