Transcript
Dean Wehrli:
Hello everyone, this is the New Home Insights podcast. I’m your host, Dean Wehrli. It feels like a pretty good time for rundown of the spring selling season. That to me, it actually seems like it started about New Year’s Day. We’ll see. We’ll talk about that.
Today though we’re going to cover the big trends so far this year, pricing, incentives, sales and inventory. And then we’re going to dig into how new home builders see the world right now. And maybe a hint into what they anticipate for the rest of the year.
To walk us through that, we have the legendary Jody Kahn. She’s a senior vice president. She’s chuckling, but it’s absolutely true. Senior Vice President of Research here at John Burns Research and Consulting. She keeps tabs on the National for-Sale Housing Market better than anyone in the world in fact.
And we’re also joined by the brilliant up-and-comer Dillan Krieg, a research analyst, I’m sorry, a research analyst also here at JBREC who works with Jody on the builder surveys, on the monthly metro sales analysis and forecast publications that we do here. Welcome guys. How’s it going so far?
Jody Kahn:
Good. We’re glad to be here. Thanks, Dean.
Dillan Krieg:
Yeah, thanks Dean. Happy to be here.
Dean Wehrli:
I’m very glad you’re here. Because so far, I mean we will get into it, but it does seem like one thing that’s sort of become an axiom is that there’s so much fluctuation. The market has been less predictable these last several years than ever before. Even now that COVID is in the rearview, it still seems like you don’t know what’s going to happen.
So, hopefully we’ll get into that here in just a minute. First, I’m going to start you off though with a question that I think is deceptively difficult. And that’s give me your official definition of the starting gun for the spring selling season. When does it start?
Jody Kahn:
So, the industry vibe is that it starts right after the Super Bowl. I honestly always think who picked this as the start date? Because frankly, there’s a lot of places in the country that conditions are pretty icy. There’s winter storms; you kind of wonder about people getting out and really looking at new home communities. But that’s the official answer, it’s right after the Super Bowl.
Dean Wehrli:
It is funny you say that because it is kind of a climate thing, isn’t it? In California where I am, honestly, it’s early January. I mean, things are still building January to February, to April to May for sure. I skipped March because you know what you do. But still it does seem like it’s earlier here in warm weather and of course later in some of the colder places.
But officially, Super Bowl after the Niners suffer a crushing defeat, the spring selling season begins. So, let’s get in now to the survey. And I’m going to start with you Jody. What exactly is the spring selling season? Why is it such a huge deal?
Jody Kahn:
So, I’m glad you’re asking because there are things shifting right now that make you wonder why do we honor this concept of a spring season. What I can tell you from our builder survey, which we launched in 2008, is in fact April and May are the peak sales rate months out of the entire year with the exception of COVID where everything was kind of crazy.
But the history is April and May will be the peak sales months. And for a lot of builders, they’re going to sell more homes in the first half of the year than in the second half of the year. So, it is legitimately a stronger season.
Even with the interest lists that the builders establish from the spring season, they continue to work with those leads through the rest of the year. So, what happens in the spring season is really important to the builders.
Dean Wehrli:
How about a why. Why are folks looking to move? Other than weather, why are folks looking to move in the spring?
Jody Kahn:
Many families want to be in place in their new digs by the time that they need to sign their kids up for school. And historically, that meant you had to backtrack, say six months, even eight months to buy a home that was going to be started after you signed the sales contract.
And it takes time to complete and close. And so, if you back that up, it puts you right around March that you need to be buying a home if you want to be in there for say late August and September.
Dean Wehrli:
Spring break though is kind of like Easter, isn’t it? You don’t know when it’s going to be. It’s sometime in March and April. I believe they need supercomputers now to define when Easter actually is, ironically. I mean, the breakup of spring break, does that help smooth things over a little bit?
Jody Kahn:
Oddly, spring season, or I’m sorry, the Easter and the spring break tend to disrupt the spring season. Families go on trips. Or even if they’re not traveling, they’re focusing on activities to entertain the kiddos. And it doesn’t strike me as a time when a lot of people are out looking at the new home communities.
So, usually spring break for schools ends up taking a part of, I would say March and sometimes April, depending on where you are regionally. So, the builders actually don’t look forward to spring break. But the spring season, yes, they’re all on board.
Dean Wehrli:
Dillan, how are things going so far? How are we tracking the spring selling season so far? Real quick, maybe mention that we are recording here on March 22nd, so we’re into the spring selling season. How are we doing so far, Dillan?
Dillan Krieg:
Yeah, so Jody and I we’re really measuring two primary things here to kind of gauge how the season is doing. So, the first thing we’re measuring is traffic, which is going to lead into sales. So, builders have been telling us for actually quite a while that their traffic of people coming into homes, looking at the models, deciding what they might want.
Overall, the volume of traffic hasn’t been great. It hasn’t been gangbusters. However, they’re telling us that the quality of it has been pretty strong. And we think a lot of this is that some folks know that they want to buy a home and that they’re able to purchase with the rates, and so they’re looking.
But a lot of other people know that rates are much higher than they have been for a while and prices have been pretty rough. So, they are kind of self-selecting themselves out of looking right now.
Dean Wehrli:
When you say quality Dillan, you mean folks are qualified, it’s not so much of a lookie-loo kind of thing. Is that what you’re referring to?
Dillan Krieg:
Exactly, yeah. There’s not a ton of people coming into the model homes and talking to the builders. But the people who are coming in are often qualified. They’re looking to buy and they’re qualified to purchase.
Dean Wehrli:
I’m going to ask both of you guys this, Jody you too on this one. The higher quality of traffic, do you think there’s anything to do with more and more builders going toward appointment only, not having someone on site?
It’s the thing where you put in the code and you get a walk and so forth, is that thinning out the lookie-loo types and improving the quality as a percent of total traffic? Does that make sense?
Jody Kahn:
I hadn’t thought of it that way, Dean, but that does make sense. If you can’t just drop in any old time, maybe that does cut back the lookie-loos. I tend to think that the quality has tended to improve over time. Because people can do a lot of pre-research before they go to the community.
They’re looking at all these communities online. They know what the models look like. They know what the square footage is. They can understand the floor plans. I think a lot of people are showing up at the new home communities with a pretty clear idea of what they want to view.
And they’ve already opted out of floor plans they don’t care about. Or maybe they liked one builder over another in terms of the offering. And I think that’s creating that feeling of a high quality because you have an educated consumer.
Dean Wehrli:
Buyers are savvier and more informed every year. And it’s been going on for a while, but it just seems to be increasing every year. Dillan, back to you. Let’s talk about sales. Again, as you know, maybe you don’t, as the folks listening, is that Jody and Dillan and crew do a survey that has responses every month from hundreds of builders across the country.
And so, we have some really good data in a pretty timely way. Dillan, how have sales rates been so far in the spring selling season?
Dillan Krieg:
Yeah, so sales actually, it really depends on how you look at things. John Burns, our CEO, he was just on our client webinar yesterday and he had a really great way of looking at it. If you’re looking at things from a very long-term perspective, sales are actually doing really great right now.
Builders sold about a little over three and a half, sorry, a little under three and a half sales per community in February per our builder survey. We hear from several hundred builders all around the country, so it’s a national sample. But that’s compared to about two and a half sales per community historically.
So, in the long term, we’re actually quite above where we usually are in February, which is the last month that we have the data for. But if you look at the comparison from January to February how much sales improved month over month, it’s actually a little bit wimpy. It only rose about 2% from January to February compared to 14%, which is what we usually expect.
And we think part of this is that December and January, which are usually pretty early, it’s not when we really expect to see a lot of improvement in sales. The second half of December and January, were actually much better than expected. So, that’s leading to the jump between January and February is a little bit more muted.
Because it was already pretty good in January. And we also think that the rates, they went above 7% for much of February and that really slowed down activity then. But now that rates have gone down a little bit as of mid-March, we just did another check on builders in the mid-month here, and that seems to be really helping a lot. Now that rates are below 7%, builders are seeing more traffic and some more sales activity.
Dean Wehrli:
It’s remarkable how much rates impact in a very immediate way by our reactions and by our behavior. You’re right, here we are in the latter part of March, we’ve seen rates pop down a little bit. I fully expect for this to be a better weekend than a couple of weeks ago.
And it’s really become extraordinarily dependent upon rates and the feeling and the zeitgeist of how rates are going. It’s more than ever before. And part of that is I think because rates are so unstable and they fluctuate so much all the time it seems. Let’s talk about pricing. Jody, what’s going on with pricing power so far this spring?
Jody Kahn:
We look at builders pricing behavior on a net of incentives basis. For everyone listening, that means we’re backing out or asking the builders to back out anything they’re contributing. That could be rate buydowns. There are 30-year rate buydowns, but there’s also short term one to maybe three year buydowns available.
There are closing cost contributions. Sometimes the builders are offering free or reduced price options and upgrades at their design center. And more and more we hear of builders, especially in the move up segment, moving to more of a pot of cash that the buyer can allocate as they wish across all those different types of incentives.
So, when we say net, we want to see how are the builders behaving. Because if they feel sure about their sales, they’re going to be testing pricing improvements. If sales are weak or they’re not feeling very secure, they’re going to be very tentative about changing price.
So, what we saw in our February survey was nationally 32% of the builders were raising their net prices. So, they were tampering a bit with the incentives and also with list prices. And we expect to start seeing that in February. But really when we survey at the end of this month, we’ll get an even a better take on how confident the builders feel based on the March activity.
So, this is a month-over-month shift. 32% of builders nationally raised prices in February compared to January, only 7% nationally reduced their net prices. That would be throwing more incentives into the bucket. Or in some cases, maybe even shaving off some of their list price because maybe they had some particular floor plans that weren’t selling well.
Dean Wehrli:
I’m glad you mentioned that by the way, Jody. I think sometimes we sleep on month over month statistics. And we downgrade them because we know that seasonality can impact those. We all know that.
But honestly, to give you a sense of what’s happening right now, if you look at them judiciously, the month-over-month data is much more informative than year over year sometimes depending on what happened a year ago. So, I’m glad we’re tracking that, we’re thinking about that.
Jody Kahn:
Yeah, I definitely think right now, and especially given the seasonality and this whole concept of a spring season, we need to see the percentage of builders raising the net prices growing in March and April. Because that demonstrates in tandem with the sales that we really have that spring lift happening.
I do want to say that with the two percentages I just gave, the missing percentage is the number of builders or percentage of builders that reported flat pricing. And that’s 61% of the responses. So, when people ask me to generalize, I say pricing is flat to rising at this point.
Dean Wehrli:
Jody, modestly flat to fairly modestly rising. Is that a fair characterization?
Jody Kahn:
Yeah, absolutely. But the interesting thing, Dean, is there’s a lot of regionality to what’s happening in pricing. So, in the survey, 43% of the Northeast builders and 42% in southern Cal were raising their net prices. Those are the strongest pricing environments that we’re seeing.
And in contrast, the region with the weakest pricing environment measured by not as many builders raising prices was actually Florida with only 23% signaling price increases. So, I was digging into the data and what I’m seeing is that in the major volume markets, which are Jacksonville, Tampa and Orlando, the prices are flat to even falling a little bit as compared to last year when things were still really kind of gangbusters and the builders weren’t needing to add very many incentives.
But this year they have had to add some incentives. And so, you see on a net basis, they’re not raising prices as much.
Dean Wehrli:
Can we talk about Florida or is it going to make Florida and your friendship with Florida uncomfortable? Because, Jody, you live in Florida. But are we seeing the impact of the insurance – I don’t know if crisis is the right word.
Maybe you’re seeing that word bandied about in Florida media. But there’s certainly a ton of concern about insurance, home insurance in Florida. Are we seeing the impact of that right now?
Jody Kahn:
I would expect to see that more in the resale market frankly than the new home segment. And the reason I say that, a little known fact is many of the largest builders have their own insurance companies. I don’t know why they’re not promoting that more in a timeframe and in a state where insurance is a big headache for people.
But most of the publics and many of the largest privates offer hazard insurance. You have to have this in order to close on a home. So, just like the builders have their own mortgage companies to make sure that there isn’t an issue at the closing table like, “Hey, you never got approved for a mortgage.”
They can also be on hand to provide the insurance. And you’re going to pay for the insurance, but at least it’s something they can provide. So, it shouldn’t be a big issue for the new home segment.
Dean Wehrli:
What is the shape of the incentives right now and any trends and incentives that you’re seeing? Or what are builders using incentives for? Other than to make sales, what are they kind of doing with incentives and playing with incentives right now?
Jody Kahn:
I think the big news has been builders catering the incentives for who the buyer is and what that buyer needs. So, last year it was kind of buy-downs for everyone, kind of almost a bit of a one size fits all solution. It’s a good solution. There’s a long history of builders using rate buy-downs when rates are high.
Closing costs were also in the mix. This year and really at the tail end, even say fourth quarter 2023, we started hearing builders say, “Not all of our buyers really want this buydown. Some of them would prefer other things.” So, particularly in the move up segment, we’re seeing the builders offer more of that flexible cash that you can spend the way you want.
They tell us that some buyers might choose a short-term buydown. And the reason they don’t want to pay for or spend it on a 30 year is they’re planning to refinance anyway once the rates come down. And a lot of those move-up buyers have the capacity. Meaning they can qualify for their mortgage if they’re taking one.
So, it’s not going to hold them back from the transaction. And on the flip side for the entry segment, the buydown is really the right tool. Really you’re talking about getting that monthly payment into a price point that the buyer can qualify for the purchase. And the buydown’s the perfect tool.
Dean Wehrli:
I’m hearing mostly that, just by the way in the markets that I work in every day, is that they do have this sort of discretionary bucket of money. Here’s $20K, do with it what you will. At the entry level and even into the first move up, they’re opting for buydowns.
And even if it’s a part of their buydowns, I’ll use your $20K, add another $20 to get my 30-year buydown for the full term. That seems to be the way most of those buyers in that price sector are going.
Jody Kahn:
We specifically asked the builders mid-month how reliant their sales feel on use of buydowns and other incentives. And the vibe was in the entry segment, almost all of the builders were saying, “Yes, our sales are completely reliant on continuing to offer incentives.”
Whereas some of the move up and luxury builders like maybe not so much. And in a few cases like in the Northeast, I’m thinking especially of Boston and maybe Philadelphia, even some of the DC builders like, “Nope, we’re not offering really incentives.” In fact, some of the Boston builders never offered incentives.
Why should they? They can’t replace those lot positions. There’s not exactly a lot of land available and convenient commutable locations in Boston. So, I think the idea was we’ll just take our time. We’ll sell at a slower rate. That’s fine. And they never offered incentives.
Dean Wehrli:
That’s interesting. I guess this all revolutionary war battlefields in that area. I don’t know. I’ve never been to Boston.
Jody Kahn:
True.
Dean Wehrli:
I have a very distant view of Boston. Dillan, let’s talk about inventory. That’s always traditionally seen as a concern among builders. And I’m going to test that a little bit. But let’s start with are we seeing finished inventory on the rise? Is it stable? How much of there is it so far?
Dillan Krieg:
Yeah, no, I mean that’s a great point, Dean, that the question about is inventory in a good place or a bad place. It’s really something we look at very carefully. Right now finished inventory has risen, especially from where it was during the pandemic when it was functionally zero for a lot of builders around the country.
Right now where builders have about two homes finished on the ground ready for a buyer at least within the next 30 days or so per community. That’s a national level. We think that’s actually a really healthy level. In our survey’s history, that’s a pretty average sort of number that you expect to see. And builders are really looking to actually have inventory right now.
There are some pockets where there is some elevated levels of inventory that might be a concern. And in those areas, you might see some price cuts or maybe some investor purchases. But mostly around the country it’s in a pretty healthy level. And builders are really using this to leverage a lot of the strengths that they have right now.
Particularly in competition with the resale market where there really isn’t very much supply around the country. So, when builders are able to have these homes on the ground ready for someone to walk into and close on, it’s a real advantage for builders. Not to mention also, a lot of the incentives that they use really require a home that you can close on pretty quickly.
Some of these buydowns that builders are using, they have a pretty short time period in which you can actually use them. So, being able to close the home quickly is a huge advantage for them there.
Dean Wehrli:
I’m seeing that everywhere too. Those incentives aren’t offered if the build out is more than maybe 30, 60 days if the delivery is longer than a couple of months. But also, there is this balance between having not so much inventory that’s risky and having enough inventory to satisfy the market.
And when resale listings are down, I know they’re creeping back up, but when they are relatively down, having that ready to go, ready to buy is a huge advantage competing with your new home builders who have nothing to give you. To sell right there.
Dillan Krieg:
Exactly. And overall, even though builders have some inventory and resale listings are up a bit, when you really look at it on a national level, even when you combine the total resale transactions and total new home transactions, it’s still a historically low level on inventory. The resale market is just so constrained right now that builders are really in a lot of places, the only game in town.
Dean Wehrli:
It strikes me this is one of those things where the year over year, it can be a little bit misleading. Because we are now comparing listings to one year ago when listings were already dampened because interest rates really started coming up in the first quarter of 2022. And so, listings started to quickly ratchet down.
So, now we’re comparing year over year to early ’23 when listings were already down year over year. I guess, that’s a long-winded bad way of saying that. Even as listings are rising, they’re still very constrained.
Dillan Krieg:
Yeah, exactly. And we as a company, we look at comparisons to 2019 or even before 2019 as kind of the last sort of normal year in housing. It’s not entirely true. 2019 isn’t exactly a normal year. And there’s really never a normal year for the market. But it’s more consistent before the pandemic times.
And if you compare it to 2019 or really any year before 2019, we are still way below that in terms of total resale listings and transaction volume. We’re up from the pandemic era lows, but that doesn’t mean we’re at kind of a healthy normal level yet.
Dean Wehrli:
Yeah, that’s huge. And we all know why. We won’t talk about the golden handcuffs. We’ve talked about that ad nauseam but that’s clearly what’s still happening. How about cancelations? Are we seeing cancelation rates going up?
Dillan Krieg:
Yeah, so cancelations are in a really great place for builders nationally right now. One of the concerns with inventory a lot of times is that it’s inventory because there are a ton of contracts that are just falling off or people who aren’t able to qualify for homes. That happened a bit in late 2022.
Cancelations rose a lot for some builders, especially in the Southwest and just California and Texas, some places. Right now, cancelations are only about like 8% of contracts nationally as of February. That’s actually much lower than our historical norm, which is usually around 10 to 15% of contracts.
Because we expect there to be some cancelations. Someone accidentally buys a TV when they’re already at the edge of being able to qualify. And that messes up their credit rating. People get divorced. They end up having to change their job or something. Things happen.
Builders expect that. But right now, because what we were talking about with a lot of these buyers really know that they’re qualified, they’re interested, they know what home that they want. There’s really not a lot of cancelations.
So, that’s how we know that this inventory buildup that builders are working on, this is intentional. They’re doing this as a strategy to take advantage of what their opportunity is in the market right now.
Dean Wehrli:
I love the idea of an accidental major appliance purchase.
Dillan Krieg:
It happens.
Dean Wehrli:
I guess. All right. How about starts and are there differences in sectors in terms of inventory and starts in terms of price sectors or regional differences?
Dillan Krieg:
Yeah, I mean, there’s more inventory I’ll say in Texas for sure. Texas and some of the Southeast is where we’re seeing larger levels of inventory. Builders are really starting homes all over the country right now. Start levels have been rising for quite a while.
And we’re seeing that overall when you look at year over year, all of the regions are actually positive in starts. Builders are starting quite a few homes right now and it’s really a national trend. For a while, the Northeast was actually lower in starts year over year.
Builders were starting fewer homes. Because as Jody mentioned, in a lot of those places there’s just not a lot of land. But where builders can find land and where they are winning out some over the competition for these lots and these land positions that they’re looking for, they are starting homes.
There are some differences also between the different types of builders and what types of buyers they’re aiming for. Move up and luxury builders going for the higher end of the market. They have some quick move in inventory, inventory that’s on the ground ready to close on. But not as much as the entry level.
Particularly as we’re talking about these entry level buyers in particular are the ones that really need the buydowns in order to qualify to purchase these homes. Move up buyers and luxury buyers, a lot of times they’re actually really interested in having a presale contract. They have some time to choose the different sort of features they want in their home.
And they’re okay with having a longer cycle and not closing on it immediately. And so, a lot of the move up and luxury builders are catering to those buyers and giving them exactly what they want.
Dean Wehrli:
How about cycle times? What are we seeing with respect to build cycle times in the spring?
Dillan Krieg:
Yeah, this is also a huge improvement from where it was over the pandemic. Build cycle times, they improved really significantly from last year, which was an improvement over the year before that. Supply shortages really have mostly cleared through the system.
There are a lot of issues with power still, including in Northern California where you work, Dean. We’re hearing from a lot of builders that utility companies are having trouble getting power hookups. There’s issues with transformer supply. And a lot of that is because of what we’re seeing with competition for power essentially in the marketplace.
We have these huge AI data centers, demand from electric vehicles and all that manufacturing. That is taking some of the supply out of the market for builders. But that’s really a lot of the big issue that builders are seeing. But overall, it’s much improved from where it was.
And this is really allowing some of these pre-sales to happen, these builders getting these contracts with these move up and luxury buyers in order to actually build their home over time and add all the features that they want. Because before now, essentially in the pandemic, you really couldn’t do that.
Because you had no idea of when you were going to actually get those homes on the ground because of just the shortages of materials and labor. And it was a really difficult time for builders. But it’s much better than it has been for a while.
Dean Wehrli:
That’s good to hear. Before we move on to talking about a look ahead and what builders anticipate for the rest of the year, I want to ask you another follow-up on the inventory and the construction schedules. If I heard you right, I think the answer to this is going to be yes, but I want to ask you still.
Are you seeing more builders just really push their construction schedules and to have inventory on the ground? And what that means is that they have to pre-choose and they have to pre-select all the options and upgrades for the buyers. So, we’re seeing much less discretion for buyers about the upgrades spending and what they’re spending upgrades on. Are you seeing that nationwide?
Dillan Krieg:
Yeah, we have been seeing builders and talking to builders who are doing that. And part of it is a bit of value engineering on their part that they want to offer more affordable options. And when they don’t have to have 20 different supply chains for different sorts of tile in the houses that they’re offering, that’s going to really ease those sorts of burdens.
Because they can get some better deals with suppliers and they have just a more consistent idea of what they’re going to be buying. But we are definitely hearing builders do that. And it’s definitely a trend that we have our eyes on going forward.
Dean Wehrli:
It kind of dovetails too with more builders doing packages for options and upgrades where, again, there’s less discretion among buyers. And let’s be clear, outside of the luxury sector, most buyers, they don’t need that kind of discretion. If you give them a few good packages to choose from, that’s fine. That actually takes a lot of worry and stress from the purchase.
So, let’s move to looking ahead. You know I love forward-looking future kind of crystal ball type stuff here on the show. What are we expecting for the rest of 2024, Jody?
Jody Kahn:
The builders are really optimistic about 2024. So, backing up to November in 2023, we asked a repeat question we ask every November because we know the builders will have completed their budget work and they know what their outlook is for the year ahead. So, we asked them for their sales, starts and closing forecasts, not in numbers but in terms of percentage growth.
And what we heard in November 2023 was hugely optimistic. Definitely there were people on our team that were like, “No, this can’t be right. Why are they so bullish?” So, we did some additional surveying and we found in conversations talking to builders like, “Why are you projecting such a big lift this year?”
Particularly in places like Southern Cal that we know are really constrained in the ability to open new communities. And what we heard was that there are a lot of communities the builders plan to open this year. And from a timing perspective, back in 2022, a lot of builders dropped a lot of land deals.
Remember that sales were crashing? The cans that Dillan mentioned earlier were on the rise. People had been waiting a long time in the construction queue and meanwhile rates were creeping up and the builders had to cancel a lot of people. It was kind of a big mess.
And a lot of builders tried initially to renegotiate their land deals. And then finally realizing that the sales weren’t there, the level of cancelations according to the top land brokers was the most they’d ever seen in their careers. So, then we move into 2023 and by then, the builders were really perfecting their use of the rate buydowns and also a tool called a forward commitment where they were actually originating mortgages at below market prices.
And they’re still doing this now. But it was definitely a big shift in the vibe. And the builders started realizing, “Wow, sales are picking up. Now we don’t have the runway of lots we thought we were going to need because our sales were a lot better.”
And there’s been a big scramble in 2023 to repurchase a bunch of lots and land at different stages or different flavors, needing finished lots, paper lots that still require site development, etc. So, the builders did a lot of this in 2023. But very few of them were successful in actually opening a new community with those new lot acquisitions.
That whole long process is going to bear fruit in 2024. And this is why the builders are so enthusiastic. They control the land. They’re making progress. Dillan mentioned before the value engineering where they have looked at what lot sizes do they need, what are the right homes to offer.
They’ve pulled some gingerbread out of the homes or even adjusted the specifications of things like kitchen counters and cabinets. They’re really aware of the affordability issue. And so, the enthusiasm is more communities, but also the right product that they think will bring buyers in successfully.
Dean Wehrli:
It’s funny you say that, the word gingerbread. Why do we always use the word gingerbread for super nice homes? Have you ever made a gingerbread house from those kits? They’re nightmares. They always turn out like you’re on an episode of Nailed It. So, I…
Jody Kahn:
Yeah, I always forget you have to build the gingerbread part of it and let it cure for a bit before you can decorate, which leads to some really frustrated kids.
Dean Wehrli:
I know this is a tangent, but God, I hate gingerbread houses. Sorry about that. How about sales and starts? Are all the builders really pretty sanguine about the volumes going forward?
Jody Kahn:
Yeah, I would say that all of the builders seem pretty enthusiastic, including builders in places that where it is difficult to bring a new home community. So, in Southern California for example, some of the builders have said, “We’d like to open communities in 2024. But some of our first sales may get pushed into 2025.”
There’s just a lot of uncertainty and delays. And in fact, the top land brokers who we also survey have told us that the development delays alone, this is not home building, but just getting the sites ready to build homes on, are running a minimum of six months behind. So, that does speak to the fact that it’s going to be a little challenging to get all of these new communities open this year.
I’m expecting that we’ll see more in the second half of the year than the first half. And some of those projects probably get nudged into early 2025, even though the builders would like to have them sooner. But we do see some big differences regionally in terms of the expected growth from the builders that we survey.
With Florida and the Southeast, builders particularly reporting robust growth. Averaging 17% increases in those regions compared to 11% nationally. Frankly, Dean, even 11% community count growth is huge.
We’ve been negative nationally on community account growth. If we can get even half of that, I’m sure our team will be thrilled, particularly our consulting team that works on feasibilities.
Dean Wehrli:
And Texas is growing and it’s an expectation of more homes. And I wonder, I think the lowest on the survey of the numbers I’m looking at right now is Southern California. But it’s still a positive number. The expectation of more actively selling projects.
And I think as you hinted to a minute ago, a lot of that is not demand. It’s the ability, the land constraints and the ability to get homes onto the ground is just a lot easier in Florida and Texas than Southeast than is in California and some other markets.
Jody Kahn:
It is. There’s more land availability. Most of the major metros, if you think about in Orlando or a Tampa or a Charlotte, they’re not constrained physically in the same way that the California markets are. They have the land. And they’ve also experienced a lot of in-migration.
So, there is a lot of demand in these markets. So, you can see why the builders would be enthusiastically prepping for more community openings. Whereas as I mentioned, the Southern Cal builders want more communities.
But it’s a slow process. And several of them have said, “If we open by year end, we’ll be lucky. It probably ends up nudged into 2025.” So, this was just a forecast for what’s going to happen in 2024.
Dean Wehrli:
How about lot sizes, home sizes, the product, the housing product that we’re seeing builders move to or any changes going forward? What kind of trends are you noticing there?
Jody Kahn:
We haven’t specifically pressed the builders for this detail yet. But the vibe is that awareness of affordability and the need to do that value engineering. Which is really all about focusing on the things that the customer really wants and is prepared to pay for.
And rethinking things that the customer doesn’t care about because we’re just adding to the cost of the home. We were in Southern Cal last week. Dillan and I met with a whole bunch of builder clients. And one of the things we’re hearing is that the issue regarding the fires, the hazard insurance is going to put some pressure on the attached product, which as we know is the way that builders will typically turn in order to offer relative affordability.
So, there is a lot of unknown there on whether there’s going to be any problem, for example, for the homeowners associations to be able to get coverage for their amenities. But also for consumers buying an attached home, will there be any concerns? And I think everybody’s not sure at this point because it’s just no clarity really on this topic yet.
Dean Wehrli:
That could be really problematic. Because as you mentioned, density is one of the key ways to get better affordability. And if we’re precluded from attached housing, there’s only so much you can do with small lot detached.
Jody Kahn:
Right. We heard a couple of builders talking about worry of doing anything more dense than duplexes for this reason. We also heard from some California builders that confirm that they have dropped land deals where insurance appears to be a problem.
This is really just the leading edge of what I think is going to be a huge topic this year. We will no doubt be surveying and getting more insight on this. But right off the bat, I can say it was surprising to hear the velocity of land deals that may not work at this point because of insurance.
Dean Wehrli:
And home size shrinking, right? Again, for the same idea, you can get down to an absolute price point that is more attainable.
Jody Kahn:
Maybe it’s shrinking, Dean, but I actually think it’s going to be more about what is easy to construct. And you know that the box-over-box construction methodology is the most efficient. And so, that is probably going to be more important than the actual square footage of the home.
Some of those little homes are actually technically more challenging to build. And I’m sure you’ve seen in your neck of the woods some of those little jewel boxes. So, smaller isn’t always cheaper. Sometimes it’s cheaper, but something that’s efficient to build.
And that is very much the builders have been working on that too. Not just pulling out unwanted features that customers don’t value, but also looking at that efficiency so that they are getting the very best bids from their labor.
Dean Wehrli:
Yeah, and ditching spaces that people aren’t that fond of. Formal dining rooms and living rooms and things like that. You just don’t need those things. You just be more efficient in your floor plan and you’d be…
Jody Kahn:
Exactly.
Dean Wehrli:
… just as livable at a small square footage. Dillan, let’s get to the why of this. Jody is telling us how optimistic builders are. Beyond what she’s kind of covered so far, why are builders so optimistic about the market going forward?
Dillan Krieg:
Yeah, I think there’s kind of three main levers that we’re looking at here. The first one is of course going to be the resale market, which we’ll go into. But also we’re looking at mortgage rates and really those community expectations.
Those three, when you put them together, they really paint a picture of optimism for builders and builders just continuing to take advantage of the opportunities that they have to really excel right now. So, I mean, on the first front, the community counts are really a benefit to builders.
On one hand, it’s just literally more storefronts. There’s more places that they can sell homes out of and there are more homes to sell. And that’s going to really be a benefit for them with the constrained resale market. We don’t have to go into all the lock-in which we’ve talked about plenty.
But the resale market, we’re expecting it to stay pretty constrained going forward. And one of the things that we’ve been digging into as well when it comes to the low resale supply is that it’s not just about the total quantity of homes on the market as well, but the quality of the resale homes on the market is also really not what people are looking for.
We’re hearing a lot about homes that are in poor condition. They’re not staged properly. A lot of times they’re overpriced. The sellers are really looking at what their neighbors got for homes two years ago, which the pricing is just not there anymore.
And also the really limited incentives on these resale homes. Even when it comes to credits for repairs, we’re hearing a lot of sellers don’t want to do those. And for a lot of buyers, that’s like a one-two punch. They’re already dealing with the high rates and the high home prices.
And then if you have to do some remodeling, repair your home after you purchase it, then there’s no money left. A lot of people can’t do that. And they also just don’t want the stress of going through a whole remodeling process too.
Dean Wehrli:
That’s interesting because it kind of flies a little bit in the face of the bigger story about resales. Which is that they’re supply constrained, you would think that folks would be a little more tolerant of those kinds.
Yeah, I know you have termites. I just need a place to live kind of a thing. But you’re saying, no, they are saying no to that resale based on its condition and those kinds of factors.
Dillan Krieg:
No, absolutely. Buyers are saying no to those homes. When you have a good quality home on the market and if it’s priced well, they staged it right and it’s in a good location, really helps too. Those homes are seeing multiple offers.
They’re going over bid. That’s driving up prices in the resale market. Agents really love those homes because they get a great kickback on those too. But when it comes to these….
Dean Wehrli:
Kickback, Dillan? Let’s be careful with that. Actually, it’s funny you say that though, because that’s where the agents are going to add the value that we’re earning a commission. It may not be 3% anymore.
But being able to guide a client through that process that you’re talking about, the staging and fixing things that need to be fixed, that adds value from the agent perspective. As opposed to just the market’s so hot, you can sell anything you want.
So, it’s interesting that you mentioned agents there because I think we’ll see more. We’ll likely see more home sellers be smart about that because their agents are going to have to help them with that to kind of earn their keep.
Dillan Krieg:
Yeah, and we’re seeing that agents are really, agents are frustrated right now. And a lot of them are really looking to see where they can add value and where they can get sellers to work with them and make these sales happen. But we think part of it too is really just, it comes down to the mortgage rates.
And a lot of that is of course still locking in sellers. But we don’t really expect that to change really anytime soon. We’re really thinking rates are going to stay about 6%. Over the next couple of years there might be some variation there. But we really expect rates to be kind of in this higher for longer space.
And that’s going to keep resale constrained. But on the builder side, that’s going to really allow them to keep using these buy-downs as well, which are really helping with the affordability issue. They’re not really a thing in the resale market. Resale sellers are not broadly using buy-downs, but builders are.
And a lot of times that’s making these new homes that are in good condition that builders have a lot of, because they’re increasing their community counts. It’s making them a really attractive prospect for potential sellers out there. And builders are really optimistic about it and they think that’s going to be really their opportunity to excel going forward.
Dean Wehrli:
So, really we just have a whole slew of reasons of why things are looking pretty good. Again, it’s sort of tempered. I think it’s fair to again characterize the situation as we are subtly optimistic, good things are happening. But it’s not like we’re heading into one of those crazy, insane unsustainable kind of markets. Is that fair?
Dillan Krieg:
No, we think it’s going to be a good market. Builders aren’t expecting it to be 2020, 2021 where they couldn’t build homes fast enough. It’s going to be a solid market. And builders are going to be able to do some really great volume. But it has normalized a lot from where it was back a couple of years ago.
Dean Wehrli:
Let’s book-end this with another difficult question that we started with. Now, I’m going to ask you, when officially will the spring selling season end?
Jody Kahn:
Usually by May things are really tailing down in the new home space as far as the spring season. And if you think about it, May you have people graduating from college and people are getting married, and depending on your school district, kids are actually finishing school. And so, we see a shift in May and definitely by June as we move into the summer months.
It’s not that nobody’s buying a home then, but the whole spring frenzy if there was one, dies down. And we can see that in the history of our builder survey that the sales rates, they don’t tank, but they’re just not at the same velocity as March and April.
Dean Wehrli:
Yeah. And June is usually a pretty solid month too, isn’t it?
Jody Kahn:
It is, but like I said, graduations, weddings, even Mother’s Day in May, Father’s Day in June, those weekends can pull people away from looking at new homes and focusing, as they should, on family matters. So, all those little things create a little bit of attrition in the average sales rate. But you can still have a very solid sales month.
Dean Wehrli:
If you’re listening to this, right when we uploaded, which you should, then you builders have another, and sellers, you have another, what, two, three months to crush it and then things seasonally maybe slow down a little bit. But still, we still are looking at a pretty solid second half of the year too, aren’t we?
Jody, Dillan, thank you so much for coming on. I hope everybody out there got a lot out of this and got some insights. I know I did. Thank you guys for being a guest.
Jody Kahn:
It’s our pleasure, Dean. We love to hop on and share these spring views.
Dean Wehrli:
I do too.
Dillan Krieg:
Great to be here, Dean. Thank you.
Dean Wehrli:
Right on. Thanks guys. This has been the New Home Insights podcast with Dean Wehrli. We will see you again in a couple of weeks.
