If the Great Recession has taught us any-thing it’s that we should expect fundamental changes in virtually every aspect of the housing market in the near future.
Perhaps most important, the housing finance system will change significantly as it is restructured from the ground up.
For home buyers, this is likely to mean more documentation, larger down payments, and more scrutiny by lenders. The mortgage menu will also be shorter, and risky “exotic” mortgages such as interest-only loans and payment-option ARMs are likely to virtually disappear.
For home builders, the restructuring of the housing finance system will mean tighter underwriting and greater equity requirements on AD&C loans, a trend that is already evident. Moreover, the number of lenders making AD&C loans is likely to decline due to bank failures and mergers, and we can expect new regulations limiting the proportion of AD&C loans in lenders’ portfolios.
At this point, the nation’s housing finance system is a work in progress, but it’s clear that it will become more difficult for builders to get AD&C financing. Consequently, all of us will need to be more creative about financing our projects and will need to seek out less traditional sources of loans.
Land development may also be in flux for some time, and builders looking to get back into the market are likely to find that the inventory of entitled lots is limited in some markets.
For those willing to take risks, there will be opportunities to pick up land from banks at reduced prices. And we may see some developers working with banks to take land off the bank’s balance sheet, most likely at deep discounts.
Regarding infrastructure and who pays for it, we will see local governments struggling to adjust to tighter budgets. As a result, some jurisdictions will raise fees; others will lower them in an effort to encourage growth and generate revenue.
Green building is growing, and those who get ahead of the curve are likely to enjoy fast-track approvals and tremendous marketing advantages. There will also be a big push to integrate green building and green development into federal laws and regulations, especially as it relates to transportation.
The effort to combat global climate change will also affect the housing industry with regulations and mandates that affect how we do business and the homes we build. Likewise, increasing consumer awareness of climate change and “green” issues will result in buyer demand for homes that conserve energy and other resources.
Finally, the future will bring fundamental differences in how we market and sell. For one thing, consumers now expect more for less. As the housing market returns to equilibrium, home buyers will expect the same giveaways, free upgrades, and price concessions that they enjoyed during the recession; it will not be easy to alter that expectation.
Another factor will be how consumers get information. Many people now get their information almost exclusively from non-print media. This means that relying on traditional advertising won’t work.
I encourage you to think long and hard about marketing. It can be expensive, it’s easy to make mistakes, and the trends are definitely changing.
Inevitably, the economic downturn will end, and the builders who study the market, anticipate change, and adapt to change will be positioned for success.