The Top Ten Issues that will impact new construction in 2013.
- Impact of Political Decisions
- Energy Efficiency
- Rebounding Prices
- Startups and Startovers
- Need for Land
- Demand for Multifamily Housing
- Foreclosures and Rentals
- Need for Labor
- Desire for the Micro House
- Loss of Some Industry Leaders
Builders are likely to remember 2012 as the year when their industry finally arose from the hospital bed it’s been laying in for five years, and walked around again without a discernible limp or the use of a cane.
The survivors of the past recession stepped up their construction activities and were even able to get some price appreciation from customers who, while still somewhat hesitant because the job market is still uncertain, at least showed a willingness to consider buying and selling houses.
Market watchers expect housing’s growth to continue through at least the next two years. But the industry faces challenges that include a still-shaky economy, a potentially tougher regulatory climate, and already-noticeable shortages in labor, finished lots, and building materials that would impede growth if they get worse.
The following series of articles rounds up the key news topics of 2012, with an eye toward the future and how they are likely to play out and affect the housing and real estate sectors.
1. Political Thrust and Parry
Does the re-election of President Barack Obama, with Republicans holding onto their vote lead in the House of Representatives, augur four more years of paralyzed federal governance? Certainly the seemingly (at least through mid-December) endless and implacable arguments over preventing the so-called fiscal cliff from triggering deep spending cuts and tax increases on January 1 hasn’t inspired confidence that Washington is entering a new era of consensus.
For builders, a government at political loggerheads will make arriving at solutions to big issues that fundamentally affect housing markets and customers harder to achieve. The future of America’s secondary mortgage market—specifically the fates of Fannie Mae and Freddie Mac—could takes years to sort out, even under ideal legislative conditions. Retaining the mortgage interest deduction (MID), which builders and Realtors keep insisting is essential to industry and economic growth, will become a tougher sell if lawmakers ultimately lean toward a budget-cutting formula that favors limiting entitlements rather than enhancing revenues. (You know the MID could be imperiled when one of housing’s best friends in Congress, Georgia Sen. Johnny Isakson, said he’d be willing to trade MID for lower corporate tax rates.)
Builders are also watching which way the political winds blow on various regulatory fronts. Ongoing rhetorical skirmishes over the EPA’s power to dictate water and air quality standards on states, and OSHA’s ability to mandate stricter workplace rules, could get fiercer and possibly even litigious. And as more consumers express concerns about the environment, builders will wonder just how far the Department of Energy is willing to push the envelope on efficiency standards for residential and commercial construction.
2. Energy Efficiency Takes Flight
In December, a Houston-based startup called Houze Advanced Building Science launched an affordable zero-energy home that Houze claims can produce on-site electricity and thermal heat from a natural-gas power cell, and whose building envelope acts like a thermos.
To back up its claims, Houze offers buyers a warranty that guarantees no gas or electric payments for the first 10 years of homeownership when themicro-cogeneration power cell and advanced heating and cooling technologies are included in the construction.
Sound too good to be true? Maybe. But Houze’s branding partners include AT&T Digital, the American Gas Association, Carrier, James Hardie, and Pella. And Houze is talking about building and selling homes in 35 markets over the next two years.
Energy efficiency is a battleground where builders now win or lose customers. Meritage Homes, Ideal Homes in Oklahoma, KB Home, Wathen Castanos Hybrid Homes, Fulton Homes, K. Hovnanian, and myriad other builders are putting performance front and center in their construction and marketing.
Some builders still wonder just how many home buyers are willing to pay for energy efficiency, and how widespread demand actually is. And there’s still some voodoo out there, as manifested by the Federal Trade Commission’s recent crackdown on exaggerated performance claims by five replacement window manufacturers.
Skepticism, though, isn’t keeping a growing number of builders from riding this bandwagon. “Net-zero, carbon-zero homes are available today and cost effective,” C.R. Herro, Meritage’s vice president of energy efficiency and sustainability, told EcoHome magazine, Builder‘s sister publication, last March. “It’s no longer a technical challenge. That’s all done. All that’s left now is the average consumer choosing better.”
Last year Meritage announced its first net-zero home, as well as the first EPA triple-certified home. Energy Star’s 3.0 certification, which went into effect in January 2012, gives builders looking for a competitive edge another goal to shoot for. Indeed, builders and contractors report that achieving compliance with Energy Star’s Qualified Home Program and the 2012 International Energy Conservation Code is driving significant changes in the size, efficiency, and installation of HVAC systems.
The growing market for high-performance homes is creating opportunities for startups. In Maryland, Nexus EnergyHomes claims its product can achieve close to net-zero consumption from an existing power grid. An energy management system called NexusVision monitors consumption and allows the owner to adjust that usage via a proprietary, smart-grid–compliant electrical distribution panel. Users can also monitor their houses’ energy consumption through iPads and iPhones.
Nexus’s homes range from $264,000 to $1.5 million. Earlier this year, CEO Paul Zanecki said his company was planning to build up to 400 homes by the end of 2013.
3. Prices Bounce Back
Throughout 2012 builders around the country finally managed to raise prices for their houses. Any increases are stunning turnaround from the past several years, when builders regularly scrounged for business by enticing reluctant buyers demanding bargains with generous incentives and giveaways on everything from options to closing costs.
Now, builders are becoming more like Pinnacle Homes in Michigan, whose sales team’s goals include selling more houses without offering discounts, says this builder’s managing director Howard Fingeroot. Even hard-hit Atlanta, whose housing market was in a deep hole throughout most of the recession, is hopeful that gains the market enjoyed in existing-home prices during the second half of 2012 will have forward momentum.
Builders’ optimism about house-price appreciation is partly based on a reasonable assumption that the sparse supply of completed and under-construction new homes (about six months’ worth nationally, according to Hanley Wood Market Intelligence) will drive prices higher until construction catches up. Builders also like the trends in house prices they’ve been seeing lately in house-price indices generated by Federal Housing Finance Agency (FHFA); Case-Shiller, which tracks 20 metros; the National Association of Realtors, which looks at 149 markets; and CoreLogic, which estimated in October that year-over-year prices rose by 6.3%.
A quick scan of headlines around the U.S. in early- and mid-December shows house prices on a positive trajectory: “Sacramento-area home prices continue upward trend”; “Phoenix-area home prices up 34% in a year, new-home sales up 85%”; “and “Home prices will rise in 2013, but local markets will vary.”
That last headline and story, posted online by the Home Buying Institute, quotes Freddie Mac, which predicts that its house-price index will rise by 2% to 3% next year. The National Association of Business Economists, extrapolating FHFA data, forecasts that home prices will increase by 2.8% in 2013.
More aggressive projections came from JPMorgan Chase, which earlier this month suggested that home prices in 2013 could rise by as much as 9.7% if investors decide to take a bigger stake in the housing sector; and Standard & Poor’s, which predicts a 5% price jump next year.
When Paradise Homes in Lakewood Ranch, Fla., filed court papers to liquidate its operations last October, with 233 creditors and 30 home buyers left dangling in the wind, the housing industry got one more reminder that while business conditions are improving, there are still companies out there holding on by a thread.
Nearly 90 builders went bankrupt or closed their doors during the past economic recession, according to the website Implode-O-Meter, which tracks this activity (and that number is probably conservative). And builders like American West Development, which thought it could get through the bankruptcy process quickly and relatively intact, found that extricating oneself from debt obligations is easier said than done.
But as the saying goes, Nature fills a void, and where some builders disappeared, others took their places, with clean slates and unencumbered by expensive legacy real estate.
Atlanta-based Acadia Homes & Neighborhoods launched in 2011 and has used a focused marketing approach and its relationship with three local brokers to sell from 13 communities. Acadia was hoping to triple its closings this year. Last June, two veterans of Marmol Radziner Prefab broke away to start Connect:Home, a Los Angeles–based modular manufacturer whose claim to fame is its economical solution for shipping modules long distances.
When Nebraska’s HearthStone Homes filed for court protection from creditors last February, after failing to find a buyer, two of HearthStone’s key managers left that builder to form The Home Company, which positions itself as a production builder offering more of a custom look than competitors in and around Omaha. The Home Company partners with Boyer Young Development, which is feeding finished lots to the new builder.
Bankruptcy doesn’t have to be a death sentence, as some builders are proving. After coming out of Chapter 11 a few years ago, WCI Communities shifted its business model away from building high-rises to master-planned communities that cater to move-up, active-adult, and second-home buyers. WCI expects to show big gains in closings and revenue in 2012.
Since emerging from bankruptcy last February, Wm. Lyon Homes aggressively made up for lost time by taking hundreds of new orders in its markets in California, Arizona, and Nevada. In December, Wm. Lyon entered Colorado by acquiring Village Homes.
Pennsylvania-based DeLuca Enterprises relinquished virtually all of its assets when it went bankrupt in 2010. But the family who owned the company started over as DeLuca Homes, which expected to close around 60 homes this year. They also made remodeling a “core” of DeLuca’s operations by adding a division called Signature that offers architectural services.
5. Grasping for Land
“Finished lot shortage could boost new-home prices.” Sound familiar? It should—that headline ran over a story that the St. Louis Business Journal published on March 8, 1993.
That history keeps repeating itself should come as no surprise to housing industry veterans who have watched their markets soar and plummet several times over the past 25 years.
The question, once again, is whether an industry that hardly developed any land for residential construction during the past recession is coming up seriously short of finished lots now that demand for housing is finally returning. And if they do come up short, how many builders are willing to develop raw dirt on their own, something they’ve been allergic to in recent years?
For the most part, builders have focused almost entirely on controlling finished lots, and many of the industry’s largest companies have been acquiring competitors to gain access to their land portfolios or have been scooping up finished lots with a vengeance, including giants like D.R. Horton, which controls more than 60,000 finished lots; and PulteGroup, which owns or controls 122,000, and recently disclosed its intention to spend another $1 billion on land development and acquisition.
As business improved in 2012, builders and developers spoke openly about the dwindling supply of lots in “A” locations, and worried that shortages, at some point, might impede the pace of the housing recovery. “By 2014, we may not be able to deliver enough finished lots to meet consumer demand for housing,” Will White, who manages Land Advisors Organization’s office in Tucson, Ariz., told Inside Tucson Business last September. “There is a substantial amount of platted lots, but who is going to build those? The owners don’t want to shell out that kind of money.”
That same situation appears to exist in many other markets, most noticeably in Greater Atlanta, where builders commonly lament only about 10% to 15% of the roughly 140,000 finished lots available are worth building on. And prices for choice lots everywhere aren’t getting any cheaper.
It would appear, then, that builders that have forged relationships with land owners, developers, and redevelopers; or that aren’t afraid of developing raw land on their own—such as Minto Communities in Florida or The Corky McMillin Cos. in California—could be positioned better to expand over the next several years.
6. Multifamily Mania
A growing number of builders and developers now target buyers who are looking for urban and lower-maintenance living choices. Consequently, multifamily construction has been setting the pace for a housing industry getting back on its feet.
As of November, starts of structures of five or more units were running at an annualized rate of 285,000, or 19.2% ahead of the same month a year earlier, according to Census Bureau estimates. More to the point, the ratio of single-family to multifamily construction over these months was only roughly 2 to 1.
In a report it published on Nov. 15, John Burns Real Estate Consulting estimated that 44 metro markets at least doubled the number of permits they issued for multifamily construction (including apartments and for-sale condos) in 2012, led by Durham, N.C. (up 403%), and West Palm Beach, Fla. (up 248%).
“There is now more multifamily construction than single-family construction in 36 of the 183 MSAs we forecast,” wrote Leslie Deutch, a vice president with the consulting firm. West Palm’s multifamily permits, however, were still only 19% of that municipality’s peak year, which was also the case for several other metros such as Fort Worth, Texas (11%), and Atlanta (21%).
What’s spurring a lot of this permitting and construction activity is demand for rental apartments (see “Foreclosures and Rentals”) and the relative shortage of available rental housing. In November, Massachusetts Gov. Deval Patrick revealed a plan to produce 10,000 multifamily housing units per year through 2020, an initiative that includes a program called Compact Neighborhoods that will encourage the creation of housing near job centers.
For the time being at least, shortages across the nation have led to rising rents that keep homeownership in the running as a viable option, even for cash-strapped younger buyers.
In November, the number of homes entering the foreclosure process fell 28% to its lowest level in six years, according to RealtyTrac. Foreclosures as a percentage of total home sales were 17.6% in October, down from 26.7% at the beginning of 2012 or 23.5% in October 2011, according to the FNC Residential Price Index. The federal government has stepped up its efforts to keep distressed owners in their homes.
But as usual, the foreclosure picture remains complicated, as home repossessions in November rose to a nine-month high. Roughly one million homes are in some stage of foreclosure, and another 11 million mortgages remain underwater, so it’s anyone’s guess how many owners will ultimately lose or walk away from their houses.
One thing’s for certain, though. Foreclosures during this recessionary period (since September 2008 through October 2012, 3.9 million foreclosures have been completed, according to CoreLogic) are adding much-needed rental housing at a time when demand has grown and a segment of potential buyers question the value of homeownership.
Trulia’s “American Dream” survey for 2012 found that 72% of the nearly 2,100 consumers polled still place a high value on ownership. But that’s down from 77% in 2010. And while 93% of younger Americans say they would purchase a house “someday,” any action probably hinges on employment improving and how fast rents rise.
Consequently, more builders are trying to tap into the rental market. Maryland-based Bozzuto Construction, for one, in December announced four new projects with 822 for-sale and rental units. What concerns builders, though, is how quickly existing foreclosed and bank-owned properties will rebound onto the market as rentals, and what impact that potential avalanche might have on home prices.
Investors have been striking while the rental fire is hot. In 2012, Blackstone Group invested an estimated $1.5 billion to acquire 6,500 foreclosed single-family homes. Los Angeles-based Colony Capital Group gobbled up 4,000 foreclosed homes. The New York Times quotes an analyst at Keefe Bruyette & Woods who estimates that private equity investors and hedge funds had raised more than $8 billion for the purpose of buying foreclosed homes from banks and the federal government, with the primary intention of putting them back onto the market as rentals.
That includes Silver Bay Realty Trust, a Minnesota-based startup that recently raised $245.1 million in an initial public offering in December to buy foreclosed homes.
Even former builders are getting into the act, like Jim Previti, whose Frontier Enterprises since May 2009 has bought, renovated, and resold more than 1,500 homes in California, Arizona, and Georgia.
8. Laboring to Meet Demand
One of the bitter ironies of the housing recovery is that rising demand is creating shortages in available field labor, which has dwindled over the past five years.
The commercial and residential construction sectors lost an estimated two million workers during the recession, and relatively few have come back into this field. While the problem is still anecdotal, builders around the country are worrying about their ability to complete projects—especially if business really starts picking up—if they don’t have enough subcontractors available.
Bloomberg quoted government estimates that builders in October had the most job openings while at the same time broke ground on more homes than at any time in four years. Labor shortages are leading some builders to raid each other’s jobsites for workers, reports USA Today, which quotes Labor Department data showing that the jobless rate in the construction sector is down to 11.4%, from 17.3% two years ago, only because 320,000 construction laborers stopped working or looking for work.
“Where there has been a fundamental pop in sales volume, it has been big enough and sustained enough to start maxing out the base” of labor supply, observes Jody Kahn, a vice president at John Burns Real Estate Consulting in Irvine, Calif. She points specifically to markets like Phoenix and certain metros of Florida where labor shortages have become palpable on builders’ jobsites.
Consequently, rosy projections for housing starts “would be pie in the sky” if the industry comes up seriously short of labor, predicts Bob Curran, Fitch Ratings’ home building analyst.
9. The Micro House Looms Larger
In Northeast Washington, D.C., homes with only 150 to 200 square feet of living space are being built and sold for between $20,000 and $50,000, less than the downpayment for a two-bedroom condo in some neighborhoods, according to the Washington Post, which ran a photo essay on this project last month.
The trend toward micro houses, which have been around for a while in Europe and Asia, is catching on in urban areas in the U.S. as a way of providing affordable housing nearer to job centers. Infill projects in San Francisco, Boston, Portland, and New York will feature for-sale and rental hosuing that typically won’t get much bigger than 400 square feet. New York’s adAPT NYC micro-apartment pilot program, for example, is integrated into that city’s broader affordable housing initiative that has been aiming to add or preserve 165,000 housing units by 2014.
In San Francisco, modular manufacturer Zeta Communities drew interest in its 65-foot modules that were used to construct an 11,775-square-foot four-story wood-framed building squeezed onto a 3,750-square-foot lot in this city’s South of Market Street (SoMa) district. Another designer, Aaron (Zhibin) Chengof Bar Architects in San Francisco, even devised a micro apartment complex that converts into a parking deck during the day.
Jay Shafer, one of the progenitors of America’s “tiny house” movement, was profiled this month in National Geographic, which reported that one of Shafer’s enterprises—Four Lights Tiny House Company—is selling house kits for 106-square-foot abodes. Price tag: $15,000.
In February, Simmons College in Boston will conduct a two-day seminar about building these microscopic homes. Simmons is partnering in this event with Tumbleweed Tiny House Company, which markets “houses” that range from a minuscule 65 square feet to 874 square feet.
10. Turn, Turn, Turn
The housing industry lost several prominent builders in 2012. Some will be remembered locally, and two had national stature:
•Walter Stefanowicz, 74, a retired builder who died on Nov. 17 from cardiac arrest while recovering from knee surgery, worked on the financial side of his family’s residential construction business, which built homes in several Maryland counties.
•Henry (Hank) Allen Morris, 92, died on Nov. 30. Morris built houses in Houston for 40 years and was a former director of the Texas Home Builders Association.
•Stephen Gidus, 50, died on Oct. 8 from cancer. He began his career as a carpenter, and eventually ran PSG Construction, a builder and remodeler in Orlando, with his brother. An avid marathoner, Gidus also worked with Rebuilding Together Orlando, a nonprofit organization that rehabilitates homes free of charge for low-income homeowners who are disabled, veterans, or elderly.
•Ed Ryan, 88, died on June 1 from a stroke. Ryan founded Ryan Homes in 1948, from which he retired in 1973. That business was acquired by NV Homes in 1987, a year after NV went public. The merged companies became NVR, now the industry’s fourth-largest builder. NVR’s chairman Dwight Schar got his start working for Ryan Homes in the 1960s.
Ryan also owned harness racing horses, and co-owned (with 84 Lumber’s patriarch Joe Hardy) The Meadows Racetrack, where he introduced computerized betting, televised racing, and telephone wagering. Ryan was inducted into the Harness Racing Hall of Fame. He was also a major supporter of the March of Dimes.
•Barry Alan Berkus, 77, died form leukemia November 30. A renowned architect and founder and president of B3 Architect in Santa Barbara, Calif., Berkus designed more than 600,000 residences from 10,000 designs.
One of his first big clients was William Levitt, the real estate developer often called the father of American suburbia. Berkus’s designs were primarily for production housing. Readers of Residential Architect selected Berkus as one of the 10 most significant figures of the 20th century. In 1999, Builder counted Berkus among the 100 most influential individuals of the past century of American housing.Architectural Digest named him one of its top 100 builders in 1991.
In his spare time, Berkus was an art collector, athlete, philanthropist, author, and lecturer.
Source: John Caulfield, Builder Magazine