This is going to be the year that the best builders distinguish themselves from the pack. The substantial sprawl that has occurred in many markets is resulting in very competitive situations where only the strongest will survive.
Supply Now Meeting Demand
Thanks to strong demand from consumers and speculators, home sales have been steadily rising for the last decade. In response to that demand, the building industry has been growing rapidly, buying expensive land close to the job centers and much less expensive land further from the job centers. After many years of undersupply, we are now building approximately 2.2 million housing units, which is 5 percent to 15 percent more than we need (according to three different credible sources).
We need to slow down construction in certain submarkets. Since I cannot envision a scenario where this will occur, I believe we need to brace ourselves for a very competitive year.
Submarket Issues
Since the land furthest from the job centers is more plentiful, most of today’s new homes are on the fringes of the metropolitan areas. The following three maps from various builder Web sites illustrate what is typical in many markets. The major employment centers are circled in red and the new-home communities are labeled outside the red circles.
All three of the markets above have outstanding job growth so, on the surface, one would think that homes are selling quickly. The problem, however, is that not everyone wants to live in outlying areas. These areas have also been flush with investors, but that will be the subject of a future report.
When builders open communities in distant areas, they bring in additional buyers due to the expanded appeal of the variety of communities and excellent marketing efforts. At some point, however, there are too many communities, which results in discounting and incentives to lure buyers. A typical scenario is shown as follows.
Strategies
In the scenario above, the winning builders will be those who have:
1. the lowest costs,
2. significant profits from other divisions,
3. the least amount of debt,
4. the most cash in the bank, and/or
5. the best management teams.
If you have all five of the above, you will emerge from this year much stronger than your competitors. Let’s see how it unfolds.
John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis. He can be reached at jbrec@realestateconsulting.com.
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