Housing's Future Is On The Rebound

You want to know if housing has really gotten back on its feet again?

Ask Nathan Jameson, director of operations for Radnor, Pa.–based Traditions of America, whose newest active-adult community, Bridle Path, received deposits from 44 buyers in two hours during a presale event in late September. Over the following 14 days, all but two of that community’s 241 homesites were sold. The builder’s other five communities saw their closings jump to 200 last year, from 152 in 2011.

Ask Dennis Webb, a vice president with Tempe, Ariz.–based Fulton Homes, which was on track to hit 650 closings in 2012, compared with 343 in the previous year; and 850 sales, Fulton’s highest number since 2005. “We’re seeing price appreciation of, on average, 25 percent,” Webb says.

Or ask Pat Neal, CEO of Lakewood Ranch, Fla.–based Neal Communities, which by September had surpassed the 403 homes it sold in all of 2011. Neal’s most successful community, Central Park at Lakewood Ranch, moved 314 houses in just a little over two years.

All throughout the second half of last year, customer polling, statistical projections, and anecdotal evidence more than hinted at a broader rebound for housing markets. Builders restarted mothballed projects and re-entered abandoned markets. Nationally, annualized housing starts in November ran 22 percent ahead of the same month in 2011. And the Federal Reserve’s promise to keep interest rates low until at least 2015 could give reluctant buyers a nudge.

The housing market “has turned a corner,” said Jamie Dimon, CEO of JP Morgan Chase, in October after his company got a jolt from its mortgage business during the summer. In the quarter ending on Sept. 30, Owens Corning’s insulation business reported its first quarterly profit in four years “in an improving U.S. construction market,” said CEO Mike Thaman. Virtually every housing industry association, economist, and analyst foresees a major boost in construction and sales over the next two years, particularly in 2014. “Ready or Not, Home Builders Are Back,” proclaimed Bloomberg BusinessWeek in an article in early October that featured Toll Brothers, which is preparing to put nearly 1,800 homes on 387 acres of undeveloped land 50 miles south of Los Angeles it bought with Shea Homes last June. “This is our big ‘we’re back in’ play,” Seth Ring, Toll’s vice president, was quoted as saying.

WHAT WILL NORMAL BE?

Post-recession euphoria has pushed doubting Thomases into the background. But some skeptics keep insisting “not so fast” when the conversation turns to the pace of the industry’s recovery.

Charlie Kamps, the nonexecutive chairman of AmeriSus, a supplier of home construction kits, wrote this response to an article posted on Builder’s website in October citing the UCLA Anderson School of Management’s forecast that housing would return to normal levels by 2014: “With 8 million foreclosed homeowners not being able to return to the housing market, recent graduates with unprecedented debt, the nation facing a fiscal cliff, empty-nesters having lost 30 percent of their asset base, and nearly punitive mortgage lending requirements set by the underwriters, the likelihood of returning to normal in the next few years is about the same as my getting a date with JLo.”

Frank Blake, CEO of Home Depot, thinks what’s going on in housing now is more of a thawing than a full-blown recovery, which he told Reuters could take another two years, at least, to achieve. Bob Curran, a managing director at Fitch Ratings, agrees. “Enthusiasm should be measured, as we believe recovery will likely occur in fits and starts,” he wrote in a paper published in mid-October.

Even the optimists aren’t completely sure yet that the industry’s recovery is sustainable. “The majority of our members are climbing out, but the recovery could be a little inconsistent from market to market,” observes Brian Pavlik, COO of Custom Builders USA, the buying group for 234 custom builders in 16 markets that were on track to start 2,737 homes in 2012.

And when chief executives such as Lennar Corp.’s Stuart Miller say, as he did in September, that housing “is beginning to revert to normal,” what will normal ultimately look like? (Lennar’s 9,281 deliveries through the first nine months of fiscal 2012, while up 25.6 percent from a year ago, were less than two-fifths of its deliveries in the same nine months in 2007.) For Webb, Phoenix’s housing market—which once pumped out 60,000 residential permits annually but hovered around 13,000 last year—would be healthy again at 25,000 to 30,000, “which is what [builders] were doing in the early 2000s.” Jameson of Traditions of America thinks four sales per community per month suit his company just fine, versus the anomalous double-digit monthly sales its communities sometimes hit during the last boom.

TROUBLESOME TRENDS

There’s certainly more confidence being expressed that an improving housing industry eventually could reach 1.3 million annual starts again. In mid-October, NAHB Economics’ Robert Denk predicted that home starts could hit 70 percent of that “normal” level by the end of 2014. But current market forces and demographic trends make one wonder how strong demand will be in the coming years, and whether the industry, in its present anorexic state, could even meet that level of demand if it did materialize.

The nation’s commercial and residential construction industries lost nearly 2 million jobs during the recession (including nearly 212,000 carpenters and more than 99,000 painters), and had yet to regain a single net job through the first quarter of 2012, according to an analysis of employment data by the New York–based National Employment Law Project. And since there’s no appetite in Washington, D.C., for immigration reform, cheap and legal immigrant labor probably won’t be showing up in large numbers at residential jobsites any time soon.

The lack of available workers and building materials, which usually means higher costs, is just one factor that could restrain the housing industry’s momentum. Will there be enough buyers with good-paying jobs and access to mortgage credit? Will younger people’s inclination to rent rather than own follow them as they age? Will short sales and appraisals continue to hold home-price appreciation hostage? Will shortages of finished lots in premium locations force more builders to become developers? And where will AD&C capital come from?

This special report on the future of the housing industry takes a closer look at all of these questions, as well as the ongoing debates surrounding urban versus suburban living, and at which buyers builders should be aiming their marketing.

None of these issues is clearly delineated yet, and there’s plenty of ambiguity in shifting trends. Take, for example, the long-held belief that childbirth spurs home buying. That’s a reasonable assumption, and one that builders hang their hopes on about echo boomers becoming buyers. But fewer Americans are forming the kinds of nuclear family units that have been the backbone of the housing sector. In 2010, the latest year for available Census Bureau data, only one-fifth of all households in the U.S. consisted of a married couple with children, down from 23.5 percent in 2000, and 40 percent in 1970.

Nearly one in five households had student debt in 2010, up from 15 percent in 2007, and 9 percent in 1989, according to the Pew Research Center. The average household college debt in 2010 was $26,682, and 9.1 percent of students who entered the payback period in 2009–10 defaulted on their loans, according to the U.S. Department of Education. One glaring reason for these defaults has been the dearth of well-paying full-time entry-level jobs: The unemployment rate for 20 to 24 year olds was 12.4 percent in September 2012, so many younger Americans couldn’t afford a down payment, much less a house.

Even the most qualified buyers, regardless of age group, are being put through the document-verification wringer before they get a mortgage. And with the previously untouchable mortgage interest deduction potentially on the budget-cutting table, no one can know for sure whether that perk’s demise would decelerate sales or cause house prices to fall again, although it’s a pretty safe bet that its disappearance wouldn’t help.