Spend too much time in any one place and there are bound to be things that start to bother you about your surroundings. Many Americans understand that feeling all too well as they have been spending much of their time at home in response to the coronavirus—which, in turn and perhaps by surprise, has resulted in booming business for many new-home builders.
“Sales have been great,” says Mike Satterfield, executive vice president and CEO of Irmo, South Carolina–based Great Southern Homes, which ranked No. 44 on the latest Builder 100 list. “The fact that our industry is considered essential has been so important in allowing us to continue to move the housing industry forward. People need a place to live.”
Stay-at-home orders began in mid-March across the U.S., but it didn’t take long for construction of single-family and multifamily housing to be deemed an “essential infrastructure business” by the Department of Homeland Security. While that guidance did not supersede state and local orders, it did help residential construction resume in some parts of the country, which the NAHB deemed a “critical win.”
“Early on, we experienced significantly decreased traffic and buyer uncertainty,” recalls David Lemnah, co-owner of No. 151–ranked Lokal Homes in Englewood, Colorado, about the start of the typically faster-paced spring selling season. “Fortunately, those who were touring new communities or calling about our homes were serious buyers. We deliberately focused on slowing the home-buying process down and spent quality time with our buyers to ensure they understood the process and were getting exactly what they wanted.”
With much of the U.S. under stay-at-home orders in the spring, how was that impacting people’s desires in relation to housing? To find out, a group of industry experts in late April conducted the America at Home Study, which surveyed 3,000 consumers—25 to 74 years old and with a household income of $50,000 and up—about their current housing situation and their future preferences. One of the key findings was that within a matter of weeks, Americans had already begun to make changes to their living spaces in response to COVID-19. Certain home designs and areas that may have worked as intended before the pandemic no longer did, and open concept floor plans suddenly proved challenging when one room simultaneously had to serve multiple functions. The study also found that almost half (46%) of current renters said they would now prefer to own versus rent.
“It is evident that the pandemic has created a heightened interest in single-family homeownership, including more renters looking to own,” says Doug Bauer, CEO of Irvine, California–based TRI Pointe Group, No. 16 on the Builder 100. “The pandemic has also led consumers to look more critically at the livability of their home in terms of safety, technology, flexibility, and comfort.”
Shifts in Housing Outlook
In January, industry experts were revising down recession probabilities, and the home builders who responded to our annual Builder 100/Next 100 survey had no idea the coronavirus was about to upend everything in its path. But despite initial business setbacks at the start of the pandemic and fears that 2020 might be the next 2008, the housing industry has been faring better than anticipated.
In fact, builder confidence rose by five points in September to an all-time high of 83 in the NAHB/Wells Fargo Housing Market Index. That confidence is a bit of a shift from a mid-April online survey of the BUILDER audience, which found that, at the time, 74.8% of respondents reported less customer demand during the pandemic, and 35.1% anticipated their revenue for the year would drop 10% to 30%.
“We were all surprised with the housing market’s positive response to the pandemic,” notes Kimball Hakes, president of Las Cruces, New Mexico–based Hakes Brothers, ranked No. 102 on this year’s list. “People are stuck at home, and they want better. They want new, clean, open, light, bright, and they want out of the crowded big cities.”
Robert Dietz, NAHB’s chief economist, believes the geography of housing demand is changing as a result of COVID-19 and the recession—meaning prospective buyers are willing to buy homes farther away from urban cores. In his latest column for BUILDER, he writes, “Count me firmly in the camp that sees not only ongoing evidence of this change but also expects it to continue to a degree in the post-vaccine economy.”
New-home sales data from Meyers Research, BUILDER’s sister company, continues to highlight that the strength of the housing market is carrying on later in the year than the typical seasonality. Meanwhile, total listings have grown tighter across the country, with 50% to 60% decreases in the active listing count in some areas—attributed to homeowners choosing to refinance instead of sell, combined with an incredibly high demand for homes.
Given this trend in the existing-home space, new homes are seeing a large market share gain over 2019. However, a series of disruptions—such as materials supply, pricing, and delays in government services—may impact new-home construction’s momentum going forward.
“During the COVID pandemic, our resale market went from healthy inventory levels to unhealthy levels very quickly. This significantly increased opportunities for new-home builds where a buyer could count on a home purchase from a builder,” says Lemnah. “Our customers shared stories about being outbid for a home or not being able to tour a house that they were really interested in because it was occupied. Fortunately, new-home communities were a great way to showcase our homes and were easily sanitized and accommodated new buyers with all the right precautions. New homes became a ‘sure thing’ for any buyer in need.”
John Burns, vice president and general manager at Regent Homes in Nashville, Tennessee—ranked No. 129—agrees, noting that “when much of the world was experiencing negative emotions due to the pandemic, our industry was positive, selling, and ‘cautiously’ optimistic.” As time passed, it became clear to Burns that a new, clean, safe home had become something to market. “This seems like an easily attainable marketing angle that many builders have pivoted to,” he says.
Meridian, Idaho–based CBH Homes has done the same. “We are aiming to provide homeownership on every level, from single-family homes to rentals,” says Ronda Conger, vice president at CBH, which is No. 38 on the list. “People need safe and clean homes that fit their new needs, whether that’s home offices, more space for home gyms, or items as simple as new interior selections.”
In August, 81% of builders asked by Meyers Research said material supply disruption will affect their sales plan moving forward—up from 49% in late July and 30% in early June.
“We have experienced a handful of localized shortages of materials, but have been able to pivot to alternate sources to avoid any impact to our business,” says Dar Ahrens, chief field operations officer at Scottsdale, Arizona–based Taylor Morrison, No. 6 on the list. “Materials pricing is beginning to create some challenges as we look at starts over the next quarter.”
The challenges throughout the building materials supply chain are being felt across the country. Steve Fritz, chief operating officer at HHHunt Corp. in Glen Allen, Virginia, explains that the ability for the company to deliver “truly affordable homes is becoming very difficult” as the firm is experiencing supply chain and pricing pressure on building products and materials in all of its markets. Current supply issues for HHHunt—No. 77 on the Builder 100—include lumber, windows, cabinets, and appliances. Window delivery timelines have increased from two to four weeks to 10 weeks over the past two months, says Fritz.
Other builders cite similar challenges. Increased new-home demand, in turn, means increased demand for building materials, and manufacturers and suppliers are struggling to keep up. For the industry, it’s big business: Recent NAHB analysis of government data finds that new single-family and multifamily construction used a total of $94.93 billion in building products in 2019.
Across many product categories—windows, cabinetry, doors, hardware, flooring, and more—Burns says Regent Homes has experienced increases in order lead times, back orders in shipping, or discontinuation of product.
“Generally our team has been able to adjust by ordering things ahead of time to counteract the longer lead times,” says Damon Sachs, president of Houston-based Liberty Home Builders, No. 164 on the list. “It has been critical to make sure we are over-communicating with customers so they are not caught off guard.”
Given the disruptions across the supply chain, communication and well-established relationships with manufacturers and suppliers have proved invaluable for builders.
“We’ve experienced delays with products including treated lumber, door hardware, appliances, and HVAC systems to name a few,” says Lemnah of Lokal Homes. “We’ve worked together with our trades and manufacturers to release purchase orders early in the build process and to build inventory of product that we know will be needed.”
While some builders have been able to “work ahead” and build product inventory like Lokal Homes, others have had to come up with alternative approaches to complete their homes. “The one product that has the biggest effect on our ability to deliver a 100% complete home is appliances,” says Matt Guelich, senior vice president of construction at Sun Lakes, Arizona–based Robson Communities, No. 65 on the Builder 100. “We’ve been able to provide our homeowners with ‘loaner’ appliances while we wait for their specific appliances to be installed in their homes.”
Then there are other firms that have been able to navigate the past few months without experiencing any significant setbacks due to materials availability. Joan Webb, chief marketing officer at The New Home Co. in Aliso Viejo, California—No. 51 on the Builder 100—notes that while there’s been some disruption in labor and the supply chain within the firm’s operations, it hasn't been a “critical issue, and so far we have been able to mitigate any delays.”
Satterfield at Great Southern Homes also says product availability hasn’t been a problem, but he admits he’s unsure whether “we’re out of the woods just yet.” He foresees record-high lumber prices and availability being an issue in the upcoming quarters.
Lumber Drives Up Home Prices
Lumber is one of the top issues in the housing industry right now. In mid-September, lumber prices were up more than 170% since mid-April, adding more than $16,000 to the price of a typical new single-family home, according to the NAHB. Chuck Fowke, NAHB chairman and custom home builder from Tampa, Florida, notes that while “historic traffic numbers” have led to positive market conditions, many are concerned about rising costs and delays for building materials—especially lumber.
“More domestic lumber production or tariff relief is needed to avoid a slowdown in the market in the coming months,” Fowke says in response to the latest NAHB/Wells Fargo Housing Market Index. But as of press time, there was no relief in sight. As a result, much of those increased costs are being passed on to home buyers. According to the September COVID-19 update webinar by Meyers Research, 94% of builders raised base prices in mid-September compared with mid-August, and 50% reported a significant increase in prices.
“The escalation of lumber prices and availability has been a huge issue over the past 30-plus days,” says Todd Pyatt, president of Carmel, Indiana–based Pyatt Builders—a newcomer to this year’s Builder 100/Next 100 at No. 196. “We have raised pricing $10,000 to $15,000 in almost all communities and will still experience margin compression due to lumber.”
Likewise, Sachs says Liberty Home Builders has been treating its lumber increases as a pass-through cost to buyers, and Butch Hogan, chief financial officer at Owasso, Oklahoma–based Simmons Homes, No. 147 on the list, says it has raised prices “in small increments in order to keep appraisals moving up with cost, but we will lose at least 2% net margin over the lumber issues.”
Jake Oates, chief operating officer at McLean, Virginia–based Miller and Smith, No. 110 on the list, also cites raised home prices. “In the majority of our communities we have been able to raise prices, which has lessened the impact of lumber costs, but it is still a problem,” he says. “As production of lumber increases, we are optimistic that pricing will fall.”
Lokal Homes’ Lemnah echoes both sentiments of concern and optimism pertaining to lumber. “We project a 5% to 10% overall increase to hard costs through lumber, trusses, and engineered wood costs, which will have to be passed on to customers,” he says. “We’re hopeful that the NAHB and the president’s administration focus on lumber will help alleviate this pressure.”
On the West Coast, lumber pricing is driving up costs and squeezing margins at Santa Clarita, California–based Williams Homes, No. 141 on the list. “We’re trying to be strategic in our lumber buys,” says Scott Ouellette, senior vice president of land and chief financial officer. “We may need to delay some framing, but the situation should level off.”
Taylor Morrison’s Ahrens anticipates the sky-high lumber prices will be a short-term issue as mill production ramps up and the supply and demand relationship normalizes.
Labor Woes Continue
While skilled labor issues remain, they seem to have been momentarily overshadowed by lumber concerns. According to Meyers Research, construction employment through August had recovered to 60% of its pre-COVID-19 levels.
“We were very fortunate to be deemed an essential activity in Colorado and were able to keep our trades healthy and working throughout the entire pandemic,” Lemnah says.
On NAHB’s Eye on Housing blog in September, Dietz notes that construction hiring bounced back in May, after an accelerated pace of layoffs in March and April, which increased the count of open jobs in July per data from the Bureau of Labor Statistics. “The pace of construction rehiring increased the open jobs rate to 4.4% in July, with 344,000 total of open construction sector jobs. This is only somewhat smaller than the count of 352,000 a year ago,” Dietz writes. “However, builders continue to cite limited access to skilled construction workers as a concern as they seek labor to undertake more home construction and remodeling.”
Miller and Smith is one of those builders. “The challenge of finding skilled labor is not new,” says Oates. “What is new is that everyone is trying to be safe—which is obviously a good thing—but by having fewer trades in the home at one time, we are slowing cycle times.”
Impacts on schedules and changes in safety protocols and how crews are managed on jobsites have been par for the course over the past six months.
“We face daily challenges of skilled labor availability. This has been going on for several years but has been exacerbated by the pandemic,” says Pyatt. “The operational challenges of building with a slower-than-normal labor force, coupled with product delays, has proved to be a significant obstacle.”
Meanwhile, Burns of Regent Homes notes that its labor rates have not increased and labor availability has not yet been a challenge for the company. However, it has still experienced operational hurdles on the jobsite. “Our biggest challenge or change with jobsite operations has been a slight change to the building schedule so that we do not double book trades in the same house on the same day,” he says. “Of course, it still happens as schedules change, but the subcontractors have become used to social distancing.”
Physical distancing is also resulting in delays for Simmons Homes, Hogan says, as allowing only one crew in the home at a time has caused additional time and cost.
Demand for New Homes
The New Home Pending Sales Index by Meyers Research grew 3% month over month and 39.6% year over year in August, and “nearly every market across the country is enjoying robust new-home sales.” No one we spoke with saw that coming at the start of the pandemic.
“We stopped all spec starts and land purchases during March and April. We feared the worst,” recalls Hakes in New Mexico. “But it didn’t take long before we began to see major interest and quickly fired up our engines to meet that demand. We are now tracking slightly above our goals for 2020.”
Home prices are reaching new highs, but thanks to today’s mortgage rates, “demand hasn’t skipped a beat,” says Ali Wolf, chief economist at Meyers Research. “The housing market continues to be the standout sector of the entire economy.”
Many builders we spoke with are experiencing an uptick in sales and demand. The fact that people are home more, want more space, and perhaps are able and/or willing to move farther out than they might have been pre-COVID is good for business.
“We really haven’t changed our product specifically for COVID, but we are offering something that buyers can’t necessarily get in urban areas: square footage,” says Oates about the Washington, D.C., metro area. “We are seeing more buyers who likely would have been urban buyers pre-COVID because the convenience of urban just doesn’t exist right now and commuting is far less of an issue.”
These moves fit in with what NAHB’s Dietz is saying about a “suburban shift,” and it appears many of the Builder 100 firms are experiencing that trend firsthand.
“We have seen an increased demand from first-time buyers. While not all of them are coming from urban living, we have seen many moving toward the suburbs and leaving apartments and multifamily living,” says Pyatt.
Webb has seen similar shifts, noting that in markets where The New Home Co. builds, buyers are leaving dense urban areas for the suburbs because gaining space—“not necessarily more space, but well-designed space”—is now worth the change in lifestyle. She adds that the ability to work virtually has also enabled some buyers to be more flexible with their choices.
Americans with generous work-from-home policies—representing less than 10% of all jobs, according to Dietz—aren’t the only ones benefiting from a strong internet connection and virtual tools. Today, more of the home-buying process is able to be done virtually than ever before in housing’s history.
“Our investment in technology and our team paid off big time. We were able to move our back office and non–customer facing operations to a virtual environment within days,” says Fritz of HHHunt Corp. “Opportunities abound with options to meet the new needs of our customers like home office/schooling, and the entire selling process is taking a huge virtual evolution.”
Having anticipated “a new era of online home sales” before the COVID-19 crisis, Bauer says TRI Pointe Group had already invested in the technology applications necessary for facilitating an online sales process. “When the pandemic hit and shelter-in-place orders were implemented,” he says, “we quickly accelerated the use of those digital home shopping technologies.”
He points out that the conversion rate with virtual sales has been impressive for the firm. One example Bauer shared is that 48% net orders in the second quarter were achieved through virtual and one-on-one appointments resulting from engagement with the company’s online sales team, which is a 21% increase compared with the first quarter.
“Technology is key to sustaining operations today, from the virtual selling and marketing of our products, the interactions with our customers during construction, the control of our business at the field level, and, ultimately, to all our internal teams’ operations,” Fritz says. “Our ability to go virtual within days ensured that we did not miss a beat with sustaining operations, while providing maximum protection to our customers and team members.”
Strength in Change
“The strength of the market shocked many and proved that the best analysts really didn’t know how this would play out,” says Lemnah, adding that his team at Lokal wasn’t surprised by the strength of the “highly desirable” Denver market. And while we’re now months into the pandemic, there’s still plenty left to play out.
“The world has definitely changed,” says Oates of Miller and Smith. “We have never purchased so much hand sanitizer, cleaning materials, masks, and anything else that is needed to continue working during these challenging times.” The firm feels good about its market, although Oates admits it’s been difficult “to find well-located, reasonably priced land to keep up with demand.”
One surprising opportunity to come out of this period for Williams Homes is that larger builders dropped some big deals. “As a private company, we’ve been able to jump into at least one deal dropped by a public builder,” Ouellette says, adding that, as a result of COVID, “we saw a retreat in the capital markets, both banks and private equity. Some deals have been resurrected, and we needed to extend closing dates on land purchases because capital slowed down.”
With all the industry is experiencing right now—including record low interest rates and inventory for both new and resale homes—Ahrens and the team at Taylor Morrison are striving to find balance and remain mindful of affordability, “but a prolonged supply and demand imbalance could place significant upward pressure on pricing, forcing many customers to sit on the sideline,” he says.
Single-family construction has been a bright spot for the U.S. economy, with permits running 3.4% higher during the first half of 2020 compared with the first half of 2019, says the NAHB. While many of the Builder 100/Next 100 firms are encouraged by the low interest rates and increased new-home demand in the current environment, most companies with which we spoke share concerns surrounding pricing, access to new land opportunities, and the upcoming election.
“Historically speaking, election season has not necessarily equated to great housing markets,” says Webb with The New Home Co. “The headwinds of a national election—and an extremely polarized and divisive one like we are facing—combined with the country’s continuing high unemployment rate due to the pandemic are both influences that could have an impact on our housing markets.”
Liberty Home Builders’ Sachs is also concerned about how the election might impact the economy. “There is a lot of turmoil in the U.S., and I am really hoping we can find some unity among everyone,” he says. “While I am an extremely optimistic person, I don’t want to be blind that there could be a cliff ahead.”
It’s unclear what a cliff ahead would mean for housing and the overall economy, but in late August, Wolf of Meyers Research noted that the next three job reports will tell us the direction of the economy for the next two years.
“Continued recovery of jobs is essential, and continued recovery from the pandemic is essential. We are hopeful for both,” says Fritz of HHHunt. “The upcoming election and political environment will certainly provide some turbulence to the journey, but we are prepared to adjust to changing conditions.”
If nothing else, 2020 appears to have been teaching everyone, repeatedly, how to adjust to change. And that may be good news for the housing industry, which has been notoriously slow to evolve certain processes.
“We’ve proved that we can accomplish so much virtually and without in-person meetings. I don’t think home building will ever operate the way it did before COVID,” Lemnah says. “We’ve changed our approach and reliance on technology and will never go back to the way it was.”
Symone Garvett, Mary Salmonsen, and Christine Serlin contributed to this report.