Only a month-and-a-half into 2017, and a week or so into a heightened drama period of residential real estate transactions known as Spring Selling Season, it is too early to tell exactly what kind of year it's going to be on the new-home business front.
Most smart longtime industry observers predict a good year for housing in a broad sense--with slightly more for-sale inventory coming online in lower price ranges, slightly easing credit access, and a lot of pent-up demand champing at the bit to move into their family-formation life-stages after unprecedented delays out of the demographic gate.
Offsetting, well-known forces include skilled labor cost and access risk, lots that price in both seller premiums and regulatory burden and are painfully slow to bring online to boot, new material input cost pressure, and lately, interest rates that have started to take off from their historically "dirt-cheap" levels to some higher new normal.
And then, of course, there are "unknown unknowns," both on the plus and the negative side. They could influence consumer sentiment; they could incentivize massive new corporate investment; they could free boat-loads of capital from regulatory fetters; they could kickstart hiring in good-paying jobs that could serve as an adrenaline shot to a so-far anemic, plodding economic recovery.
What's clear is that geography and timing are everything. Call the next stretch ahead a stage of recovery where growth is not a given, it's more of "a taken."
The right product in the right place at the right price is a rule that's always at work in an economy that is made up of countless micro-economies and nano-jurisdictional sub-markets. This year, product, place, and price will separate stronger from weaker home building businesses on both the pace and the profitability front, largely because strategic programs--land position, product segmentation, and local operational workflows--take months and months, if not years, to establish, barring acquisitions.
Best-of-breed builders very likely will be takers when it comes to their share of sales and opportunity in their respective operational footprint. It's best-of-breed builders, by the way, who'll grow in 2017, not necessarily all the rest.
They'll take from:
- Rentals--multifamily and single-family for-rent
- Staying put
- Other new builder competitors
Now, seeing as 150 million people (the combined Baby Boom and Millennial generational cohorts) are moving through the early stages of a housing preference inflection point, it's going to be the best-of-breed builders who'll seize advantage with the early-adopter vanguard of that tipping point mega-demand force.
Big builders with smoothed-out access-to-capital structures are--despite SEC-inflicted pain and other fiduciary headaches--likely to continue to consolidate ever more volume as time passes, especially given tightening constraints around lot deliveries, skilled laborers, technological investment, and the vicissitudes of borrowing for projects and operating expenses.
Public builders perform under the lash of quarter-by-quarter investor behaviors, attitudes, and moods, which can tend to reward the wrong thing at the right time, and the right thing at the wrong time.
That said, their capital structures and business models may have similarities, but their submarket geographies, operational competences, product development, and financial management skills vary across a wide spectrum.
As a peer-group bucket, investment analyst and advisor Ivy Zelman and the Zelman & Associates team believe that big builders will absorb the psychological hit of rising interest rates in the first half of the year, and then regain hefty, double-digit growth momentum in the latter half. The Z Report, a bi-weekly analysis focusing exclusively on rich content for executives and business leaders overlapping the apartment, building products, homebuilding, home improvement, mortgage, real estate services, single-family rental and title insurance industries, looks at the public builder 2017 prognosis this way.
"Our forecast incorporates new order growth of 8% in 2017, modest deceleration from 10% in 2016 due to our concern that fourth quarter activity benefited at the expense of first quarter from the movement in mortgage rates. However, we expect the lull to be temporary, forecasting orders to increase 10% in 2H17 after 7% in 1H17."
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I don't disagree with this view. The only qualification I'd add is that all public home building companies are not created or evolved into equals. A rising tide in this case will not lift all boats.
Have a look, for example at Calculated Risk contributor Thomas Lawler's roll-up of how eight of the 22 or 23 public companies operating as home builders fared in their operational performance for the quarter ended Dec. 31, 2016. Net order growth across the peer group was 11.5%, but look at how wildly varied some performances were vs. others.
That double-digit order growth is not a given, it's a taken.