Homebuilders Are Healthier But Worry About Rising Costs
Rising consumer confidence, pent-up demand and home values are driving a slow-but-steady residential market recovery, with 1.15 million new housing starts anticipated this year, or nearly a quarter more than in 2013, reports the National Association of Home Builders.
"There is a growing need for new construction. Distressed sales are diminishing, and builders see it," said David A. Crowe, NAHB chief economist, who presented his annual forecast on the first day of this year's International Builders' Show, held on Feb. 4-6 in Las Vegas, which attracted 75,000 attendees. "The slow-and-steady housing recovery will bring nationwide housing starts to 93% of normal by the end of 2015," he added.
The business is clawing its way back. At least 3 million fewer households than usual were formed over the past five years "as many college graduates were forced to double up or move in with their parents," added David W. Berson, chief economist, Nationwide Financial, Columbus, Ohio. "We think it's going to be a good year for construction, with overall inflation remaining low and the economy getting a boost from less fiscal drag, lower oil prices and faster growth abroad."
Financial stability is returning to builders, as well. For example, D.R. Horton Inc., Fort Worth, Texas, which operates in 78 markets across 27 states, had a $2.2-billion sales-order backlog in 2013, up 33% from a year ago, with a 12% increase in home sales prices. "We increased our investments in land, lot and home inventories by $2.1 billion during fiscal 2013 in response to the increased demand for our homes and improved market conditions," said Chairman Donald R. Horton in the company's 2013 annual report. "We expect that further growth in housing demand will occur as overall and local economic conditions, especially full-time job growth, improve from current levels."
Similarly, PulteGroup Inc., Bloomfield Hills, Mich., is pursuing more homebuilding activity in 2014 amid strengthening market conditions, with a 23.2% gross margin last year, its highest margin since 2005. Low interest rates, a limited home supply and the economic recovery is prompting PulteGroup's $2 billion in land-related spending in 2014.
Home affordability still remains a concern, however, as builders grapple with rising land prices, growing materials costs and a diminished construction labor pool. As a result, home sales prices are expected to increase 5% this year, said Frank E. Nothaft, chief economist at Freddie Mac, McLean, Va., who also expects mortgage rates to reach 5%.
Moreover, the job market is still plagued by part-time and low-paying positions. "Households that rent rather than own [have] increased steadily since 2004," Crowe said, adding that the trend "will likely continue until jobs are more secure, mortgages more accessible and careers more stable."
Multi-family construction is expected to increase 9% this year, with 330,000 units being built in 2014 and 363,000 units being built in 2015, said NAHB. "We are starting to see parents get a little long in the tooth with kids living at home," added Guy K. Hays, president of Legacy Partners Residential Inc., Forest City, Calif. "The economy went south, and kids moved in with parents. Now, they're getting the boot and renting."
Parents, meanwhile, are buying new single-family homes, and 55-year-old-plus households will make up 43.3% of the market in 2014, say economists. "Homeowners have been in a holding pattern for five or six years, and they're tired of doing nothing," said Steven W. Bomberger, president of Benchmark Builders Inc., Wilmington, Del. "The buyers are back, and it's a good feeling."
