This article was featured in our December 2014 issue of BUILDER Magazine.
New home demand commentary was peppered with the words “weakening,” “softening,” and “slowing” for many markets in October’s Demand Index, but builders and regional directors alike aren’t sweating it. Lot demand cooled in few markets, as builders appear to be scooping up any available lots they can in preparation for the coming year.
The average scores for new home and new lot demand in the past six months show that across the board, new home demand has been flatter in 2014, while demand for new building lots has been steeper, in line with the goals many public builders have to increase their community counts.
Metrostudy chief economist Brad Hunter has found that “nationwide, lot deliveries are still trailing housing starts by a tiny margin, but the gap has nearly closed, as lot deliveries rise sharply.” In select markets like Tampa, Austin, Southern California, and Salt Lake City, lot deliveries have now outpaced starts, ”a bullish sign for 2015.” Hunter has predicted a 14 percent increase for new home starts in 2015, backed by a strengthening economy and loosened mortgage requirements (although mortgages are still hard to obtain).
On the other hand, Mark Zandi, chief economist at Moody’s Analytics, has made some very bold comments about the coming year, predicting that we could be closing in on 1 million units by the end of 2015. Zandi cites job growth and millennial-entry into the market as the main drivers for an intense uptick in supply in the coming years.
As we outlined extensively in last month’s Index commentary, job growth precipitates demand for new housing, and markets where industry is booming should be prepared for housing demand in the coming year. But that doesn’t mean that pent-up households will dissipate quickly in response, or that millennials will make their initial foray into the market any time soon.
Hunter’s “biggest surprise” of 2014 was how few millennial formed households. Instead, millennials have opted to move in with their parents or double-up in rental units. They haven’t contributed to the single-family market notably in 2015 at all, and it could be largely driven by the fact that they were in their teens when “foreclosure” became a regularly heard or seen word in the news.
Smart builders will be wise to leave Millennials out of the equation in
2015, and focus on Boomers instead. According to Metrostudy, 52 percent
of new-home buyers in the next five years will be over 55, and the top five
markets to have a baby boomer housing deficit are Dallas-Ft. Worth, Houston,
D.C., Atlanta, and Miami. None of these markets have had lot deliveries outpace
starts in 2014, and both Texas markets fell in the top 5 for new lot demand in
the past six months. 2015 will be a big year for housing, but success will be
dependent on builders focusing their efforts in the right places.