Builders are likely to remember 2012 as the year when their industry finally arose from the hospital bed it's been laying in for five years, and walked around again without a discernible limp or the use of a cane.
The survivors of the past recession stepped up their construction activities and were even able to get some price appreciation from customers who, while still somewhat hesitant because the job market is still uncertain, at least showed a willingness to consider buying and selling houses.
Market watchers expect housing’s growth to continue through at least the next two years. But the industry faces challenges that include a still-shaky economy, a potentially tougher regulatory climate, and already-noticeable shortages in labor, finished lots, and building materials that would impede growth if they get worse.
The following series of articles rounds up the key news topics of 2012, with an eye toward the future and how they are likely to play out and affect the housing and real estate sectors.
1. Political Thrust and Parry
Does the re-election of President Barack Obama, with Republicans holding onto their vote lead in the House of Representatives, augur four more years of paralyzed federal governance? Certainly the seemingly (at least through mid-December) endless and implacable arguments over preventing the so-called fiscal cliff from triggering deep spending cuts and tax increases on January 1 hasn't inspired confidence that Washington is entering a new era of consensus.
For builders, a government at political loggerheads will make arriving at solutions to big issues that fundamentally affect housing markets and customers harder to achieve. The future of America’s secondary mortgage market—specifically the fates of Fannie Mae and Freddie Mac—could takes years to sort out, even under ideal legislative conditions. Retaining the mortgage interest deduction (MID), which builders and Realtors keep insisting is essential to industry and economic growth, will become a tougher sell if lawmakers ultimately lean toward a budget-cutting formula that favors limiting entitlements rather than enhancing revenues. (You know the MID could be imperiled when one of housing’s best friends in Congress, Georgia Sen. Johnny Isakson, said he’d be willing to trade MID for lower corporate tax rates.)
Builders are also watching which way the political winds blow on various regulatory fronts. Ongoing rhetorical skirmishes over the EPA’s power to dictate water and air quality standards on states, and OSHA’s ability to mandate stricter workplace rules, could get fiercer and possibly even litigious. And as more consumers express concerns about the environment, builders will wonder just how far the Department of Energy is willing to push the envelope on efficiency standards for residential and commercial construction.
2. Energy Efficiency Takes Flight
Credit: U.S. Department of Energy
In December, a Houston-based startup called Houze Advanced Building Science launched an affordable zero-energy home that Houze claims can produce on-site electricity and thermal heat from a natural-gas power cell, and whose building envelope acts like a thermos.
To back up its claims, Houze offers buyers a warranty that guarantees no gas or electric payments for the first 10 years of homeownership when the micro-cogeneration power cell and advanced heating and cooling technologies are included in the construction.
Sound too good to be true? Maybe. But Houze’s branding partners include AT&T Digital, the American Gas Association, Carrier, James Hardie, and Pella. And Houze is talking about building and selling homes in 35 markets over the next two years.
Energy efficiency is a battleground where builders now win or lose customers. Meritage Homes, Ideal Homes in Oklahoma, KB Home, Wathen Castanos Hybrid Homes, Fulton Homes, K. Hovnanian, and myriad other builders are putting performance front and center in their construction and marketing.
Some builders still wonder just how many home buyers are willing to pay for energy efficiency, and how widespread demand actually is. And there’s still some voodoo out there, as manifested by the Federal Trade Commission’s recent crackdown on exaggerated performance claims by five replacement window manufacturers.
Skepticism, though, isn’t keeping a growing number of builders from riding this bandwagon. “Net-zero, carbon-zero homes are available today and cost effective,” C.R. Herro, Meritage’s vice president of energy efficiency and sustainability, told EcoHome magazine, Builder's sister publication, last March. “It’s no longer a technical challenge. That’s all done. All that’s left now is the average consumer choosing better.”
Last year Meritage announced its first net-zero home, as well as the first EPA triple-certified home. Energy Star’s 3.0 certification, which went into effect in January 2012, gives builders looking for a competitive edge another goal to shoot for. Indeed, builders and contractors report that achieving compliance with Energy Star’s Qualified Home Program and the 2012 International Energy Conservation Code is driving significant changes in the size, efficiency, and installation of HVAC systems.
The growing market for high-performance homes is creating opportunities for startups. In Maryland, Nexus EnergyHomes claims its product can achieve close to net-zero consumption from an existing power grid. An energy management system called NexusVision monitors consumption and allows the owner to adjust that usage via a proprietary, smart-grid–compliant electrical distribution panel. Users can also monitor their houses’ energy consumption through iPads and iPhones.
Nexus’s homes range from $264,000 to $1.5 million. Earlier this year, CEO Paul Zanecki said his company was planning to build up to 400 homes by the end of 2013.
3. Prices Bounce Back
Credit: Robert Paternoster
Throughout 2012 builders around the country finally managed to raise prices for their houses. Any increases are stunning turnaround from the past several years, when builders regularly scrounged for business by enticing reluctant buyers demanding bargains with generous incentives and giveaways on everything from options to closing costs.
Now, builders are becoming more like Pinnacle Homes in Michigan, whose sales team’s goals include selling more houses without offering discounts, says this builder’s managing director Howard Fingeroot. Even hard-hit Atlanta, whose housing market was in a deep hole throughout most of the recession, is hopeful that gains the market enjoyed in existing-home prices during the second half of 2012 will have forward momentum.
Builders’ optimism about house-price appreciation is partly based on a reasonable assumption that the sparse supply of completed and under-construction new homes (about six months’ worth nationally, according to Hanley Wood Market Intelligence) will drive prices higher until construction catches up. Builders also like the trends in house prices they’ve been seeing lately in house-price indices generated by Federal Housing Finance Agency (FHFA); Case-Shiller, which tracks 20 metros; the National Association of Realtors, which looks at 149 markets; and CoreLogic, which estimated in October that year-over-year prices rose by 6.3%.
A quick scan of headlines around the U.S. in early- and mid-December shows house prices on a positive trajectory: “Sacramento-area home prices continue upward trend”; “Phoenix-area home prices up 34% in a year, new-home sales up 85%”; “and “Home prices will rise in 2013, but local markets will vary.”
That last headline and story, posted online by the Home Buying Institute, quotes Freddie Mac, which predicts that its house-price index will rise by 2% to 3% next year. The National Association of Business Economists, extrapolating FHFA data, forecasts that home prices will increase by 2.8% in 2013.
More aggressive projections came from JPMorgan Chase, which earlier this month suggested that home prices in 2013 could rise by as much as 9.7% if investors decide to take a bigger stake in the housing sector; and Standard & Poor’s, which predicts a 5% price jump next year.