Housing's recovery pattern, well-established over the past 18 months, since the downturn's most dire days shook the cosmos in the latter half of the last decade, has virtually irrefutable definition. With the exception of a handful of markets fuel-injected by energy- and tech-driven jobs growth, the "rebound," such that it is, has confined itself to places thick with people who are moving, purchasing, and buying new because they can rather than because they need to.
As a result, other than in those exceptional jobs-growth markets--Texas, Florida, Georgia, the Carolinas, the Bay Area, and North Dakota--where secure income growth and prospects have been yanking young people off housing's sidelines and into the entry-level homeownership fray, discretionary buyers--ones who are virtually or entirely unencumbered by either current debt obligations, geographical constraints, or future cash-flow concerns--have made up the lion's share of the driving force in the "A Lot Recovery of 2013-14."
Higher volume production home builders have responded to this lopsided early recovery stretch in two ways. One, is that, broadly, they've concentrated operations, marketing, and management focus on profitability measures at lower volumes, largely trading off pace for price and healthier margins. Testing price elasticity, and emphasizing margins among the top two- to three-tiers in the production home price continuum have been a preferred early-stage recovery strategy vs. the other--which would have been to aim at the entry-level first-time buyer at the outset.
Secondly, having achieved some mojo at the second- and third-time move-up level of the new-home market, builders sought to open more communities that would offer buyers of this stripe their new-home solution, believing that more stores would keep total orders growing even as orders per store ebbed.
The curiosity of moment is, now that housing demand momentum and broad economic health, jobs, and income growth are at least temporarily heading in opposite directions, what will re-spark demand? Will the back half of 2014 mirror or diametrically contrast with the second half of 2013?
To get a reading of at least some of the tea leaves, Buck Horne, Paul D. Puryear and their team of analysts at Raymond James & Associates have compiled a fascinating analysis of public home builder new community positions with an overlay of GreatSchools.org geographic data.
Despite the fact that nuclear, married-with-children traditional families represent a smaller and smaller percentage of household types nationally, the Raymond James team notes a strong correlation between both price and pace and the quality of nearby school districts in their scope of analysis. There tends to be a powerful tie between average selling price--a proxy for both land position and construction quality--and the GreatSchools ranking of schools in the area.
What we've done with the Raymond James data is to take it one step further. Hanley Wood data journalist Katie Gloede used Metrostudy Analytics to filter the closings by builder in each market in the Raymond James research, and the top 10 housing markets for 2013 (excluding New York City, which is replaced by New Jersey in Raymond James' research). From there, the percent change in closings by builder shows the relationship between land grade and increase in sales between the first- and the second-quarter.
What's clear from this data mash-up is not that pace and volume tie causally and necessarily to the strongest land positions--we can see that D.R. Horton's volumes rule the roost despite more challenged school district positions. It's that the strongest land positions--from a schools standpoint--favor a higher volume of well-heeled buyers, which have enabled a few builders, namely, Toll, Taylor Morrison and WCI, to sustain order volume despite a pull-back in the general market.
This type of analysis from Raymond James helps decipher land and lot valuation criteria as the market moves from serving a narrow niche to a broader spectrum of new home buyers. We'd like to see such an analysis of lot pipelines that tie to less conventional, less traditional households as well to get a look at the correlation between say all-cash new home buyers and their submarkets. Or other households with non-traditional household compositions.
Which household types do you feel will drive the next "leg" of the recovery, traditional married-with-children households looking for good schools, or some other, less conventional ones?
Learn more about markets featured in this article: New York, NY.